<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 13, 1997
REGISTRATION STATEMENT NO. 333-34367
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 2
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
DIVERSIFIED SENIOR SERVICES, INC.
(Name of small business issuer in its charter)
<TABLE>
<S> <C> <C>
NORTH CAROLINA 8050 56-1973923
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
915 WEST FOURTH STREET
WINSTON-SALEM, NORTH CAROLINA 27101
(910) 724-1000
(Address and telephone number of principal executive offices)
915 WEST FOURTH STREET
WINSTON-SALEM, NORTH CAROLINA 27101
(Address of principal place of business or intended principal place of business)
------------------------
SUSAN L. CHRISTIANSEN
915 WEST FOURTH STREET
WINSTON-SALEM, NORTH CAROLINA 27101
(910) 724-1000
(Name, address and telephone number of agent for service)
COPIES TO:
<TABLE>
<S> <C>
DON R. HOUSE JAMES R. TANENBAUM
HOUSE LAW FIRM STROOCK & STROOCK & LAVAN LLP
3325 Healy Dr. 180 Maiden Lane
Winston-Salem, N.C. 27103 New York, N.Y. 10038
(910) 768-2225 (212) 806-5400
</TABLE>
------------------------
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
PROSPECTUS SUBJECT TO COMPLETION, DATED NOVEMBER 13, 1997
1,500,000 SHARES
DIVERSIFIED SENIOR SERVICES, INC.
COMMON STOCK
------------------------
Diversified Senior Services, Inc., a North Carolina corporation ("DSS" or
the "Company"), is offering (the "Offering") for sale 1,500,000 shares of Common
Stock, no par value (the "Common Stock"). Prior to the Offering, there has been
no public market for the Common Stock and no assurances can be given that a
public market will develop following the completion of the Offering or, if
developed, that it will be sustained. The Common Stock has been approved for
quotation on the Nasdaq SmallCap Market under the symbol "DSSI," subject to
official notice of issuance. The initial public offering price (the "Offering
Price") has been negotiated by the Company and Strasbourger Pearson Tulcin
Wolff Incorporated, as underwriter (the "Underwriter"), and is not related to
asset value, net worth or any other established criteria of value. See
"Underwriting" for a discussion of the factors considered in determining the
Offering Price. It currently is anticipated that the Offering Price will be
between $5.00 and $7.00 per share.
------------------------
AN INVESTMENT IN THESE SECURITIES INVOLVES A HIGH DEGREE OF RISK AND IMMEDIATE
SUBSTANTIAL DILUTION OF THE BOOK VALUE OF THE COMMON STOCK FROM THE
INITIAL PUBLIC OFFERING PRICE. ACCORDINGLY, THE SECURITIES OFFERED
HEREBY SHOULD NOT BE PURCHASED BY ANYONE WHO CANNOT AFFORD A
LOSS OF HIS ENTIRE INVESTMENT. SEE "RISK FACTORS" BEGINNING
ON PAGE 7.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
[CAPTION]
<TABLE>
<S> <C> <C> <C>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS (1) COMPANY (2)
<S> <C> <C> <C>
Per Share........................................... $ $ $
Total............................................... $ $ $
</TABLE>
(1) Does not reflect additional compensation to be received by the Underwriter,
including (a) a non-accountable expense allowance of up to 2% of the gross
proceeds of the Offering, of which $100,000 has been paid and (b) warrants
entitling the Underwriter to purchase up to 150,000 shares of Common Stock
at a price equal to $ per share for a period of four years commencing
one year from the effective date of the Registration Statement of which this
Prospectus forms a part (the "Underwriter's Warrants"). In addition, the
Company has agreed to indemnify the Underwriter against certain civil
liabilities. See "Underwriting."
(2) Before deducting expenses of the Offering payable by the Company, estimated
at $205,500, excluding the Underwriter's non-accountable expense allowance.
See "Underwriting."
------------------------
The shares of Common Stock are being offered by the Underwriter on a "firm
commitment" basis, when, as, and if delivered to and accepted by the
Underwriter, and subject to approval of certain legal matters by counsel for the
Underwriter. The Underwriter reserves the right to withdraw, cancel or modify
such offer and to reject orders either in whole or in part. It is expected that
delivery of the certificates evidencing the shares of Common Stock offered
hereby will be made at the offices of counsel to the Underwriter on or about
, 1997.
------------------------
STRASBOURGER PEARSON TULCIN WOLFF
INCORPORATED
The date of this Prospectus is , 1997
<PAGE>
------------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OFFERED
HEREBY, INCLUDING PURCHASES OF THE COMMON STOCK TO STABILIZE ITS MARKET PRICE,
PURCHASES OF THE COMMON STOCK TO COVER SOME OR ALL OF A SHORT POSITION IN THE
COMMON STOCK MAINTAINED BY THE UNDERWRITER AND THE IMPOSITION OF PENALTY BIDS.
FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO, AND
SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL
STATEMENTS (INCLUDING THE NOTES THERETO) APPEARING ELSEWHERE IN THIS PROSPECTUS.
EACH PROSPECTIVE INVESTOR IS URGED TO READ THIS PROSPECTUS IN ITS ENTIRETY. ALL
REFERENCES TO THE "COMPANY" IN THIS PROSPECTUS ARE REFERENCES TO DIVERSIFIED
SENIOR SERVICES, INC. ("DSS") AND ITS WHOLLY-OWNED SUBSIDIARY, RESIDENTIAL
PROPERTIES MANAGEMENT, INC. ("RPM").
THE COMPANY
GENERAL
Diversified Senior Services, Inc. was founded in May 1996 to develop and
manage assisted living residences, to provide home care services to the frail
elderly and to manage low and moderate income apartment complexes. Management
believes that there is a growing demand for assisted living residences for the
low and moderate income frail elderly, specifically in the Company's targeted
areas of smaller cities and towns of North Carolina and throughout the
Southeast. Although the Company has been operating for less than two years,
through affiliates of the Company, senior management has over 20 years of
experience in developing and operating housing specifically designed for this
target population with a concentration in Eastern North Carolina. The Company's
two-year growth objective is to develop at least 16 new assisted living
residences, with a capacity of approximately 960 residents. The Company is in
the early stages of its assisted living development program, with ten sites
optioned to date and nine feasibility studies completed. The Company intends for
the majority of the projects it develops to be owned by or sold to qualified
non-profit organizations, with the Company retaining management contracts for
these projects. By transferring ownership of the properties to non-profit
organizations, the Company expects to be able to utilize tax-exempt bonds to
finance the majority of its facilities, while at the same time carrying little
real estate on its balance sheet. See "Business -- Development Division". With
respect to the Company's current cash generating operations, as of the date of
this Prospectus, the Company manages 62 apartment complexes, 31% of which are
owned by non-profit organizations, consisting of approximately 2,393 rental
units of low and moderate income rent-subsidized apartments, 56% of which are
occupied by the elderly. See "Business -- Apartment Management Division". The
Company also currently provides approximately 1,400 hours of home care services
per month.
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 is a
privately-held corporation controlled by the Company's senior management. DSS
was initially capitalized with $100 and its parent, THE, received 100 shares of
Common Stock. In July 1996, THE exchanged all of the stock of its wholly owned
subsidiary, RPM, for 2,277,678 shares of DSS. 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. RPM, now a wholly-owned
subsidiary of the Company, manages 2,393 rental housing units located across
four states: North Carolina, South Carolina, West Virginia and Pennsylvania. The
Company's management contracts have initial terms of one to three years, with
varying renewal provisions. Of the 62 RPM management contracts, 37, or 60%, are
controlled by affiliates and 25, or 40%, are controlled by third parties.
Currently, apartment management provides the majority of the Company's revenues.
See "Business -- Apartment Management Division".
The Company's home care activities are limited to providing personal care
services to the same population targeted for its assisted living residences. The
Company does not provide medical services and, as such, is not subject to the
regulatory burdens of that market, nor the attendant legal liabilities. The
Company utilizes its home care business for two primary purposes: (i) to provide
services to residents of its existing subsidized senior apartments; and (ii) to
establish operating procedures for delivery of personal care services at its
future assisted living residences.
BUSINESS STRATEGY
The Company's growth is expected to come primarily from developing and
managing assisted living residences. The Company expects its future assisted
living residences to serve as the foundation from which to provide a continuum
of care for low to moderate income senior citizens. The Company has already
developed and implemented its policies, procedures and operating systems for
providing personal care services and has hired its core staff for the personal
care division. Assisted living management is the combination of providing
personal care and real estate management services, both businesses in which the
Company is already involved and in which the Company's senior management has
extensive experience. The Company has developed a 60-unit assisted living
prototype for development primarily in small to mid-sized communities with
populations of under 75,000, whose target resident will be a low to moderate
income frail, elderly individual. In addition, the Company will continually
review apartment management opportunities and may add to its management
portfolio.
Once the Company's assisted living residences have been developed, DSS will
be able to offer low and moderate income elderly individuals a continuum of
living arrangements: apartments managed specifically for the needs of the
elderly;
3
<PAGE>
home care services provided in such apartment facilities if, such individual
requires such assistance; and, finally, assisted living residences when a
greater level of support becomes necessary.
The Company expects to achieve its business objectives by implementing the
following strategies:
SELECTIVELY LOCATING ASSISTED LIVING RESIDENCES. During its initial phase
of development, the Company will locate some of its assisted living facilities
within close proximity to the Company's managed apartment complexes. Such
locations offer immediate benefits to the Company. Since over 56% of the
Company's apartments are occupied by low and moderate income elderly tenants,
when an elderly tenant needs to move into an assisted living residence, the
Company will be well positioned to be the provider of choice. In addition, since
over 31% of the Company's apartment complexes are owned by non-profit
organizations, the Company already has numerous relationships with regional
non-profit organizations, many of which are expected to become the ultimate
owners of the Company's assisted living facilities. Lastly, the Company expects
to be able to utilize certain staff positions in both apartment complexes and
assisted living facilities, namely maintenance staff and certain providers of
personal care, helping control costs at both locations.
DEVELOPING ASSISTED LIVING FACILITIES SPECIFICALLY DESIGNED FOR LOW AND
MODERATE INCOME RESIDENTS. Each assisted living residence developed by the
Company will be designed, constructed and managed to be profitable with only
public pay residents, while providing features typically found in residences
designed for the private pay population, such as private bedrooms, personal
lavatories and diverse common areas. As such, for each private pay resident, for
whom monthly fees are typically $150 to $300 per month higher, the Company
expects to generate significantly greater profits. Most moderate income
residents will typically begin their residence as private pay individuals and
will convert to public pay only when such individual's personal resources are
exhausted. Since the Company's cost structure for its assisted living residences
has been designed based on complete occupancy by public pay residents, when
these changes occur the Company expects profitability to be maintained. In
addition, because many assisted living residences only accept residents who have
resources to cover a minimum time period, typically 18 months or longer, the
Company anticipates that demand for the Company's residences will be high among
the moderate income frail elderly who may not have the resources to cover such
an extended period of time.
ACCESSING FAVORABLE FINANCING. Because of management's extensive experience
working with non-profit organizations, particularly entities which qualify for
Section 501(c)(3) treatment under the Internal Revenue Code of 1986, as amended
("501(c)(3)s"), the Company intends to use tax-exempt bonds to finance the
majority of its assisted living residences. This low-cost financing vehicle
provides the Company with a competitive cost advantage. The Company also
receives the added benefit of not carrying significant amounts of real estate on
its balance sheet, freeing up capital for new developments. In addition, future
earnings will not be charged with the associated depreciation and amortization.
TRANSFERRING EXPERIENCE TO ASSISTED LIVING RESIDENCES. Assisted living is
the combination of providing senior housing and providing home care services.
The Company and its affiliates have extensive experience in developing housing
for low and moderate income seniors and disabled persons. Several of the
Company-managed apartment complexes currently provide regular activities,
communal meals, laundry facilities, and other amenities frequently associated
with assisted living residences. In addition, the Company currently provides
home care services to low and moderate income frail elderly. The home care
services provided by the Company include assistance with dressing, personal
hygiene, medication management, preparation of simple meals, assistance with
mobility, dental, hair and skin care and maintenance of a safe environment.
These services are identical to those required in an assisted living residence.
The Company's staff is experienced in providing and documenting these services,
assessing and developing individual care plans, maintaining client records,
regulatory compliance, quality assurance and Medicaid billing. Thus, the Company
believes it already possesses the personnel skills and management systems
required for assisted living care.
JOINT VENTURES AND CONVERSIONS. Management anticipates growth opportunities
in addition to those provided by its own independent development activities. The
Company is developing alliances with local government agencies, such as public
housing authorities, dedicated to providing housing and services to the low
income elderly and disabled. The Company intends to explore joint ventures with
local agencies which provide assisted living to its targeted population. These
activities may include newly developed facilities as well as the conversion of
sections of existing subsidized senior housing to assisted living residences.
The Company is in the preliminary stages of developing newly constructed
assisted living with the housing authority of one North Carolina community and
exploring the conversion to assisted living of two residential floors in two
existing subsidized senior housing complexes. Management sees these joint
venture and conversion opportunities as a method of providing assisted living in
larger communities, as well as in the small to medium sized communities
currently targeted by the Company.
The Company's principal offices are located at 915 West Fourth Street,
Winston-Salem, North Carolina 27101 and its telephone number at that address is
(910) 724-1000.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered.................................. 1,500,000 shares
Common Stock Outstanding after the Offering........... 3,300,000 shares(1)
Use of Proceeds....................................... The Company intends to apply the net proceeds of this Offering (i) to
repay outstanding debt, approximately $1.51 million as of October 31,
1997; (ii) to fund the development and construction of assisted
living facilities, approximately $3.5 million; and, (iii) for general
corporate purposes.
Proposed Nasdaq SmallCap Market Symbol................ DSSI
</TABLE>
- ---------------
(1) Does not include (i) 150,000 shares of Common Stock issuable upon the
exercise of the Underwriter's Warrants, and (ii) an aggregate of 80,329
options to purchase Common Stock at per share exercise prices ranging from
50% to 100% of the public offering price held by certain members of senior
management. See "Underwriting" and "Principal Shareholders."
RISK FACTORS
An investment in the Common Stock offered hereby is speculative and
involves a high degree of risk. See "Risk Factors."
5
<PAGE>
SUMMARY FINANCIAL INFORMATION
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The summary financial information set forth below is derived from the more
detailed financial statements appearing elsewhere in this Prospectus. This
information should be read in conjunction with such financial statements,
including the notes thereto. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED YEAR ENDED SEPTEMBER 30,
DECEMBER 31, 1995(1) DECEMBER 31, 1996(2) 1997
-------------------- -------------------- -----------------
<S> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Income................................ $ -- $2,319 $ 1,884
Operating income (loss)............... -- (719) (635)
Net income (loss)..................... 87 (706) (740)
Net income (loss) per share........... $868 $ (.31) $ (0.35)
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
-------------------------
ACTUAL AS ADJUSTED(3)
------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Current assets.............................................................. $ 350 $ 6,594
Current liabilities......................................................... 2,174 704
Working capital............................................................. (1,824) 5,890
Total assets................................................................ 931 7,175
Total liabilities........................................................... 2,638 1,168
Accumulated deficit......................................................... (1,263) (1,263)
Stockholders' equity (deficit).............................................. (1,707) 6,007
</TABLE>
- ---------------
(1) These results reflect the results of operations of RPM only. RPM was not
actively engaged in business during 1995; its activities were limited to
investing activities, thus the net income shown resulted from those
investing activities.
(2) Pro forma as if DSS had been incorporated and had owned the stock of RPM on
January 1, 1996.
(3) Gives effect to the sale of the Common Stock offered hereby, the application
of the estimated net proceeds therefrom.
UNLESS OTHERWISE INDICATED, THE INFORMATION IN THIS PROSPECTUS DOES NOT
GIVE EFFECT TO, AND DOES NOT INCLUDE: (I) 500,000 SHARES OF COMMON STOCK
RESERVED FOR ISSUANCE UPON THE EXERCISE OF STOCK OPTIONS UNDER THE COMPANY'S
STOCK OPTION PLAN, OF WHICH NO OPTIONS TO PURCHASE SHARES HAVE BEEN GRANTED,
(II) 150,000 SHARES OF COMMON STOCK ISSUABLE UPON THE EXERCISE OF THE
UNDERWRITER'S WARRANTS, AND (III) A MAXIMUM OF 80,329 OPTIONS TO PURCHASE COMMON
STOCK AT PER SHARE EXERCISE PRICES RANGING FROM 50% TO 100% OF THE INITIAL
PUBLIC OFFERING PRICE HELD BY CERTAIN MEMBERS OF SENIOR MANAGEMENT. SEE
"MANAGEMENT -- STOCK INCENTIVE PLAN," "PRINCIPAL SHAREHOLDERS" AND
"UNDERWRITING."
6
<PAGE>
RISK FACTORS
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE IN NATURE AND INVOLVE A HIGH
DEGREE OF RISK. ACCORDINGLY, IN ANALYZING AN INVESTMENT IN THESE SECURITIES,
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER, ALONG WITH OTHER MATTERS
REFERRED TO HEREIN, THE FOLLOWING RISK FACTORS. NO INVESTOR SHOULD PARTICIPATE
IN THIS OFFERING UNLESS SUCH INVESTOR CAN AFFORD A COMPLETE LOSS OF HIS OR HER
INVESTMENT. PROSPECTIVE INVESTORS SHOULD NOTE THAT THIS PROSPECTUS CONTAINS
CERTAIN "FORWARD-LOOKING STATEMENTS," AS SUCH TERM IS DEFINED IN THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995, INCLUDING, WITHOUT LIMITATION,
STATEMENTS CONTAINING THE WORDS "BELIEVES," "ANTICIPATES," "EXPECTS," "INTENDS,"
"SHOULD," "SEEKS TO," AND SIMILAR WORDS. PROSPECTIVE INVESTORS ARE CAUTIONED
THAT ANY SUCH FORWARD-LOOKING STATEMENTS ARE NOT GUARANTEES OF FUTURE
PERFORMANCE AND INVOLVE RISKS AND UNCERTAINTIES. ACTUAL RESULTS MAY DIFFER
MATERIALLY FROM THOSE IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF VARIOUS
FACTORS, INCLUDING BUT NOT LIMITED TO, THE RISK FACTORS SET FORTH IN THIS
PROSPECTUS. THE ACCOMPANYING INFORMATION CONTAINED IN THIS PROSPECTUS IDENTIFIES
CERTAIN IMPORTANT FACTORS THAT COULD CAUSE SUCH DIFFERENCES.
LACK OF OPERATING HISTORY; SUBSTANTIAL LOSSES
The Company was incorporated in May 1996 and, effective July 1, 1996,
acquired all of the outstanding capital stock of RPM, a company with substantial
subsidized apartment management experience. Through RPM, the Company began its
apartment management operations in July 1996. Also in July 1996 the Company
became a licensed home care agency under the laws of the State of North Carolina
and began providing home care services in August 1996. However, the Company's
growth plan is predicated almost exclusively on developing and managing assisted
living residences, a market in which the Company has no prior experience. The
Company experienced a net loss of $592,487 for the period from inception to
December 31, 1996 and a net loss of $740,292 for the nine months ended September
30, 1997. As of September 30, 1997 the Company had an accumulated deficit of
$1,263,429. With respect to most of the Company's intended operations (other
than apartment management), the Company has no operating history to provide
assurances that the Company can successfully implement its growth plans and thus
become profitable. The Company plans to begin and expand its operations as soon
as reasonably practicable. The Company will immediately incur significant
expenses for acquisitions, development and other activities. The Company's
success will depend on its ability to achieve and maintain profitability and to
successfully manage the Company's growth.
CAPITAL REQUIREMENTS
The Company estimates that the net proceeds of this Offering, in
conjunction with other sources of funds, should provide adequate capital for the
Company's operation and growth over the next 24 months. The Company's ability to
sustain any operating losses and to otherwise meet its growth objectives will
depend, in part, on its ability to obtain additional financing on acceptable
terms from available financing sources, specifically the tax-exempt bonds that
the Company intends to be the predominant long-term financing source for its
assisted living residences. In addition, raising additional funds through the
issuance of equity securities could cause existing shareholders to experience
further dilution and could adversely affect the market price of the Common
Stock. The Company intends to finance future requirements through a combination
of its cash reserves, including the net proceeds of this Offering, additional
construction and permanent indebtedness or public or private sales of debt
securities or capital stock. There can be no assurance, however, that funds will
be available on terms favorable to the Company or that such funds will be
available when needed. The Company's inability to obtain additional financing on
acceptable terms could delay or eliminate some or all of the Company's growth
plans. See "Management's Discussion and Analysis of Financial Condition and
Results of Operation -- Liquidity and Capital Resources."
ABILITY TO MANAGE GROWTH
The Company intends to expand its operations through development and
management of assisted living residences and, to a lesser extent, through
expansion of the Company's home care services. The Company currently plans to
develop 16 assisted living facilities over the next two years, with an estimated
aggregate capacity for 960 residents. The Company's ability to develop
successfully assisted living residences will depend on a number of factors,
including, but not limited to, the Company's ability to acquire suitable
development sites at reasonable prices; and the Company's success in obtaining
necessary zoning, licensing, and other required governmental permits and
authorizations. In addition, the Company's development plans are subject to
numerous factors over which it has little or no control, including competition
for developable properties; shortages of labor or materials; changes in
applicable laws or regulations or their enforcement; strikes; and adverse
weather conditions. As a result of these factors, there can be no assurance that
the Company will not experience construction delays, that it will be successful
in developing and constructing currently planned or additional assisted living
residences, or that any developed assisted living residences will be
economically successful. If the Company's development schedule is delayed, the
7
<PAGE>
Company's growth plans could be adversely affected. Additionally, the Company
anticipates that the development and construction of additional assisted living
residences will involve a substantial commitment of capital with little or no
revenue associated with facilities under development, the consequence of which
could be an adverse impact on the Company's liquidity. Although the Company may
in the future consider the acquisition of existing assisted living facilities,
the Company currently does not have any plans to make such acquisitions.
Although senior management of the Company has extensive experience in
providing housing for low and moderate income, frail elderly, the Company has
limited experience in developing and managing assisted living residences. The
Company's growth plans will also place significant demands on the Company's
management and operating personnel, which demands may divert management
resources away for the existing apartment management operations. Such diversion
of resources may cause apartment management operations to suffer. The Company's
ability to manage its future growth effectively will require it to improve its
operational, financial, and management information systems and to continue to
attract, retain, train, motivate, and manage key employees. If the Company is
unable to manage its growth effectively, its business, results of operations,
and financial condition will be adversely affected. See "Business -- Business
Strategy."
DEVELOPMENT IN CONCENTRATED GEOGRAPHIC AREAS
The Company's growth strategy involves the development of assisted living
residences in a concentrated geographic area. See "Business -- Business
Strategy." Accordingly, the Company's results of operations and growth plans may
be adversely affected by a number of factors, including regional and local
economic conditions, general real estate market conditions, including the supply
and proximity of senior living communities, competitive conditions, and
applicable local laws and regulations. See "Business -- Development Division."
DISCRETIONARY USE OF PROCEEDS
A significant portion of the net proceeds of this Offering will be
allocated to the development of assisted living facilities which are ready to
begin construction subject to arranging construction financing. Although the
Company has options for ten assisted living sites, the Company has made no firm
commitments to acquire or develop any additional sites or facilities. The
Company will have broad discretion in developing and selecting potential sites
and acquisitions and, accordingly, will have broad discretion in using the net
proceeds of this Offering. See "Use of Proceeds."
COMPETITION
The management of low and moderate income apartments and assisted living
facilities and the provision of home care services is highly competitive and the
Company expects that its businesses will become increasingly competitive in the
future. The Company will continue to face competition from numerous local,
regional and national providers of assisted living and long-term care whose
facilities and services are on either end of the senior care continuum. The
Company will compete with a range of providers based on many factors, including
cost, quality of care, services provided, reputation, geographic location and
family preferences. While there are currently few existing assisted living
facilities in the market the Company intends to serve, and even fewer serving
the low to moderate income frail elderly, the Company expects that as assisted
living receives increased attention and the number of states which include
assisted living in their Medicaid waiver programs increases, competition will
grow from new market entrants, including companies focusing primarily on
assisted living. Moreover, in implementing the Company's expansion program, the
Company expects to face competition for development and acquisition of assisted
living residences. Some of the Company's present and potential competitors are
significantly larger and have, or may obtain, greater financial resources than
those of the Company. Consequently, there can be no assurance that the Company
will not encounter increased competition in the future, which could limit its
ability to attract residents or expand its business and could have a material
adverse effect on the Company.
GOVERNMENT REGULATION
Federal, state and local governments regulate various aspects of the
Company's business. The development and operation of assisted living residences,
the management of subsidized housing and the provision of home care services are
subject to federal, state and local licensure, certification, and inspection
laws that regulate, among other matters, the number of licensed beds, the
provision of services, the distribution of pharmaceuticals, billing practices
and policies, equipment, staffing (including professional licensing), operating
policies and procedures, fire prevention measures, environmental matters, and
compliance with building and safety codes. Changes in or the adoption of such
laws and regulations, or new interpretations of existing laws and regulations,
could have a significant effect on methods and costs of doing business and
amounts of reimbursement from governmental and other payors. The Company's
success will depend upon its ability to satisfy the applicable
8
<PAGE>
regulations and requirements and to procure and maintain required licenses and
subsidies. There can be no assurance, however, that federal, state or local laws
or regulatory procedures will not be imposed or expanded which might adversely
affect the Company.
The North Carolina legislature has adopted a 12-month moratorium on
assisted living licensure in North Carolina. The law provides several exclusions
that exempt the Company's currently proposed activities based on the current
status of development (binding options entered into before August 25, 1997) and
the proposed location of facilities (counties with vacancies of less than 15% or
a special determination by a county's board of commissioners that a special need
exists). The purpose of the moratorium is to study adult care homes in North
Carolina to determine whether the existing licensure procedures need to be
modified. "Adult care homes" now include everything from group homes to old
style rest homes to new assisted living facilities. The Company's current
pipeline of developments should provide the Company with adequate development
activity during the moratorium period. Although it is anticipated that the
moratorium will result in stricter licensing procedures in North Carolina,
management believes that the alternative provided by the Company will be the
type of quality, cost effective assisted living that will be favored by the
State. In addition, the Company also intends to focus on expanding its
operations beyond the boundaries of North Carolina.
Federal and state anti-remuneration laws, such as "anti-kickback" laws,
govern certain financial arrangements among health care providers and others who
may be in a position to refer or recommend patients to such providers. These
laws prohibit, among other things, certain direct and indirect payments that are
intended to induce the referral of patients to, the arranging for services by,
or the recommending of, a particular provider of health care items or services.
Federal anti-kickback laws have been broadly interpreted to apply to certain
contractual relationships between health care providers and sources of patient
referral. Similar state laws vary, are sometimes vague, and seldom have been
interpreted by courts or regulatory agencies. Violation of these laws can result
in loss of licensure, civil and criminal penalties, and exclusion of health care
providers or suppliers from participation in the Medicare and Medicaid programs.
There can be no assurance that such laws will be interpreted in a manner
consistent with the practices of the Company.
Under the Americans with Disabilities Act of 1990, all places of public
accommodation are required to meet certain federal requirements related to
access and use by disabled persons. A number of additional federal, state and
local laws exist that also may require modifications to existing and planned
communities to create access to the properties by disabled persons. Although the
Company believes that its managed apartment complexes and planned assisted
living residences are or will be substantially in compliance with present
requirements or are exempt therefrom, if required changes involve a greater
expenditure than anticipated or must be made on a more accelerated basis than
anticipated, additional costs would be incurred by the Company. Further
legislation may impose additional burdens or restrictions with respect to access
by disabled persons, the costs of compliance with which could be substantial.
See "Business -- Regulatory Matters."
DEPENDENCE ON THIRD PARTY PAYORS
The Company intends to focus its assisted living operations on the low and
moderate income frail elderly. It is anticipated that a large portion of the
residents in the Company's facilities will not have the resources to pay for the
Company's services, and the Company will depend, to a significant extent, on the
public pay systems in the states in which the Company's assisted living
residences are to be located. The Company's initial facilities will be located
in the State of North Carolina. The State of North Carolina currently provides
special assistance to cover the cost of room and board for qualified recipients.
In addition, North Carolina provides limited Medicaid funds to cover personal
care services and enhanced personal care services for these qualified
recipients. Considering the substantial savings incurred by the State of North
Carolina by providing these services in an assisted living setting, as opposed
to a traditional nursing home, the Company anticipates that the North Carolina
special assistance program will continue to be favorable to the assisted living
alternative. Potential investors should be aware, however, that adverse changes
in general economic factors affecting North Carolina's health care industry, or
in North Carolina laws and regulatory environment, including special assistance
and Medicaid reimbursement rates and qualifying standards, could have a material
adverse effect on the Company. In addition, as the Company expands its business
into other states, it will depend upon the reimbursement systems of such states.
The public pay programs as then in effect in such states will be a significant
consideration in determining whether to expand into any such state.
DEPENDENCE ON KEY PERSONNEL
The success of the Company's business will be highly dependent upon the
services of its management team, specifically its executive officers: William G.
Benton, CEO; Susan L. Christiansen, COO; and, G.L. Clark, Jr., CFO. All three
individuals have employment contracts with the Company, however, the loss of the
services of one or more of these employees could
9
<PAGE>
adversely affect the Company. The Company does not maintain key-person life
insurance policies on any personnel. See "Management -- Executive Compensation;
Employment Agreements."
LACK OF OWNERSHIP OF REAL ESTATE
Although the Company may own a small percentage of the acquired and
developed assisted living facilities, it is anticipated that most properties
will be owned by a third party non-profit entity and that the Company will
operate the facilities pursuant to a management contract. Although the assisted
living management agreements are anticipated to have a minimum rolling term of
three years renewable annually, and it is anticipated that the Company's
interest will be further protected by a fee for termination without cause during
the contract term and, further, that the Company will have an option to purchase
the facilities at fair market value, these protections do not afford the same
rights as direct ownership.
DEVELOPMENT AND CONSTRUCTION RISKS
During the next two years, the Company plans to develop or acquire
approximately 16 new assisted living facilities with a capacity of approximately
960 residents. The Company's ability to achieve its development plans will
depend upon a variety of factors, many of which are beyond the Company's
control. There can be no assurance that the Company will not suffer delays in
its development program, which could slow the Company's growth. The successful
development of additional assisted living residences will involve a number of
risks, including the possibility that the Company may be unable to locate
suitable sites at acceptable prices or may be unable to obtain, or may
experience delays in obtaining, necessary zoning, land use, building, occupancy,
licensing and other required governmental permits and authorizations. The
Company may also incur construction costs that exceed original estimates, may
not complete construction projects on schedule and may experience competition in
the search for suitable development sites. The Company will be relying on
third-party general contractors to construct its assisted living residences.
There can be no assurance that the Company will not experience difficulties in
working with general contractors and subcontractors, which could result in
increased construction costs and delays. Accordingly, if the Company is unable
to achieve its development plans, it could be adversely affected.
FACILITIES MANAGEMENT, STAFFING, AND LABOR COSTS
The Company competes with other providers of senior living and home care
services with respect to attracting and retaining qualified personnel. A
shortage of skilled personnel may require the Company to enhance its wage and
benefits package in order to compete in the hiring and retention of such
personnel or to hire more expensive temporary personnel. The Company will also
depend on the available labor pool of semi-skilled and unskilled employees in
each of the markets in which it operates. No assurance can be given that the
Company's labor costs will not increase, or that, if they do increase, they can
be matched by corresponding increases in rates charged by the Company. Any
significant failure by the Company to attract and retain qualified management
and staff personnel, to control its labor costs, or to pass on any increased
labor costs through rate increases could have a material adverse effect on the
Company.
CONTROL BY PARENT
Upon completion of the Offering, THE will beneficially own approximately
54.5% of the outstanding shares of Common Stock (not including the conversion of
any of the outstanding 178,386 shares of Series A Preferred Stock (as defined
herein), which are convertible into shares of Common Stock after September 30,
1999). The outstanding voting securities of THE are owned by a small group of
investors, including the officers and directors of the Company. A super majority
of the voting securities of THE are subject to a voting trust agreement electing
William G. Benton as voting trustee and a shareholders' agreement which grants
THE and William G. Benton, Susan L. Christiansen and G.L. Clark, Jr. a right of
first refusal on any transfer of stock and an option to buy all shares of any
deceased, disabled or terminated shareholder. Both of the agreements provide
that William G. Benton, Susan L. Christiansen and G.L. Clark, Jr. shall serve as
the directors of THE. Accordingly, the shares of Common Stock of the Company
owned by THE will be voted at the discretion of Mr. Benton, Ms. Christiansen and
Mr. Clark. Accordingly, such persons will have the ability to elect all of the
Company's Board of Directors and to determine the outcome of most matters
submitted to the Company's shareholders. Furthermore, such control could
preclude any unsolicited acquisition of the Company and, consequently, adversely
affect the market price of the Common Stock. See "Principal Shareholders."
The Company has in place various policies, procedures and controls with
respect to any related party transactions involving the Company and any
affiliate, including its Parent. Such procedures include having the legally
requisite number of independent directors approve related party transactions and
having independent accountants review contracts between the Company and its
affiliate, unless such contracts have already been reviewed by government
agencies.
10
<PAGE>
ABSENCE OF PRIOR PUBLIC MARKET AND POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the Offering, there has been no public market for the Company's
Common Stock. There can be no assurance that an active public market for the
Common Stock will develop or that, if developed, such market will be sustained.
The offering price of the Common Stock offered hereby has been determined by
negotiations between the Company and the Underwriter and may not be indicative
of the price that may prevail in the public market upon the completion of the
Offering. See "Underwriting." Consequently, there can be no assurance that the
market price for the Common Stock will not fall below the offering price.
The market price of the Common Stock will be influenced by many factors,
including the depth and liquidity of the market for the Common Stock, investor
perceptions of the Company and its industry, and general economic and market
conditions. The market price of the Common Stock may also be significantly
influenced by factors such as quarter-to-quarter variations in the Company's
results of operations and conditions in the industry.
POSSIBLE DELISTING OF SECURITIES; PENNY STOCK RULES; UNDERWRITER'S POTENTIAL
INFLUENCE ON THE MARKET
The Common Stock has been approved for quotation on the Nasdaq
SmallCap Market under the symbol DSSI, subject to official notice of
issuance. While the Company presently meets the required standards for continued
inclusion in the Nasdaq SmallCap Market, there can be no assurance that it will
continue to be able to do so. If the Company should fail to meet one or more of
such standards, the Common Stock would be subject to deletion from Nasdaq
SmallCap Market. If this should occur, trading, if any, in the Common Stock
would then continue to be conducted in the over-the-counter market on the
Electronic Bulletin Board, a National Association of Securities Dealers, Inc.
("NASD") -- sponsored inter-dealer quotation system, or in what are commonly
referred to as "pink sheets." As a result, an investor may find it more
difficult to dispose of, or to obtain accurate quotations as to the market value
of, the Common Stock. In addition, if the Common Stock ceases to be quoted on
Nasdaq SmallCap Market and the Company fails to meet certain other criteria,
trading in the Common Stock would be subject to Securities and Exchange
Commission (the "Commission") rules regulating broker-dealer practices in
connection with transactions in "penny stocks." If the Common Stock became
subject to the penny stock rules, many brokers may be unwilling to engage in
transactions in the Common Stock because of the added disclosure requirements,
thereby making it more difficult for purchasers of Common Stock in this Offering
to dispose of their securities.
The Underwriter may from time to time following the completion of this
Offering act as a market-maker and otherwise effect transactions in the Common
Stock. The Underwriter is not legally obligated by law or by contract to
continue such trading, which may be discontinued at any time. See
"Underwriting." Any such cessation could have a material adverse effect upon the
price and liquidity of the Common Stock. The Underwriter is subject to the
supervision of various governmental and self-regulatory organizations, as well
as certain capital requirements. Such regulatory authorities periodically
investigate and audit the activities of broker-dealers, such as the Underwriter.
In the event the Underwriter is required to curtail or cease operations as a
result of administrative actions instituted by the regulatory authorities or
because of lack of capital, the price and liquidity of the Common Stock may be
materially adversely affected by the reduced participation or complete absence
of the Underwriter from the market.
DILUTION
The Offering involves an immediate and substantial dilution to investors of
$4.48 per share (assuming an initial offering price of $6.00, the midpoint of
the range) between the net tangible book value per share immediately after the
Offering and the offering price of each share of Common Stock offered hereby,
which dilution amounts to 75% of the offering price. See "Dilution."
NO DIVIDENDS
The Company has not paid any cash dividends on its Common Stock since its
inception and does not currently anticipate paying dividends on its Common Stock
in the foreseeable future.
LIABILITY AND INSURANCE
The provision of home care services entails an inherent risk of liability.
In recent years, participants in the long-term care industry have been become
subject to an increasing number of lawsuits alleging malpractice or related
legal theories, many of which involve large claims and significant defense
costs. The Company will maintain liability insurance intended to cover such
claims. There can be no assurance, however, that claims in excess of the
Company's insurance coverage, or
11
<PAGE>
claims not covered by the Company's insurance coverage (e.g., claims for
punitive damages) will not arise. A successful claim against the Company not
covered by, or in excess of, the Company's insurance coverage could have a
material adverse effect upon the Company. Claims against the Company, regardless
of their merit or eventual outcome, may also have a material adverse effect upon
the Company's ability to attract residents or expand its business and would
require management to devote time to matters unrelated to the operation of the
Company's business. In addition, insurance policies are subject to annual
renewal and there can be no assurance that the Company will be able to maintain
liability insurance coverage or that, if such coverage is available, it will be
on acceptable terms.
ENVIRONMENTAL RISKS
Under various federal, state and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real property may be
held liable for the cost of removal or remediation of certain hazardous or toxic
substances, including, without limitation, asbestos-containing materials that
could be located on, in or under such property. Such laws and regulations often
impose liability whether or not the owner or operator knew of, or was
responsible for, the presence of the hazardous or toxic substances. The costs of
any required remediation or removal of these substances could be substantial and
the liability of an owner or operator as to any property is generally not
limited under such laws and regulations and could exceed the property's value
and the aggregate assets of the owner or operator. The presence of these
substances or failure to remediate such substances properly may also adversely
affect the owner's ability to sell or rent the property.
EFFECT OF OUTSTANDING OPTIONS AND WARRANTS; FUTURE SALES OF COMMON STOCK
As of the date of this Prospectus, there are outstanding stock options to
purchase a maximum of 80,329 shares of Common Stock at per share exercise prices
ranging from 50% to 100% of the public offering price. In connection with this
Offering, the Company is also issuing the Underwriter's Warrants to purchase
150,000 shares of Common Stock, at an exercise price of $ per share. The
exercise of such outstanding stock options and the Warrants will dilute the
percentage ownership of the Company's shareholders, and any sales in the public
market of shares of Common Stock underlying such stock options and warrants may
adversely affect prevailing market prices for the Common Stock. Moreover, the
terms upon which the Company will be able to obtain additional equity capital
may be adversely affected since the holders of such outstanding securities can
be expected to exercise them at a time when the Company would, in all
likelihood, be able to obtain any needed capital on terms more favorable to the
Company than those provided in such stock option and warrants. In addition, the
Company has granted certain demand and piggyback registration rights to the
Underwriter with respect to the securities issuable upon exercise of the
Underwriter's Warrants. See "Management -- Option Grants," "Description of
Securities" and "Underwriting."
Sales of the Company's Common Stock in the public market after this
Offering could adversely affect the market price of the Common Stock. See
"Description of Securities" and "Shares Eligible for Future Sale."
EFFECTS OF CERTAIN ANTI-TAKEOVER PROVISIONS
Certain provisions of the Company's articles of incorporation (the
"Articles of Incorporation") and bylaws (the "Bylaws") and the North Carolina
Business Corporation Act ("NCBCA") could delay or frustrate the removal of
incumbent directors and could make difficult a merger, tender offer or proxy
contest involving the Company, even if such events could be viewed as beneficial
by the Company's shareholders. For example, the Board of Directors has the
ability to issue "blank check" preferred stock without shareholder approval.
Although the Company does not currently plan to issue any additional preferred
stock (other than the recently issued Series A Preferred Stock which is
nonvoting and is subordinate to the Common Stock in dividend and liquidation
rights), the rights of the holders of Common Stock may be materially limited or
qualified by the issuance of preferred stock. The Company's Articles of
Incorporation also require an 80% vote of each outstanding class of stock for a
number of business combinations with a person who, together with affiliates and
associates, owned 20% or more of the Company's outstanding voting shares (an
"interested shareholder") at any time during the two-year period prior to the
proposed business combination. See "Description of Securities."
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<PAGE>
DILUTION
The difference between the public offering price per share of Common Stock
and the pro forma net tangible book value per share of Common Stock of the
Company after this Offering constitutes the dilution per share of Common Stock
to investors in this Offering. Net tangible book value per share is determined
by dividing the net tangible book value (total tangible assets less total
liabilities less preferred stock) by the number of outstanding shares of Common
Stock.
At September 30, 1997, the Company had a negative net tangible book value
of approximately $(2,684,578), or approximately $(1.49) per share of Common
Stock (based on 1,800,000 shares of Common Stock outstanding). After giving
effect to the sale of the Common Stock offered hereby at an assumed price of
$6.00 per share (less underwriting discounts and estimated expenses of this
Offering), the net tangible book value at that date would have been
approximately $5,029,922, or approximately $1.52 per share. This represents an
immediate increase in net tangible book value of $3.01 per share to the existing
shareholders, and an immediate dilution of $4.48 per share to purchasers of the
Common Stock in this Offering.
The following table illustrates the per share dilution, without giving
effect to results of operations of the Company subsequent to September 30, 1997:
<TABLE>
<S> <C> <C>
Offering price per share.................................................................... $6.00
Net tangible book value before Offering................................................... (1.49)
Increase attributable to new investors.................................................... 3.01
-----
Net tangible book value after Offering...................................................... 1.52
-----
Dilution to new investors................................................................... $4.48
-----
-----
</TABLE>
The following table summarizes the number and percentage of shares of
Common Stock purchased from the Company, the amount and percentage of
consideration paid and the average price per share paid by the existing
shareholder and by new investors pursuant to this Offering:
<TABLE>
<CAPTION>
PERCENT OF
SHARES TOTAL TOTAL PERCENT OF TOTAL
ISSUED(1) SHARES CONSIDERATION CONSIDERATION
--------- ---------- ------------- ----------------
<S> <C> <C> <C> <C>
Existing Shareholders...................................... 1,800,000 54.5% $ 100 0%
New Investors.............................................. 1,500,000 45.5% $ 9,000,000 100%
--------- ---------- ------------- ---
Total................................................. 3,300,000 100% $ 9,000,100 100%
--------- ---------- ------------- ---
--------- ---------- ------------- ---
<CAPTION>
AVERAGE
PRICE PER
SHARE
---------
<S> <C>
Existing Shareholders...................................... $ 0
New Investors.............................................. $6.00
---------
Total................................................. $2.73
---------
---------
</TABLE>
- ---------------
(1) Does not include (i) 150,000 shares of Common Stock issuable upon the
exercise of the Underwriter's Warrants, and (ii) a maximum of 80,329 options
to purchase Common Stock at per share exercise prices ranging from 50% to
100% of the initial public offering price held by certain members of senior
management. See "Underwriting," and "Management -- Executive Compensation;
Employment Agreements."
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<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Common Stock offered
hereby (at an assumed public offering price of $6.00 per share of Common Stock)
are estimated to be approximately $7,714,500. The Company intends to apply the
net proceeds as follows: (i) $1,506,756 (the outstanding balance at October 31,
1997) to pay down the Company's line of credit, which currently bears interest
at the prime rate, (ii) $3,500,000 for the initial development of 8 to 12
assisted living facilities, and (iii) for general corporate purposes.
Proceeds not immediately required for the purposes described above will be
invested in United States government securities, short term certificates of
deposit, money market funds or other investment grade, short term interest
bearing investments.
DIVIDEND POLICY
The Company has never paid any cash dividends on its Common Stock and it is
currently the intention of the Company not to pay cash dividends on its Common
Stock in the foreseeable future. Management intends to reinvest earnings, if
any, in the development and expansion of the Company's business. Any future
declaration of cash dividends will be at the discretion of the Board of
Directors and will depend upon the earnings, capital requirements and financial
position of the Company, general economic conditions and other pertinent
factors.
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<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company (i) at
September 30, 1997 and (ii) as adjusted to give effect to the sale of the Common
Stock offered hereby and the application of the estimated net proceeds
therefrom, assuming an initial offering price of $6.00 per share, the midpoint
of the range. See "Use of Proceeds."
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1997
-------------------------
DEBT: ACTUAL AS ADJUSTED
---------- -----------
<S> <C> <C>
Current liabilities............................................................................... $2,174,327 $ 704,151
Long-term debt.................................................................................... 463,710 463,710
---------- -----------
Total liabilities............................................................................ 2,638,037 1,167,861
---------- -----------
STOCKHOLDERS' EQUITY:
Preferred Stock, no par value, 100,000,000 shares authorized;
178,386 issued and outstanding.................................................................. 891,930 891,930
Common Stock, no par value, 100,000,000 shares authorized;
1,800,000 shares issued and outstanding, actual;
3,300,000 shares issued and outstanding, as adjusted............................................ 100 7,714,600
Deemed distribution(1)............................................................................ (1,335,790) (1,335,790)
Accumulated deficit............................................................................... (1,263,429) (1,263,429)
---------- -----------
Total stockholders' equity (deficit)......................................................... (1,707,189) 6,007,311
---------- -----------
TOTAL CAPITALIZATION....................................................................... $ 930,848 $ 7,175,172
---------- -----------
---------- -----------
</TABLE>
- ---------------
(1) On January 1, 1996, RPM acquired certain assets from an entity related
through common ownership, by assuming certain liabilities to THE. The
difference between the value of the assets and the liabilities assumed is
recorded as a deemed distribution.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE DISCUSSION AND ANALYSIS BELOW SHOULD BE READ IN CONJUNCTION WITH THE
FINANCIAL STATEMENTS OF THE COMPANY AND THE NOTES TO FINANCIAL STATEMENTS
INCLUDED ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
DSS was formed in May 1996 as a wholly owned subsidiary of 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
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.
From 1993 through 1995, RPM was inactive. Effective January 1, 1996, RPM
acquired certain assets, consisting of management contract rights, trade
accounts receivable, land, and furniture, fixtures and equipment from an entity
related through common ownership, assumed certain liabilities to THE and resumed
its business of managing apartments. The assets acquired were recorded at the
transferor's historical cost basis at the date of transfer. The difference
between the book value of the assets acquired, the reduction of the amount due
from affiliate and the liability assumed is recorded as a deemed distribution in
the equity section of the balance sheet. Since July 1, 1996, the financial
statements of DSS are consolidated statements of DSS and RPM. 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.
The Company anticipates a moderate growth in the number of apartment units
managed and also expects that income will increase due to inflationary effects
on rents. All personnel located at the apartments who manage the apartments and
perform maintenance are employees of the Company. However, the apartments
reimburse the Company for the services of the on-site personnel. The Company
anticipates a moderate growth in reimbursement income as a result of increases
in salaries of on-site personnel and an increase in the number of apartment
complexes under management.
The Company began offering home care services in August 1996 at selected
apartment locations. Management anticipates that growth in home care service
income will continue at a moderate, controlled pace as it begins to offer these
services to elderly residents in other apartments that it manages. However,
management does not expect the income from these services to be material with
respect to the total income of the Company over the next several years.
Because the Company has not yet completed development of any assisted
living residences, it has not recognized any development fee income or
management fee income from its assisted living development activities. The
policy of the Company is to recognize development fee income when the
construction of the facility is completed and a certificate of occupancy is
issued. The Company expects to earn a fee of approximately $225,000 per
facility. Nine sites have been optioned and determined to be feasible;
construction is expected to start at all nine in 1998. One site is awaiting
feasibility study and control of five additional sites is under negotiation. The
construction process is estimated to be nine to twelve months. Once construction
on an assisted living residence is completed, the Company will begin to
recognize management fee income for those properties. Management believes that
in the near future the development and management of assisted living facilities
will provide the vast majority of the Company's revenues and profits.
All the operating expenses of the Company are related to the personnel
directly performing the management services and the corporate management staff.
Between 85% and 90% of the expenses are for salaries and benefits. The remaining
expenses are administrative expenses that support the activities of the
personnel such as travel, rent, telephone, office expenses, depreciation of
equipment and amortization of management contract rights. 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.
DSS and RPM are both incorporated in North Carolina and, as C corporations,
file their federal income tax returns as part of a consolidated group with THE.
A provision for income tax benefit has been recorded in 1996 since the losses of
DSS and RPM can be applied to income in the consolidated group. No such
provision has been recorded in 1997 since there may not be adequate income
within the consolidated group to utilize losses from DSS and RPM. Upon the
completion of this
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<PAGE>
Offering, DSS and RPM will cease filing tax returns as part of the THE
consolidated group and will file their own consolidated federal return. DSS and
RPM file separate state returns since North Carolina income tax regulations do
not permit filing consolidated returns.
RESULTS OF OPERATIONS
To provide a meaningful comparison in the discussion below, pro forma
financial information for the nine months ended September 30, 1996 is presented
as if DSS had been incorporated and had acquired RPM on January 1, 1996. The pro
forma operating statement is presented in Note 5 to the Company's financial
statements for the nine months ended September 30, 1997.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1996
Total income increased $200,192, or 11.9% to $1,883,824 for the nine months
ended September 30, 1997 from $1,683,632 in the nine months ended September 30,
1996. During the same period, the Company's total expenses increased $320,736,
or 13.9%, to $2,624,116 from $2,303,380. As a result, the Company's net loss
before income tax benefit increased $120,544, or 19.5%, to $740,292 for the nine
months ended September 30, 1997 from $619,748 for the nine months ended
September 30, 1996.
INCOME
Total income increased $200,192, or 11.9%, to $1,883,824 for the nine
months ended September 30, 1997 from $1,683,632 in the nine months ended
September 30, 1996. The increase in revenues was primarily due to increases in
management fees, reimbursement income and home care income due to increased
activity in these areas.
MANAGEMENT FEES. Management fees increased $46,933, or 7.8%, to $648,799
for the nine months ended September 30, 1997 from $601,866 for the nine months
ended September 30, 1996. This increase was the result of increased percentage
management fees at some sites and increased rent collected at the apartments.
HOME CARE INCOME. Home care income increased $118,382 to $122,018 for the
nine months ended September 30, 1997 from $3,636 for the nine months ended
September 30, 1996. Home care operations began August 1996; the increase is due
to the period of operation and an increased number of clients.
REIMBURSEMENT INCOME. Reimbursement income increased $50,832, or 4.8%, to
$1,113,007 for the nine months ended September 30, 1997 from $1,062,175 for the
nine months ended September 30, 1996. This increase was primarily the result of
an increase in the number of personnel employed at the apartment sites.
EXPENSES
Total expenses increased $320,736, or 13.9%, to $2,624,116 for the nine
months ended September 30, 1997 from $2,303,380 for the nine months ended
September 30, 1996. The increase in expenses was primarily the result of
increased personnel expense and related administrative and other expense.
PERSONNEL EXPENSE. Personnel expense increased $235,809, or 11.9%, to
$2,216,972 for the nine months ended September 30, 1997 from $1,981,163 for the
nine months ended September 30, 1996. The increase in personnel expense was
primarily due to increased staffing in the Company's home care business and
increase in the number of personnel at the apartment sites.
ADMINISTRATION AND OTHER EXPENSES. Administrative and other expenses which
consist primarily of office and administrative, rent, insurance and travel
expenses increased $48,370, or 23.4%, to $254,867 for the nine months ended
September 30, 1997 from $206,497 for the nine months ended September 30, 1996.
The increase in administrative expense was primarily due to an increase in
personnel and the increased activity in the home care business.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
$18,912, or 67.2%, to $47,057 for the nine months ended September 30, 1997 from
$28,145 for the nine months ended September 30, 1996. The increase in
depreciation and amortization was attributable to an increase in intangible
assets.
INTEREST EXPENSE. Interest expense increased $17,645, or 20.1%, to $105,220
for the nine months ended September 30, 1997 from $87,575 for the nine months
ended September 30, 1996. The increase in interest expense was attributable to
increased bank borrowings which were used to cover the Company's operating
deficit and start-up expenses.
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YEAR ENDED DECEMBER 31, 1996 COMPARED TO THE YEAR ENDED DECEMBER 31, 1995
With respect to fiscal year 1996 compared to fiscal year 1995, there are no
meaningful comparisons since DSS did not exist in 1995 and RPM had no operations
as an apartment manager during 1995. RPM's only income and expenses in 1995
resulted from its investments in securities, sales of securities and interest
expense on a note payable. The operating statement discussed below is the pro
forma operating statement for the year ended December 31, 1996 as if DSS had
been incorporated and had acquired RPM on January 1. 1996. The pro forma
operating statement is presented in Note 10 to the DSS financial statements for
the period ended December 31, 1996.
Total income was $2,335,229 for the year ended December 31, 1996. During
the same period, the Company's total expenses were $3,171,696. As a result, the
Company's net loss before the provision for income tax benefit was $836,467. The
provision for income tax benefit was $130,000, resulting in a net loss of
$706,467.
Income was made up of management fees of $833,426, home care income of
$18,797 and reimbursement income of $1,467,051 and other income of $15,955.
Expenses included personnel expense of $2,702,843, administrative and other
expenses of $292,487, depreciation and amortization expense of $43,178 and
interest expense of $133,188.
FINANCIAL CONDITION
SEPTEMBER 30, 1997 COMPARED TO DECEMBER 31, 1996
The Company had current assets of $349,508 on September 30, 1997 and
$217,825 on December 31, 1996. The primary assets in current assets are accounts
receivable and prepaid expenses. The Company had accounts receivable of $123,268
on September 30, 1997 and $133,649 on December 31, 1996. The receivables
decreased, even though receivables from Medicaid billing increased, due to the
collection of a single receivable of approximately $35,000. The Company expects
receivables to increase as the Company increases management of apartment units
and assisted living residences. Prepaid expenses increased $144,541 to $164,732
at September 30, 1997 from $20,191 at December 31, 1996. The increase resulted
from prepaid offering expenses paid in accordance with the Company's commitment
letter with the underwriter.
Furniture and equipment decreased to $65,188 at September 30, 1997 from
$88,451 at December 31, 1996 due to depreciation expense. Intangible assets
decreased to $85,459 at September 30, 1997 from $89,927 at December 31, 1996 due
primarily to amortization expense.
Development costs increased to $177,077 at September 30, 1997 from $132,350
at December 31, 1996 due to continuing development activities with respect to
assisted living residences. Development costs will either be recouped with the
successful completion of a facility or written off if a site is determined not
to be feasible.
Accounts receivable -- affiliates, primarily fees receivable from
affiliated partnerships, did not change from $253,616.
Total liabilities decreased $2,957 to $2,638,037 at September 30, 1997 from
$2,640,996 at December 31, 1996. The decrease was primarily due to the net
effect of the conversion of a note payable -- THE to preferred stock and
increases to note payable -- bank and deferred salaries and bonuses.
The conversion occurred September 30, 1997 when the parent accepted
preferred stock of $891,930 for a reduction in a note payable -- THE of a like
amount. The remaining accounts payable -- affiliates at September 30, 1997 is
$253,887 which is a total reduction of $898,603 to the payables to affiliates
from the December 31, 1996 balance of $1,152,490.
Deferred salaries and bonuses increased $299,268 to $727,556 at September
30, 1997 from $428,288 at December 31, 1996. Certain executives of the company
have continued to defer salaries during the start up phase.
The note payable -- bank increased $538,554 to $1,470,176 at September 30,
1997 from $931,622 at December 31, 1996. The line of credit has been used to
fund operating deficits and start up costs, to provide development capital and
to prepay offering expenses.
Other increases in liabilities include an increase to accounts payable and
accrued expenses of $36,827 to $158,836 at September 30, 1997 from $122,009 at
December 31, 1996 and an increase to interest payable of $20,995 to $27,582 at
September 30, 1997 from $6,587 at December 31, 1996. Both of the increases
represent increased activity in operations and start up.
Shareholder's deficit decreased $151,638 from $1,858,827 at December 31,
1996 to $1,707,189 at September 30, 1997. The decrease was the net effect of the
decrease from the conversion of note payable -- THE to preferred stock,
discussed above, and the increase from the net loss for the nine months ended
September 30, 1997.
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LIQUIDITY AND CAPITAL RESOURCES
The Company has operated, and expects to continue to operate, on a negative
cash flow basis due to start-up expenses and length of the development cycle.
Currently, the Company's primary cash requirements include covering operating
deficits and development expenses related to the development, construction and
fill-up of assisted living residences. The Company has relied upon its parent,
THE, and its bank lender to provide it with operating cash.
The Company has a bank credit line to support its daily operating
requirements and initial assisted living developments. It is a $1.6 million
credit line with a variable interest rate, based on the prime rate, renewable in
January 1998. This line of credit is fully secured by securities owned by an
affiliate.
The net proceeds of the Offering will be used to pay off the outstanding
balance under the bank line of credit, 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 Offering,
together with the funds available under its credit facility will be sufficient
to fund its operations for the next 24 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 1995 and
1996. In 1996, THE helped DSS secure a bank loan by providing collateral and
guaranteeing the loan. After the equity offering is completed and the bank loan
is repaid, THE will not offer either its collateral or its guarantee to DSS in
future bank financings. Effective September 30, 1997, the Board of Directors
approved the conversion of $891,930 of the note payable to THE to 178,386 shares
of Series A Preferred Stock.
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 in interest rate fluctuations.
High interest rates would increase the cost of building new facilities and could
slow down the Company's development plans. Also, during a period of rapid
inflation, interest rates could become so expensive that it would not be
economical to use tax exempt bond financing for permanent financing.
CERTAIN ACCOUNTING CONSIDERATIONS
SFAS NO. 123
In October 1995, FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"). SFAS No. 123 establishes financial accounting
and reporting standards for stock-based employee compensation plans. Those plans
include all arrangements by which employees receive shares of stock or other
equity instruments of the employer or the employer incurs liabilities to
employees in amounts based on the price of the employer's stock. Examples are
stock purchase plans, stock options, restricted stock awards, and stock
appreciation rights. This statement also applies to transactions in which an
entity issues its equity instruments to acquire goods or services from
non-employees. Those transactions must be accounted for, or at least disclosed
in the case of stock options, based on the fair value of the consideration
received or the fair value of the equity instruments issued, whichever is more
reliably measurable. The accounting requirements of SFAS No. 123 are effective
for financial statements for fiscal years beginning after December 15, 1995, or
for an earlier fiscal year for which SFAS No. 123 is initially adopted for
recognizing compensation cost. The statement permits a company to choose either
a new fair value-based method or the current APB Opinion No. 25 intrinsic
value-based method of accounting for its stock-based compensation arrangements.
The Company adopted its Stock Incentive Plan (as defined herein) effective
January 1, 1997 but no grants have been made through the date hereof.
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BUSINESS
GENERAL
The Company was founded in May 1996 to develop and manage assisted living
residences, to provide home care services to the frail elderly and to manage low
and moderate income apartment complexes. Management believes that there is a
growing demand for assisted living residences developed for the low and moderate
income frail elderly, specifically in the Company's targeted areas of smaller
cities and towns of North Carolina and throughout the Southeast. Although the
Company has been operating for less than two years, through affiliates of the
Company, senior management has over 20 years of experience in developing and
operating housing specifically designed for this target population with a
concentration in Eastern North Carolina. The Company's two-year growth objective
is to develop at least 16 new assisted living residences, with a capacity of
approximately 960 residents. The Company is in the early stages of its assisted
living development program, with ten sites optioned to date and nine feasibility
studies completed. The Company intends for the majority of the projects it
develops to be owned by or sold to qualified non-profit organizations, with the
Company retaining management contracts for these projects. By transferring
ownership of the properties to non-profit organizations, the Company expects to
be able to utilize tax-exempt bonds to finance the majority of its facilities,
while at the same time carrying little real estate on its balance sheet. With
respect to the Company's current cash generating operations, as of the date of
this Prospectus, the Company manages 62 apartment complexes, consisting of
approximately 2,393 rental units of low and moderate income rent subsidized
apartments, 31% of which are owned by non-profit organizations and 56% of which
are occupied by the elderly. The Company also currently provides approximately
1,400 hours of home care services per month.
The Company was formed in May 1996 as a wholly owned subsidiary of THE and
began operations in July 1996. THE is a privately-held corporation controlled by
the Company's senior management. DSS was initially capitalized with $100 and its
parent, THE, received 100 shares of Common Stock. In July 1996, THE exchanged
all of the stock of its wholly owned subsidiary, RPM, for 2,277,678 shares of
DSS. 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. RPM, now a wholly-owned subsidiary of the Company, manages 2,393
rental housing units located across four states: North Carolina, South Carolina,
West Virginia and Pennsylvania. The Company's management contracts have initial
terms of one to three years, with varying renewal provisions. Of the 62
complexes managed by RPM, 37, or 60%, are controlled by affiliates and 25, or
40%, are controlled by third parties. Currently, apartment management provides
the majority of the Company's revenues.
The Company's home care activities are limited to providing personal care
services to the same population targeted for its assisted living residences. The
Company does not provide medical services and, as such, is not subject to the
regulatory burdens of that market, nor the attendant legal liabilities. The
Company utilizes its home care business for two primary purposes: (i) to provide
services to residents of its existing subsidized senior apartments; and (ii) to
establish operating procedures for delivery of personal care services at its
future assisted living residences.
BUSINESS STRATEGY
The Company's growth is expected to come primarily from developing and
managing assisted living residences. The Company expects its future assisted
living residences to serve as the foundation from which to provide a continuum
of care for low to moderate income senior citizens. The Company has already
developed and implemented its policies, procedures and operating systems for
providing personal care services and has hired its core staff for the personal
care division. Assisted living management is the combination of providing
personal care and real estate management services, both businesses in which the
Company is already involved and in which the Company's senior management has
extensive experience. The Company has developed a 60-unit assisted living
prototype for development primarily in small to mid-sized communities with
populations of under 75,000, whose target resident will be a low to moderate
income frail, elderly individual. In addition, the Company will continually
review apartment management opportunities and may add to its management
portfolio.
Once the Company's assisted living residences have been developed, DSS will
be able to offer low and moderate income elderly individuals a continuum of
living arrangements spanning the course of many years: apartments managed
specifically for the needs of the elderly; home care services provided in such
apartment facilities if, and when, such individual may come to require such
assistance; and, finally, assisted living residences for that time when a
greater level of support may become necessary.
The Company expects to achieve its business objectives by implementing the
following strategies:
SELECTIVELY LOCATING ASSISTED LIVING RESIDENCES. During its initial phase
of development, the Company will locate some of its assisted living facilities
within close proximity to one of the Company's managed apartment complexes. Such
locations
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offer immediate benefits to the Company. Since over 56% of the Company's
apartments are occupied by low and moderate income elderly tenants, when an
elderly tenant needs to move into an assisted living residence, the Company will
be well positioned to be the provider of choice. In addition, since over 31% of
the Company's apartment complexes are owned by non-profit organizations, the
Company already has numerous relationships with regional non-profit
organizations, many of which are expected to become the ultimate owners of the
assisted living facilities. Lastly, the Company expects to be able to utilize
certain staff positions in both apartment complexes and assisted living
facilities, namely maintenance staff and certain providers of personal care,
thus help to control costs at both locations.
DEVELOPING ASSISTED LIVING FACILITIES SPECIFICALLY DESIGNED FOR LOW AND
MODERATE INCOME RESIDENTS. Each assisted living residence developed by the
Company will be designed, constructed and managed so as to be profitable with
only public pay residents, even while providing features typically found in
residences designed for the private pay population, such as private bedrooms,
personal lavatories and many diverse common areas located in various areas of
the residence. As such, for each private pay resident, for whom monthly fees are
typically $150 to $300 per month higher, the Company expects to generate
significantly greater profits. Most moderate income resident will typically
begin their residence as private pay individuals and will convert to public pay
only when such individual's personal resources are exhausted. Since the
Company's cost structure for its assisted living residences has been designed
based on complete occupancy by public pay residents, even when these changes
occur the Company expects profitability at any given location to be maintained.
In addition, because many assisted living residences only accept residents who
have resources to cover a minimum time period, typically 18 months or longer,
the Company anticipates that demand for the Company's residences will be high
among the moderate income frail elderly who may not have the resources to cover
such an extended period of time.
ACCESSING FAVORABLE FINANCING. Because of management's extensive experience
working with non-profit organizations, particularly 501(c)(3)s, the Company
intends to use tax-exempt bonds to finance the majority of its assisted living
residences. This low-cost financing vehicle provides the Company with a
competitive cost advantage. The Company also receives the added benefit of not
carrying significant amounts of real estate on its balance sheet, thus freeing
up capital for new developments. In addition, future earnings will not be
charged with the associated depreciation and amortization.
TRANSFERRING EXPERIENCE TO ASSISTED LIVING RESIDENCES. Assisted living is
the combination of providing senior housing with the provision of home care
services. The Company and its affiliates have extensive experience in developing
housing for low and moderate income seniors and disabled persons. Several of the
Company-managed apartment complexes currently provide regular activities,
communal meals, laundry facilities, and other amenities frequently associated
with assisted living. In addition, the Company currently provides home care
services to low and moderate income frail elderly. The home care services
provided by the Company include assistance with dressing, personal hygiene,
medication management, preparation of simple meals, assistance with mobility,
dental, hair and skin care and maintenance of a safe environment. These services
are identical to those required to be provided in an assisted living residences.
The Company's staff is experienced in providing and documenting these services,
assessing and developing individual care plans, maintaining client records,
regulatory compliance, quality assurance and Medicaid billing. Thus, the Company
believes it already possesses the personnel skills and management systems
required in providing assisted living.
JOINT VENTURES AND CONVERSIONS. Management anticipates growth opportunities
in addition to those provided by its own independent development activities. The
Company is developing alliances with local government agencies such as public
housing authorities dedicated to providing housing and services to the low
income elderly and disabled. The Company intends to explore joint ventures with
local agencies which provide assisted living to its targeted population. These
activities may include newly developed facilities as well as the conversion of
sections of existing subsidized senior housing to assisted living residences.
The Company is in the preliminary stages of developing newly constructed
assisted living with the housing authority of one North Carolina community and
exploring the conversion to assisted living of two residential floors in two
existing subsidized senior housing complexes. Management sees these joint
venture and conversion opportunities as a method of providing assisted living in
larger communities, as well as in the small to medium sized communities
currently targeted by the Company.
ORGANIZATION
The Company is organized into three divisions: (i) developing assisted
living facilities; (ii) managing assisted living facilities targeted to the low
and moderate income frail elderly residents and (iii) managing low and moderate
income, rent subsidized apartments, primarily for the elderly.
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DEVELOPMENT DIVISION
The Company has designed a 60-unit prototype assisted living residence for
development primarily in communities with a population under 75,000. The target
resident is a low-to-moderate income, frail elderly individual with moderate
income equaling the area median income, and low income beginning at
approximately 50% of median income. Based on its own industry surveys, the
Company believes that there are currently few competitors who have targeted the
Company's demographic and regional market: the low-to-moderate income frail
elderly population of the Southeast, especially in rural areas. The Company will
target specific geographic areas where the only existing competition is old
style rest homes, home care and nursing homes.
The Company breaks down development of assisted living facilities into
three major phases as follows: (a) development consisting of town and site
selection, marketing and environmental studies, acquiring local permits,
obtaining financing and construction contracts (four to six months); (b)
construction (nine to 12 months); and (c) fill-up (three to nine months). Once a
project is completed, obtaining and qualifying residents is generally not a
problem because of the existing demand for assisted living facilities. The
Company intends to utilize both corporate and on-site marketing teams and
anticipates a period of three to nine months to fill-up a location. Management
anticipates some private pay residents, but intends to develop properties that
can be profitable with only public pay residents.
The Company's current plan anticipates that most facilities it develops
will be owned by qualified non-profit 501(c)(3)s. In management's opinion,
non-profit ownership offers the best overall financing available for these
facilities, while at the same time allowing the Company to keep its balance
sheet relatively free of real estate. The Company may own or lease some of the
properties to be developed, depending upon financing, investment and marketing
considerations. The Company anticipates construction and permanent funding for
the facilities would be tax-exempt bond financing, Federal Housing
Administration financing or a sale/leaseback with a health care REIT or other
real estate holding entity. The Company expects to combine three to five
properties in a package for non-profit owners since bond financing is more
efficient with loan amounts of $7.5 million and above. Therefore, the Company
may own and operate completed properties until enough can be packaged together
for financing.
The Company currently has 10 sites under option in the State of North
Carolina. Sites located in the nine North Carolina communities of Rocky Mount,
Goldsboro, Cherryville, Shelby, Mocksville, Laurenburg, Swansboro, Hamlet and
Southern Pines have received favorable feasibility analysis. The Company is in
the process of obtaining options on five sites. The Company intends to maintain
a geographic focus in North Carolina developing approximately three to five
facilities at a time. In the future, the Company will advance into surrounding
states, maintaining the same focus on small to mid-sized communities with a
relatively large low and moderate income elderly population with an emphasis on
developing newly constructed assisted living facilities. Initially, the Company
anticipates developing eight projects, in groups of four, per year but intends
to increase the number to 12 to 14 per year. The Company believes the increased
pace of development can be achieved with current staffing levels. More
importantly, management believes that such a heightened development pace will
bring greater economies of scale to project financings and that demand for
assisted living units among the low and moderate income population in the medium
sized markets that the Company is targeting will sustain that pace. Development
will be slightly staggered so that the Company will not be taking delivery of
all projects in the same month, but financing will typically be arranged in
packages of three to five properties. Turnkey costs, including all development
fees to the Company, for the 60-unit prototype are estimated to average
$2,581,000 for the first eight projects. In the initial phases of development,
the Company intends to locate some facilities near its existing subsidized
elderly apartments. Such location creates many cross-marketing opportunities for
the Company. However, management believes that its prototype assisted living
residences can be successfully developed independently.
The Company will enter into management contracts with non-profit owners
that provide for the development of newly constructed assisted living
residences. Once a potential site is located, feasibility and due diligence is
completed, the prospective non-profit owner will make a final commitment to the
site, subject to financing. In general, tax-exempt bond financing proceeds will
be used for both construction and permanent financing. In this situation, the
Company will assign its option to acquire a site to the non-profit for exercise,
and title in the property will go directly to the non-profit owner. The Company
will be entitled to a base development fee equal to 10% of total development
costs, less the development fee. The Company may receive an additional 5%
development fee for a total maximum fee of 15% of development costs, based on
achieving certain performance goals and cost efficiencies.
With respect to all of the current assisted living projects in development,
management has completed all of the internal analysis necessary to bring each to
what is commonly called the mortgage package phase. For each project planned for
the initial stage of development, the Company has some form of site control
(actual ownership or an option to purchase), a
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schematic architectural plan and an estimate from a proposed contractor, and the
Company's own market study. With respect to nine of the sites, the Company has
received a favorable feasibility analysis from an independent market feasibility
company. One site is awaiting feasibility study and control of five additional
sites is under negotiation. In addition, if required by the lender, the Company
will also engage a third party appraiser.
The Company's approach to individual markets for potential development is
centered on senior management's long-term experience with mid-size and rural
markets. Consequently, senior managers of the Company perform the thorough
internal market analysis at the beginning of the site acquisition process. This
internal work is then carefully reassessed by a third party market study just
prior to entering into a formal commitment to the development, which typically
takes place when the site is acquired and construction commences. Management
believes that this approach provides the safest way to ensure a feasible
development in a timely and cost efficient manner.
Prior to the Company's final commitment to proceed with a site, the project
will typically have a designated non-profit owner committed to purchase the
facility when the necessary financing to fund the purchase is in place. The
purchase price will be the sum of the net proceeds of the financing DSS
arranges. The Company currently has relationships with several qualified
non-profits and intends to develop new ones with area hospitals as the Company
continues to grow. In all cases, the Company will have an option to purchase and
other safeguards to protect its long term interest in the properties.
As an alternative, the Company may consider more conventional
sale/leaseback arrangements with for-profit organizations. However, at this
time, management believes that for-profit organizations cannot compete with
financing alternatives available to non-profits. Management also believes that
developing assisted living residences for the low and moderate income frail
elderly for non-profits, as opposed to for-profit organizations, will be better
received by localities.
With respect to architectural plans, specifications and construction
contracts, the Company intends to negotiate guaranteed not-to-exceed contracts
and not to put the work out for bid. The architect currently retained by the
Company has extensive elderly housing and healthcare experience.
Developments will be staged to begin as previous developments reach
stabilized operations to maintain a pipeline of proposed projects with all
preliminary internal work done and land under option. The Company intends that a
few excess projects will always be in the pipeline because some proposed
projects will not prove feasible after final analysis.
In addition to the foregoing development activities in which the Company
will develop newly constructed assisted living residences for management by the
Company in communities of 75,000 or less, the Company intends to participate in
development activities as a joint venturer with local government agencies and
non-profit organizations dedicated to providing housing and services to the low
income elderly. As part of these activities, the Company may perform development
activities for the construction or rehabilitation of a facility on a fee basis
with the Company having no further participation in the operation of the
facility upon completion of construction. Likewise, the Company may enter into
agreements to manage an existing property on behalf of a government agency or
non-profit owner.
The Company currently manages several subsidized apartment complexes for
low and moderate income elderly individuals, which meet many of the physical
requirements of a licensed assisted living facility. That is, the facilities
have wide hallways, communal dining rooms, kitchens, laundry facilities,
activity rooms and other common areas available for use by residents. The
Company is currently working closely with its architect and the North Carolina
Division of Facility Services regarding the potential conversion of two floors
of existing apartment complexes to licensed assisted living residences.
Management believes that joint ventures and conversion opportunities provide an
attractive means of establishing a presence in larger communities with
populations in excess of 75,000, as well as in small to medium sized
communities.
ASSISTED LIVING MANAGEMENT DIVISION
All developed assisted living residences will be managed either on a
management contract, cancelable only under very specific conditions or pursuant
to a lease between the owner and a single purpose wholly-owned subsidiary of the
Company formed specifically for the project. The term of the management contract
or lease will be for a minimum of three years, rolling forward each year unless
notice of termination is given. In addition, the Company will have an option to
purchase any project and will receive a fee if the management agreement is
terminated without cause.
Management views assisted living operations as a combination of home care
services and real estate management services, both current operations of the
Company. Thus, this division will combine these two skills in buildings that the
Company will have developed and financed specifically for the low and moderate
income, public pay frail elderly market.
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The assisted living operations division will begin full operation when the
first Company-developed assisted living residences come on line. However, with
respect to the home care component of assisted living, the Company has already
instituted a successful pilot program in which the Company is providing home
care services to low and moderate income frail elderly residents at some of the
apartment complexes that it manages as well as in private homes. These home care
services are funded by state Medicaid programs as well as private payors. The
home care services provided by the Company include assistance with dressing,
personal hygiene, medication management, preparation of simple meals, assistance
with mobility, dental, hair and skin care and maintenance of a safe environment.
The Company also has staff experienced in providing and documenting these
services, assessing and developing individual care plans, maintaining client
records, regulatory compliance, quality assurance and Medicaid billing. These
services are identical to those which the Company will be providing at its
assisted living residences. Through this pilot program the Company has
established the operating procedures which will be utilized in delivering home
care services at its assisted living residences. The Company has focused its
activities on having an exemplary operation with respect to client care,
documentation, policies and procedures and quality assurance. The Company had
its first on-site survey of its home care operations by the State of North
Carolina on May 16, 1997. The survey resulted in a deficiency-free finding by
the State. The State specifically complimented the Company's self-audit and
compliance procedures.
Until DSS reaches a certain level of assisted living units under
management, currently estimated to be approximately eight properties, this
division will, in part, be operated with personnel already providing home care
and apartment management services. There will, therefore, be some significant
operating savings to the Company as a whole. For example, with respect to real
estate management, the Company anticipates being able to share maintenance
personnel between assisted living residences and nearby apartment complexes that
the Company manages. The same overlap feature will apply to certified nurse's
aides and choreworkers who currently perform their duties in individual homes or
apartments and who can provide those same services in the assisted living
residences. However, key on-site personnel, such as the facility administrator,
will not be shared or assigned duties outside their respective property. Sharing
will take place at the service provider level only on an as-available basis.
Although the primary conduit for the Company's home care services in the
future will be its assisted living residences, the Company intends to continue
providing these services to individuals in apartments and private homes.
APARTMENT MANAGEMENT DIVISION
Affiliates of the Company have been in the business of developing and
managing senior housing for more than 20 years. Of the 62 complexes currently
managed by the Company, the Company controls 37, representing 1,351 units,
either through the direct ownership of management rights or through ownership by
an affiliated entity. The remaining 25 complexes, representing 1,042 units are
owned by third parties. Approximately 31% of the complexes are owned by
non-profit organizations.
The Company manages apartments in North Carolina, South Carolina,
Pennsylvania and West Virginia. Generally the managed properties receive
government subsidies through favorable financing and/or direct rent
contributions under programs administered by Housing and Urban Development
("HUD") or Rural Development Agency ("RDA", formerly the Farmer's Home
Administration). Approximately 39% of the units under management are eligible
for rent subsidies under Housing Assistance Payment ("HAP") contracts. The
treatment of HAP contracts upon expiration is under review by the United States
Congress. No current HAP affecting the Company's managed properties is up for
renewal until 1999. The effect of the expiration of an individual property's HAP
without renewal varies and depends on the HUD determined fair market rent for
the specific market area.
Management fees for government assisted housing are frequently higher than
fees for management of conventional apartments because of the added layers of
paperwork required to comply with government programs. The Company typically
receives a percentage of rent revenues ranging from 6% to 8% or a flat monthly
fee for occupied units. In addition, the Company receives a stated monthly
bookkeeping fee for all HUD properties it manages. The management agreements are
approved by the applicable government agency and are relatively standardized.
The initial term of a HUD management contract is two years with one-year
renewals thereafter. A typical RDA management contract has a three-year term and
must be executed every three years. The Company's apartment management contracts
have initial terms of one to three years, with varying renewal provisions; the
Company's history of contract renewal has been excellent.
As discussed above, management anticipates modest savings in operating
costs for both the properties managed in the apartment management division and
those in the assisted living management division. Because many of the initial
assisted living residences will be in close proximity to existing apartment
complexes managed by the Company, management believes that through the sharing
of certain personnel, mostly maintenance and property staff, operating costs in
both divisions will be
24
<PAGE>
lowered. An additional, very important benefit from the Company's experience
managing low and moderate income elderly properties is that it gives management
excellent operating histories to use as comparisons for the assisted living
residences. However, perhaps most important for cross-marketing purposes,
through its apartment management division the Company has established
relationships with over 1,000 low and moderate income elderly tenants. These
relationships give the Company a unique platform from which to develop its home
care and assisted living operations.
ASSISTED LIVING INDUSTRY
The Company believes that the assisted living industry is evolving as the
preferred alternative to meet the growing demands for a cost effective setting
for seniors who cannot live independently due to physical or cognitive frailties
but who do not require the more intensive medical attention provided by a
skilled nursing facility.
Generally, assisted living represents a combination of housing and 24-hour
per day personal support services designed to assist seniors with the activities
of daily living ("ADLs"), which include bathing, eating, personal hygiene,
grooming, ambulating and dressing. Certain assisted living facilities may offer
higher levels of personal assistance for residents with Alzheimer's disease or
other forms of dementia.
Assisted living facilities in North Carolina generally fall into three
types: downscale, dormitory and institutional style rest homes with shared
bathrooms; newly constructed, high fee, upscale, residential style facilities;
and traditional nursing homes with assisted living beds. The Company's prototype
residence is distinguishable from the traditional rest home or downscale
dormitory style in several respects. The Company's residences are residential in
style, provide suites with a private bath and two bedrooms, each with separate
entrance and temperature control, and provide spacious common areas that are
comparable to those in the upscale model. The Company's prototype follows the
high fee, upscale residential style in all aspects other than price.
The Company believes that a number of factors will allow assisted living
companies to continue as one of the fastest growing segments of senior care:
SUPPLY/DEMAND IMBALANCE. While the senior population is growing
significantly, the supply of skilled nursing beds per thousand is declining.
This imbalance may be attributed to a number of factors in addition to the aging
of the population. Many states, in an effort to maintain controls of Medicaid
expenditures on long-term care, have implemented more restrictive certificate of
need regulations or similar legislation that restricts the supply of licensed
skilled nursing facility beds. Additionally, acuity-based reimbursement systems
have encouraged skilled nursing facilities to focus on higher acuity patients.
The Company also believes that high construction costs and limits on government
reimbursement for the full cost of construction and start-up expenses also will
constrain the growth and supply of traditional skilled nursing beds. These
factors, taken in combination, result in relatively fewer skilled nursing beds
available for the increasing number of seniors who require assistance with ADLs
but do not require 24-hour medical attention.
COST EFFECTIVENESS. The average annual cost for a patient in a skilled
nursing home can exceed $75,000 per year in certain markets. In contrast,
assisted living services are provided at a cost which is generally 30% to 50%
lower than skilled nursing facilities located in the same region.
DEMOGRAPHICS AND CHANGING FAMILY DYNAMICS. The target market for the
Company's services are persons generally 75 years and older, one of the fastest
growing segments of the U.S. population. According to the U.S. Census Bureau,
the portion of the U.S. population age 75 and older is expected to increase by
28.7%, from approximately 13.0 million in 1990 to approximately 16.8 million by
the year 2000, and the number of persons age 85 and older, as a segment of the
U.S. population, is expected to increase by 45%, from approximately 3.0 million
in 1990 to over 4.3 million by the year 2000. Furthermore, the number of persons
afflicted with Alzheimer's disease is also expected to grow in the coming years.
According to data published by the Alzheimer's Association, this group will grow
from the current 3.8 million people to 4.8 million, or an increase of 26.3%, by
the year 2000. As Alzheimer's disease and other forms of dementia are more
likely to occur as a person ages, the increasing life expectancy of seniors is
expected to result in a greater number of persons afflicted with Alzheimer's
disease and other forms of dementia in future years absent breakthroughs in
medical research.
CONSUMER PREFERENCE. The Company believes that assisted living is
increasingly becoming the setting preferred by prospective residents as well as
their families, who are often the decision makers for seniors. Assisted living
is a cost effective alternative to other types of facilities, offers seniors
greater independence and allows them to age in place in a residential setting.
25
<PAGE>
COMPETITION
The assisted living industry is highly competitive, fragmented,
characterized by numerous small operators but also with large, public,
well-financed competitors. The scope of assisted living services varies
substantially from one operator to another and with the requirements of one
state to another. The Company believes that residential style assisted living
offers an attractive approach to providing residential and personal care
services for the elderly, particularly in light of (i) the increased emphasis by
both federal and state governments on containing costs; (ii) limitations imposed
in many states on the construction of additional skilled nursing facilities,
which have generally increased the level of care provided in such facilities and
forced less acute elderly to seek alternative care arrangements; and (iii) the
decreasing availability of family care. The primary consumers of assisted living
residences are persons over the age of 65.
The competition in managing subsidized housing for the elderly is
substantial with competition from numerous local, regional and national
companies, many of whom have greater financial resources than those of the
Company. There is increasing demand for such facilities due to the increasing
population of elderly in the United States but growth in this industry is
dependent upon the availability of government financing and subsidies which are
currently being restricted and undergoing reassessment and change. Many of the
current managers of such facilities are companies affiliated with the original
developers in the Company's geographic region. The Company does not anticipate
substantial near-term growth in this segment of its business and is not
dependent on such growth for future profitability. Management of the Company has
over twenty years experience in subsidized housing and extensive experience
interacting with governmental agencies, so the Company should be positioned to
take advantage of this business if and when conditions change.
REGULATORY MATTERS
The assisted living operations of the Company are subject to substantial
regulation by federal, state and local governmental agencies which vary among
the types of facilities and from state to state. Assisted living facilities are
generally subject to less regulation than other licensed health care providers
but more regulation than standard congregate care or independent living
facilities. However, the Company anticipates that additional regulations and
licensing requirements will likely be imposed by the states and the federal
government. Currently, North Carolina requires licenses to provide the assisted
living services provided by the Company but not a certificate of need. The North
Carolina legislature has approved a 12 month moratorium on assisted living
licensure. The law provides several exclusions that exempt the Company's
proposed activities based on the current status of development and the proposed
location of the facilities. The purpose of the moratorium is to study adult care
homes in North Carolina to determine whether the existing licensure procedures
need to be modified. "Adult care homes" now include everything from group homes
to old style rest homes to new assisted living facilities. It is anticipated
that the moratorium will result in stricter licensure procedures in North
Carolina.
The licensing statutes typically establish physical plant specifications,
resident care policies and services, administration and staffing requirements,
financial requirements, emergency service procedures plus after construction
approval of the as-built building and the Company's operating policies and
procedures. The Company's facilities must also comply with the requirements of
the Americans with Disabilities Act and are subject to various local building
codes and other ordinances, including fire safety codes. The Company is a
provider of services under Medicaid programs and is subject to Medicaid
regulations designed to limit fraud and abuse, violations of which could result
in civil and criminal penalties and exclusion from participation in Medicaid
programs. The Company believes it is in substantial compliance with all
applicable regulatory requirements. No actions are pending against the Company
for non-compliance with any regulatory requirement.
The targeted residents for the Company's facilities are eligible for
several types of public funds in North Carolina. North Carolina's Division of
Special Assistance of the Department of Social Services pays a monthly maximum
of $893 for room and board. This payment is funded from the federal Supplemental
Security Income program ("SSI") and state supplements. In addition, the state
Medicaid program provides funds for personal care services. The State and County
are each responsible for half of the Medicaid payment. The amount available
depends on the services required. Finally, an allowance of 50 cents per day is
paid by Medicaid to fund medically related resident transportation.
Subsidized apartments are also subject to substantial regulations primarily
from HUD and the RDA, as applicable. In most states, subsidized apartments are
also subject to state and local building and fire codes.
Providers of personal care services in North Carolina must obtain a license
from the Department of Facility Services. There are different levels of
licensure depending on the nature of the services provided. A provider must
obtain a Certificate of Need ("CON") to participate in the Medicare-funded Home
Health Program, which generally entails the provision of skilled medical
services and therapies. No CON is required to participate in the Medicaid funded
personal care service
26
<PAGE>
("PCS") program which is available to the low income elderly in their place of
residence nor the Community Access Program ("CAP") which provides extensive
personal care and related services for the low income disabled. The Company
participates in both the PCS and CAP programs. The reimbursement rate is
currently $11.92 per hour. Eligible participants in the PCS program can receive
up to a maximum of 80 hours of personal care services each month. Services
include assistance with the basic ADL's including bathing, dressing, grooming,
transfers, personal hygiene, assistance with medication monitoring, maintaining
a safe and clean environment, household management and simple meal preparation,
The Company's personal care revenues for 1996 and 1997 were funded 97% and 90%
respectively by the Medicaid PCS program.
FACILITIES/PROPERTIES
The Company subleases 90% of the office and administrative building located
at 915 West Fourth Street, Winston-Salem, North Carolina from THE at a monthly
rent of $2,700 plus its share of property insurance and maintenance expenses.
There is no written sub-lease and the base lease between THE and an independent
third party has a remaining term of approximately two and one-half years.
EMPLOYEES
As of October 31, 1997, the Company had 133 employees, 48 of whom are
full-time. None of the Company's employees are subject to collective bargaining
agreements and none of the employees have been on strike in the past three
years.
LEGAL PROCEEDINGS
As of the date of this Prospectus, the Company is not a party to any legal
proceedings which could have a materially negative impact on the Company.
27
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are as follows:
<TABLE>
<S> <C> <C>
William G. Benton 52 Chairman of the Board and Chief Executive Officer
Susan L. Christiansen 44 President, Chief Operating Officer and Director
G. L. Clark, Jr. 52 Treasurer, Chief Financial Officer and Director
Perry C. Craven 57 Director
Walter H. Ettinger, Jr. 45 Director
</TABLE>
Mr. William G. Benton has served as Chief Executive Officer and Chairman of
the Board of the Company since inception. Mr. Benton is a Director, President
and the controlling shareholder of THE since its incorporation in 1991. Mr.
Benton, through various entities, has engaged in the commercial real estate
business in the areas of multifamily apartments, hotels, shopping centers,
long-term health care facilities and restaurants. Mr. Benton originally
developed and serves as General Partner on many of the Section 8 elderly
properties which the Company manages. From 1988 through September 1994, Mr.
Benton served as CEO and director of Health Equity Properties Incorporated
("HEP"), a New York Stock Exchange listed real estate investment trust ("REIT")
with over $150 million in long-term health care assets. At the time of the
merger of HEP and Omega Healthcare Investors, Inc., Mr. Benton was the Chairman
of the Board and Chief Executive Officer of HEP. He is also a director of Tanger
Factory Outlet Centers, Inc., a New York Stock Exchange-listed REIT.
Ms. Susan L. Christiansen has served as President and Chief Operating
Officer and has been a director of the Company since inception. Ms Christiansen
is an officer, director, General Counsel and a shareholder of THE. Ms.
Christiansen served as Vice President, General Counsel and Secretary of HEP from
1990 until its merger in 1994. She has 20 years of experience in legal and
financial matters affecting senior housing with services. Ms. Christiansen also
has extensive experience with compliance with various government regulations and
in managerial and personnel matters. Ms. Christiansen also is a licensed real
estate broker in North Carolina.
Mr. G.L. Clark, Jr. has served as Chief Financial Officer and has been a
director of the Company since inception. Mr. Clark is a Director, Chief
Financial Officer and a shareholder of THE, and has been Chairman of the Board
of RPM since January 1, 1996. Mr. Clark served as Vice President and Chief
Financial Officer of HEP from 1988 until its merger in 1994. Mr. Clark is a
Certified Public Accountant and has been involved in financial and accounting
aspects of low and moderate income housing and long-term health care facilities
since 1983.
Ms. Perry C. Craven has been the sole shareholder and director of Perry C.
Craven Associates, Inc. since 1977, a company which specializes in elderly
housing development, non-profit development, housing training, rural housing
development and communications.
Dr. Walter H. Ettinger, Jr. has been Associate Professor of Medicine, Head
of Section of Internal Medicine and Gerontology, Department of Medicine, Bowman
Gray School of Medicine, Winston-Salem, North Carolina and Deputy Director of
the J. Paul Sticht Center on Aging, Bowman Gray/Baptist Hospital Medical Center
since 1987. From 1985 to 1987 he was Assistant Professor of Medicine, Division
of Geriatrics and Gerontology, The John Hopkins University School of Medicine,
Baltimore, Maryland, and from 1982 to 1987 was on the staff of Francis Scott Key
Medical Center, Baltimore, Maryland.
The Company's executive officers are appointed annually by, and serve at
the discretion of, the Board of Directors. All directors hold office until the
next annual meeting of the Company or until their successors have been duly
elected or qualified. There are no family relationships among any of the
executive officers and directors of the Company.
In July 1995, Grandfather Mountain Limited Partnership, which owns a
shopping center in Boone, North Carolina, filed a Chapter 11 Reorganization
under the Federal Bankruptcy Laws because both the anchor tenant, Roses
Department Store, and the lender, Mutual Savings and Loan Association,
Morganton, North Carolina filed for Reorganization. The Bankruptcy Court
confirmed the Partnership's Plan of Reorganization by Order entered October 7,
1997. Benton Investment Company, a wholly-owned subsidiary of THE, is one of the
two General Partners of Grandfather Mountain Limited Partnership, Mr. Benton and
Mr. Clark serve as CEO and President of Benton Investment Company, respectively.
DIRECTOR COMPENSATION
The Company's outside directors receive $250 for their attendance at
meetings. The Company intends to increase compensation for outside directors due
to increased responsibilities associated with serving as directors of a public
company but
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<PAGE>
has not determined the level of such compensation. In addition, the Company will
reimburse directors for out-of-pocket and travel expenses incurred for their
attendance at meetings.
EXECUTIVE COMPENSATION; EMPLOYMENT AGREEMENTS
During the fiscal year ended December 31, 1996, THE, the Company's parent,
paid and/or accrued compensation to Mr. Benton, Mr. Clark and Ms. Christiansen
for pre-incorporation services rendered to the Company. The Company has agreed
to assume the liability for all accrued but unpaid compensation and to reimburse
THE for all compensation prior to the Company's date of incorporation. Ms.
Walker and Ms. Robinson were paid by the Company's wholly-owned subsidiary, RPM
for the fiscal year ended December 31, 1996.
The following table reflects all compensation earned by the named employees
of the Company for the year ended December 31, 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
---------------------------------
AWARDS
ANNUAL COMPENSATION ---------------------- PAYOUTS
------------------------------------- RESTRICTED -------
OTHER ANNUAL STOCK OPTIONS/ LTIP ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY(1) BONUS COMPENSATION AWARD SARS PAYOUTS COMPENSATION
- ------------------------------ ----- --------- ------- ------------ ---------- -------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
William G. Benton
Chief Executive Officer..... 1996 $ 189,264(2) $84,132 -- -- -- -- --
Susan L. Christiansen
Chief Operating Officer..... 1996 104,000 14,500 -- -- -- -- --
G.L. Clark, Jr.
Chief Financial Officer..... 1996 94,500 36,750 -- -- -- -- --
Deborah O. Robinson
Chief Accounting Officer.... 1996 60,000 -- -- -- -- -- --
Sandra T. Walker
Executive Vice President.... 1996 89,615 -- -- -- -- -- --
</TABLE>
- ---------------
(1) Each of the employees in the table accrued a portion of their 1996 salary
listed above. Mr. Benton accrued $168,264. Ms. Christiansen accrued $29,000.
Mr. Clark accrued $73,500. Ms. Robinson accrued $5,000. Ms. Walker accrued
$5,000. Under an agreement with the Company, those employees agreeing to
accrue a portion of base compensation are entitled to repayment of the
accrued compensation, plus a bonus equal to 50% of the accrued compensation.
Mr. Benton and Mr. Clark are entitled to purchase shares of the Company's
common stock with the bonus portion attributed to accrued compensation at a
purchase price equal to 50% of the initial public offering price. Ms.
Christiansen is entitled to purchase shares of the Company's common stock
with the bonus portion attributable to accrued compensation at a purchase
price equal to 100% of the initial public offering price. Additional amounts
of compensation have been accrued during 1997. Management anticipates that
all such accruals will cease by December 31, 1997. See below.
(2) Mr. Benton agreed to reduce his base annual salary from $189,264 to $104,000
per year beginning July 1, 1997. In addition to his base compensation, Mr.
Benton will continue to be entitled to a performance bonus.
No Directors other than those who are full time employees of the Company
received any compensation during 1996.
<TABLE>
<CAPTION>
DIRECTORS AS A GROUP CASH ACCRUED
- ------------------------------------------------------ -------- --------
<S> <C> <C>
Number of Persons (5)................................. $117,000 $270,764
</TABLE>
Salaries for executives and other management personnel of $292,906 have
been accrued during 1996 and $224,827 during the first nine months of 1997.
Employees agreeing to the accrual of a portion of their base salary are entitled
to receive payment of accrued amounts, plus a bonus equal to 50% of the accrued
amount. Management anticipates that all such accruals will cease by December 31,
1997.
EMPLOYMENT AGREEMENTS
Mr. Benton, Mr. Clark and Ms. Christiansen have employment agreements with
the Company. The employment agreements provide for a base salary with increases
as authorized by the Board of Directors. The Agreements are for terms of five
years, with each day worked being deemed to extend the term by an additional
day.
The agreements provide for the payment to each executive officer of a
lump-sum severance payment if the Company terminates such executive's employment
during the term of the agreements other than for cause, or if the employment is
terminated for certain reasons, including a change of control of the Company.
The lump-sum payment is equal to three times
29
<PAGE>
the amount of such executive's average base salary for the previous 5 years.
These three employment agreements contain terms prohibiting solicitation of
Company employees for 18 months after termination, non-disclosure of
confidential information and return of all Company documents.
STOCK INCENTIVE PLAN
The Company's 1997 Stock Incentive Plan (the "Stock Incentive Plan") was
adopted by the Company's Board of Directors and approved by the sole shareholder
in January 1997. A total of 500,000 shares of Common Stock have been reserved
for issuance under the Stock Incentive Plan. Stock options, stock appreciation
rights, restricted stock and deferred stock may be granted under the Stock
Incentive Plan to key employees and directors or consultants of the Company or a
subsidiary. To date, no options to purchase shares have been granted under the
Stock Incentive Plan.
The Stock Incentive Plan will be administered by a Committee (the "Stock
Incentive Committee") consisting of at least two disinterested directors. The
Stock Incentive Plan requires that the members of the Stock Incentive Committee
be "disinterested persons" within the meaning of Rule 16b-3, as from time to
time amended, under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). The Stock Incentive Committee has the authority, within
limitations as set forth in the Stock Incentive Plan, to establish rules and
regulations concerning the Stock Incentive Plan, to determine the persons to
whom options may be granted, to designate the number of shares of Common Stock
to be covered by each option, and to determine the terms and provisions of the
option to be granted. In addition, the Stock Incentive Committee has the
authority, subject to the terms of the Stock Incentive Plan, to determine the
appropriate adjustments in the terms of each outstanding option in the event of
a change in the Common Stock or the Company's capital structure.
Options granted under the Stock Incentive Plan may be either incentive
stock options ("ISO's") within the meaning of Section 422 of the Code, or
non-qualified stock options ("NQSOs"), as the Stock Incentive Committee may
determine. The exercise price of each option will be fixed by the Stock
Incentive Committee on the date of grant, except that (i) the exercise price of
an ISO granted to any individual who owns (directly or by attribution) shares of
Common Stock possessing more than 10% of the total combined voting power of all
classes of outstanding stock of the Company (a "10% Owner") must be at least
equal to 110% of the fair market value of the Common Stock on the date of grant
and (ii) the exercise price of an ISO granted to any individual other than a 10%
Owner must be at least equal to the fair market value of the Common Stock on the
date of the grant. Any options granted must expire within ten years from the
date of grant (five years in the case of an ISO granted to a 10% Owner). Shares
subject to options granted under the Stock Incentive Plan which expire,
terminate or are canceled without having been exercised in full become available
again for option grants. No options shall be granted under the Stock Incentive
Plan more than ten years after the adoption of the Stock Incentive Plan.
Options are exercisable by the holder subject to terms fixed by the Stock
Incentive Committee. However, an option will be exercisable immediately upon the
happening of any of the following (but in no event during the six-month period
following the date of grant or subsequent to the expiration of the term of an
option): (i) the holder's retirement on or after attainment of age 65; (ii) the
holder's disability or death; or (iii) the occurrence of such special
circumstances or events as the Stock Incentive Committee determines merits
special consideration. Under the Stock Incentive Plan, a holder generally may
pay the exercise price in cash, by check, by delivery to the Company of shares
of Common Stock already owned by the holder or, in certain circumstances, in
shares issuable in connection with the options, or by such other method as the
Stock Incentive Committee may permit from time to time.
Options granted under the Stock Incentive Plan will be non-transferable and
non-assignable; provided, however, that the estate of a deceased holder may
exercise any options held by the decedent. If an option holder terminates
employment or consultancy with the Company or service as a director of the
Company while holding an unexercised option, the option will terminate
immediately, but the option holder will have until the end of the 90th business
day following his or her termination of employment or service to exercise the
option. However, all options held by an option holder will terminate immediately
if the termination is for cause or voluntarily on the part of the employee.
The Stock Incentive Plan may be terminated and may be modified or amended
by the Stock Incentive Committee or the Board of Directors at any time;
provided, however, that (i) no modification or amendment either increasing the
aggregate number of shares which may be issued under options or to any
individual, increasing materially the benefits accruing to participants under
the Stock Incentive Plan, or materially modifying the requirements as to
eligibility to receive options will be effective without shareholder approval of
such amendment and (ii) no such termination, modification or amendment of the
Stock Incentive Plan will alter or affect the terms of any then outstanding
options without the consent of the holders thereof.
OPTION GRANTS
As of the date hereof, no grants of options under the Stock Incentive Plan
have been made. However, separately from the Stock Incentive Plan, a maximum of
80,329 options have been granted to William Benton, Susan Christiansen and G.L.
Clark, Jr. in consideration for their deferral of certain cash compensation.
30
<PAGE>
PRINCIPAL SHAREHOLDERS
THE owns 1,800,000 shares of Common Stock and is the sole shareholder of
the Company. Upon completion of the Offering, THE will continue to own
approximately 54.5% of the Company's Common Stock.
The outstanding voting securities of THE are owned by a small group of
investors, including the officers and directors of the Company. A super majority
of the voting securities of THE are subject to a voting trust agreement electing
William G. Benton as voting trustee and a shareholders' agreement which grants
THE and William G. Benton, Susan L. Christiansen and G.L. Clark, Jr. a right of
first refusal on any transfer of stock and an option to buy all shares of any
deceased, disabled or terminated shareholder. Both of the agreements provide
that William G. Benton, Susan L. Christiansen and G.L. Clark, Jr. shall serve as
the directors of THE. Accordingly, the shares of Common Stock of the Company
owned by THE will be voted at the discretion of Mr. Benton, Ms. Christiansen and
Mr. Clark. Such persons will control the outcome of all matters submitted to
shareholders for approval, including the election of directors of the Company.
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of September 30, 1997, and as
adjusted to reflect the sale of the Common Stock offered hereby, by (i) each
shareholder known by the Company to be the beneficial owner of five percent or
more of the outstanding Common Stock, (ii) each director and officer of the
Company named in the Summary Compensation Table individually, and (iii) all
directors and executive officers as a group. In each case, the address of the
beneficial owner is the address of the principal executive offices of the
Company.
<TABLE>
<CAPTION>
NUMBER OF
SHARES PERCENTAGE
BENEFICIALLY ---------------------------------
NAME OWNED(1) BEFORE OFFERING AFTER OFFERING
- --------------------------------------------------------------------------------- --------- --------------- --------------
<S> <C> <C> <C>
THE(1)........................................................................... 1,800,000 100% 54.5%
William G. Benton(2)............................................................. 1,179,000 65.5 35.7
Susan L. Christiansen(3)......................................................... 295,200 16.4 8.9
G.L. Clark, Jr. (4).............................................................. 264,600 14.7 8.0
Walter H. Ettinger, Jr........................................................... 0 0 0
Perry C. Craven.................................................................. 0 0 0
All directors and executive officers as a group (5 persons)...................... 1,738,800 96.6% 52.7%
</TABLE>
- ---------------
(1) In May 1996, THE contributed $100 for 100 shares of Common Stock of the
Company. In July 1996, THE exchanged all of the issued and outstanding
shares of RPM for 2,277,678 shares of Common Stock of the Company. Effective
June 30, 1997, THE returned 477,778 shares which DSS retired.
(2) Mr. Benton owns, directly or indirectly, 65.6% of the issued and outstanding
shares of THE. Shares held does not include 52,579 shares of the Company
that Mr. Benton is entitled to if he exercises an option to convert deferred
compensation to stock.
(3) Ms. Christiansen owns, directly or indirectly, 16.4% of the issued and
outstanding shares of THE. Shares held does not include 3,600 shares of the
Company that Ms. Christiansen is entitled to if she exercises an option to
convert deferred compensation to stock.
(4) Mr. Clark owns, directly or indirectly, 14.7%% of the issued and outstanding
shares of THE. Shares held does not include 24,150 shares of the Company
that Mr. Clark is entitled to if he exercises an option to convert deferred
compensation to stock.
31
<PAGE>
CERTAIN TRANSACTIONS
On January 1, 1996, RPM acquired certain assets, consisting of management
contracts valued at $0, trade accounts receivable of $119,023, land valued at
$70,536 and furniture and equipment valued at $121,659 from an entity related
through common ownership with RPM, by assuming certain liabilities of THE. The
difference between the value of the assets and the liabilities assumed is
recorded as a deemed distribution in the equity section of the balance sheet.
On January 1, 1996, RPM transferred its investment in securities available
for sale, and the associated margin account payable to THE, the parent, in a
non-cash transaction which exchanged the securities at a market value of
$494,693, less unrealized gains of $270,214 and relief of a liability to THE of
$48,344, for the assumption of a margin account by THE of $185,509 and a
reduction of the paid-in capital in excess of par by $87,314. The transaction
was recorded at book value on the records of both companies.
On July 1, 1996, the Company acquired 100% of RPM from THE through the
exchange of 2,277,678 shares of DSS common stock for RPM stock. No value was
assigned to the DSS common stock issued since RPM had no positive book value at
that date. The acquisition was treated as a combination of entities under common
control.
On September 1, 1996, RPM acquired additional assets and assumed certain
liabilities of an affiliate, consisting of management contract rights of $73,610
in exchange for a reduction of accounts receivable from the affiliate of
$110,903 and the assumption of accounts payable to THE of $89,437. The
difference between the value of the assets and the liabilities assumed is
recorded as a deemed distribution in the equity section of the balance sheet.
Management fee income of RPM includes $215,067 and $284,296, for the nine
months ended September 30, 1997, and the year ended December 31, 1996,
respectively, earned from partnerships, a general partner of which is the
beneficial shareholder of the Company; $30,715 and $30,835 of such fees were
included in accounts receivable at September 30, 1997, and December 31, 1996. In
addition, the Company was reimbursed for payments made through its central
payroll system for payroll and related expenses by such partnerships of $418,691
and $473,313 for the nine months ended September 30, 1997 and the year ended
December 31, 1996, respectively.
Beginning in May 1997, the Company entered into a month to month lease with
THE, its parent, for office space for THE's corporate headquarters with required
monthly rent payments of $2,700. In addition, RPM leases computer equipment from
THE, which requires monthly payments of $404.
From time to time, the Company advances or borrows funds from THE or other
related entities. Note 2 to the financial statements for the nine months ended
September 30, 1997 schedules those advances and repayments to and advances and
repayments from such related parties. These transactions have resulted in
balances of $253,616 due to the Company from affiliates, and $253,887 due from
the Company to affiliates. In addition, the account payable to THE was converted
to a note payable to the parent during 1996. On September 24, 1997, the Board of
Directors classified 200,000 shares of preferred stock as Series A Preferred
Stock (the "Series A Preferred Stock") and authorized the issuance of 178,386
shares to THE in consideration of cancellation of a note payable to THE
effective September 30, 1997. The outstanding balance of the note at September
30, 1997 after the conversion was $76,554. Accounts payable to or receivable
from related parties bear no interest and have no scheduled repayment terms.
The Company's transactions with RPM and THE have been and will continue to
be approved by a majority of the Company's independent directors who do not have
an interest in the transactions. All future material transactions and loans will
be made or entered into on terms that are no less favorable to the Company than
those that can be obtained from unaffiliated third parties.
On June 30, 1997, the Company retired 477,778 shares of Common Stock,
leaving 1,800,000 shares outstanding on that date.
The Company participates in a defined contribution savings incentive plan
covering substantially all of its and its subsidiaries' full time employees. The
Company and its subsidiaries currently provide a 50% matching contribution to
each employee participant for contributions up to the first 5% of compensation.
The Company and its subsidiary's required contributions for the nine months
ended September 30, 1997 and the twelve months ended December 31, 1996 were
$8,745 and $11,613, respectively.
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DESCRIPTION OF SECURITIES
GENERAL
The authorized capital stock of the Company consists of 100,000,000 shares
of Common Stock, no par value and 100,000,000 shares of preferred stock, no par
value. As of the date of this Prospectus, 1,800,000 shares of Common Stock and
178,386 shares of preferred stock are outstanding and all of such shares
authorized are held of record by THE. See "Principal Shareholders." After the
completion of this Offering there will be 3,300,000 shares of Common Stock
outstanding.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share held of
record on all matters to be voted on by shareholders. There is no cumulative
voting with respect to the election of directors, with the result that the
holders of more than 50% of the shares voted can elect all of the directors then
being elected. The holders of Common Stock are entitled to receive dividends
when, as and if declared by the Board of Directors out of funds legally
available therefor. In the event of liquidation, dissolution or winding up of
the Company, the holders of Common Stock are entitled to share ratably in all
assets remaining available for distribution to them after payment of liabilities
and after provision has been made for each class of stock, if any, having
preference over the Common Stock. Holders of shares of Common Stock, as such,
have no redemption, preemptive or other subscription rights, and there are no
conversion provisions applicable to the Common Stock. All of the outstanding
shares of Common Stock are fully paid and nonassessable.
PREFERRED STOCK
The Company's authorized shares of preferred stock may be issued in one or
more series and classes, and the Board of Directors is authorized, without
further action by the shareholders, to designate the preferences, limitations
and relative rights of shares of each series, including dividend, voting,
redemption and conversion rights. The Company believes that the availability of
preferred stock issuable in series will provide increased flexibility for
structuring possible future financings and acquisitions, if any, and in meeting
other corporate needs. It is not possible to state the actual effect of the
authorization and issuance of any series of preferred stock upon the rights of
holders of Common Stock until the Board of Directors determines the specific
preferences, limitations and relative rights of a series of preferred stock.
However, such effects might include, among other things, restricting dividends
on the Common Stock, diluting the voting power of the Common Stock, or impairing
liquidation rights of such shares without further action by holders of the
Common Stock. In addition, under various circumstances, the issuance of
preferred stock may have the effect of facilitating, as well as impeding or
discouraging, a merger, tender offer, proxy contest, the assumption of control
by a holder of a large block of the Company's securities or the removal of
incumbent management. Issuances of preferred stock could also adversely effect
the market price of the Common Stock.
On September 24, 1997, the Board of Directors classified 200,000 shares of
preferred stock as Series A Preferred Stock and authorized the issuance of
178,386 shares to THE in consideration of the cancellation of a note payable to
THE in the amount of $891,930 effective September 30, 1997. The Series A
Preferred Stock is nonvoting, is subordinate to the Common Stock for payment of
dividends, has a stated liquidation value of $5 per share which is subordinate
to a preferred distribution to holders of Common Stock equal to $10 per share,
may be converted to common stock at $6 per share after September 30, 1999 and is
not redeemable at the option of the holder.
WARRANTS
In connection with this Offering, the Company will issue to the Underwriter
the Underwriter's Warrants to purchase an additional 150,000 shares of Common
Stock.
Each Underwriter's Warrant will entitle the registered holder to purchase
one share of the Company's Common Stock at an exercise price of $ per share
during the four-year period commencing one year from the date of this
Prospectus. No fractional shares of Common Stock will be issued in connection
with the exercise of Underwriter's Warrants. Upon exercise, the Company will pay
the holder of the value of any such fractional shares in cash, based upon the
market value of the Common Stock at such time.
Unless extended by the Company at its discretion, the Underwriter's
Warrants will expire at 5:00 p.m., New York time, on the fifth anniversary of
the date of this Prospectus. In the event a holder of Underwriter's Warrants
fails to exercise the Underwriter's Warrants prior to their expiration, the
Underwriter's Warrants will expire and the holder thereof will have no further
rights with respect to the Underwriter's Warrants.
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No Underwriter's Warrants will be exercisable unless at the time of
exercise there is a current prospectus covering the shares of Common Stock
issuable upon exercise of such Underwriter's Warrants under an effective
registration statement filed with the Commission and such shares have been
qualified for sale or are exempt from qualification under the securities laws of
the state or residence of the holder of such Underwriter's Warrants. Although
the Company intends to have all shares so qualified for sale in those states
where the Securities are being offered and to maintain a current prospectus
relating thereto until the expiration of the Underwriter's Warrants, subject to
the terms of the warrant agreement, there can be no assurance that it will be to
do so.
A holder of Underwriter's Warrants will not have any rights, privileges or
liabilities as a shareholder of the Company prior to exercise of the
Underwriter's Warrants. The Company is required to keep available a sufficient
number of authorized shares of Common Stock to permit exercise of the
Underwriter's Warrants.
The exercise price of the Underwriter's Warrants and the number of shares
issuable upon exercise of the Underwriter's Warrants will be subject to
adjustment to protect against dilution in the event of stock dividends, stock
splits, combinations, subdivisions and reclassifications. No assurance can be
given that the market price of the Company's Common Stock will exceed the
exercise price of the Underwriter's Warrants at any time during the exercise
period.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's securities is American
Stock Transfer & Trust Company, 40 Wall Street, New York, NY 10005 and its
telephone number is (212) 936-5100.
INDEMNIFICATION OF OFFICERS AND DIRECTORS
The North Carolina Business Corporation Act (the "NCBA") allows a
corporation's articles of incorporation to contain a provision limiting a
director's personal liability to the corporation and its shareholders for
monetary damages. No such provision may limit a director's liability for: (i)
acts or omissions known by the director to conflict with the best interests of
the corporation; (ii) liability for unlawful distributions; (iii) any
transactions from which the director received an improper personal benefit; or
(iv) acts or omissions occurring prior to the effective date of such provision
of the articles of incorporation. The Company's Articles of Incorporation limit
the personal liability of its directors for monetary damages to the fullest
extent permitted by the NCBCA.
The NCBCA contains provisions setting forth conditions under which a
corporation may indemnify its directors, officers, employees and agents from any
liability incurred in their activities on behalf of the corporation. The NCBCA
permits indemnification unless, in connection with a proceeding by or in the
right of the corporation, the person seeking indemnification is adjudged liable
to the corporation or, in connection with a proceeding charging the receipt of
an improper personal benefit, the person seeking indemnification is adjudged to
have improperly received a benefit.
The Company's Articles of Incorporation provide indemnity to the fullest
extent of North Carolina law to all persons serving as Directors and Officers of
the Corporation against all liability and litigation expense, including but not
limited to reasonable attorneys' fees, arising out of their status as such or
their activities in the foregoing capacities. The Company's Articles of
Incorporation also provide that, to the fullest extent permitted by applicable
law, no director of the Company shall have any personal liability arising out of
any action for monetary damages for breach of his or her duty as a director.
NORTH CAROLINA LAW
The NCBCA contains control shares acquisition statutes limiting the ability
of others to make tender offers for the shares of companies incorporated in
North Carolina. Under this statute, if "control shares" are acquired in "control
share acquisitions," then the "control shares" acquired have no voting rights
unless allowed by the affirmative vote of the shareholders by majority vote of
all shares entitled to be cast on the issue, excluding the interested shares.
"Control shares" are shares which, when aggregated with shares already owned,
give a person a certain threshold of voting power. "Control share acquisitions"
are acquisitions in which control shares are acquired. The NCBCA further
provides that in the event that the shareholders elect to give voting rights to
the control shares, then, in certain instances, the other holders of a
corporation's stock have the right to require that corporation to redeem their
shares. The Company has specifically waived the protections of this statute in
its Articles of Incorporation.
The NCBCA also contains prohibitions on business combinations with
interested shareholders. The NCBCA generally prohibits certain "business
combinations" with interested shareholders for a period of five years from the
date on which the person became an interested shareholder unless the business
combination is recommended by the board of directors and approved by the
affirmative vote of 95% of the votes entitled to be cast on the matter and by
the affirmative vote of two-
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thirds of the votes held by holders other than the interested shareholder
entitled to be cast on the matter. An interested shareholder is a shareholder
that beneficially owns, directly or indirectly, 20% or more of the voting power
of the outstanding voting stock of a corporation or is or was an affiliate or
associate of a corporation and at any time during the two-year period prior the
date in question owned 20% or more of the voting power of the outstanding voting
stock of the corporation. The "business combinations" that are prohibited
include: (i) any merger, consolidation or share exchange with an interested
shareholder or affiliate; (ii) any sale, lease, transfer or other disposition of
the corporation's assets to an interested shareholder or affiliate; (iii) the
issuance or transfer of any equity securities of the corporation representing 5%
or more of the total market value of the corporation's outstanding stock to an
interested shareholder or affiliate; (iv) the adoption of a plan of liquidation
of the corporation where an interested shareholder or affiliate receives
anything other than cash; (v) certain transactions that would have the effect of
increasing by 5% or more the proportionate amount of shares held by an
interested shareholder or affiliate; and (vi) the receipt by an interested
shareholder or affiliate of certain direct or indirect benefits from the
corporation.
Certain "fair price" exemptions from the special voting requirements are
available under this statute based on the amount of consideration to be paid to
the holders of the shares being acquired. Generally, the exemption provide that
the amount paid for the corporation's stock in the business combination must be
in excess of a statutorily prescribed amount based on preset formulas involving
the highest per share price paid by the acquirer during a defined period. The
Company has specifically waived the protections of these statutes in its
Articles of Incorporation.
The Company's Articles of Incorporation prohibit the Company from entering
into certain business arrangements with "interested shareholders" without the
affirmative vote of 80% of the Company's shares entitled to vote thereon. An
interested shareholder is an entity that beneficially owns, directly or
indirectly, more than 20% of the voting shares of the Company. The prohibited
business combinations include transactions such as mergers and asset sales with
the interested shareholder. The affirmative vote of 80% of the shareholders is
not required, however, if, in connection with the business combination, the
shareholders receive cash in exchange for their shares equal to the highest
per-share price paid by the interested shareholder in acquiring any of his
holdings or if the business combination is approved by a majority of the
Company's disinterested directors.
These provisions of the NCBCA could have the effect of delaying, deferring
or preventing a change in control of the Company.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have outstanding
3,300,000 shares of Common Stock, not including shares of Common Stock issuable
upon exercise of outstanding options or the Underwriter's Warrants. Of these
outstanding shares, the 1,500,000 shares of Common Stock sold to the public in
this Offering may be freely traded without restriction or further registration
under the Securities Act, except that any shares that may be held by an
"affiliate" of the Company (as that term is defined in the rules and regulations
under the Securities Act) may be sold only pursuant to a registration under the
Securities Act or pursuant to an exemption from registration under the
Securities Act, including the exemption provided by Rule 144 adopted under the
Securities Act.
The 1,800,000 shares of Common Stock outstanding prior to this Offering are
"restricted securities" as that term is defined in Rule 144 under the Securities
Act ("Restricted Shares") and may not be sold unless such sale is registered
under the Securities Act, or is made pursuant to an exemption from registration
under the Securities Act, including the exemption provided by Rule 144. THE has
agreed that for a period of 24 months from the date of this Prospectus, it will
not sell any of its shares without the prior consent of the Underwriter.
Accordingly, all of such shares will be available for sale pursuant to Rule 144
commencing , 1999. In addition, all of the officers and directors
of the Company have agreed not to sell any of their shares of Common Stock for a
period of 24 months from the date of this Prospectus without the consent of the
Underwriter. Such lock-up, however, does not apply to any shares purchased in
this Offering or thereafter in the public market.
The Company has been advised by the Underwriter that in determining whether
to give or withhold consent to any sale within the applicable lock-up periods,
it will consider whether such sale would have an adverse effect on the market
for the Company's Common Stock. Depending upon the trading market for the Common
Stock, sales of a significant number of shares or sales by an affiliate may have
an adverse effect on the market for the Company's Common Stock.
In general, under Rule 144 as currently in effect, a shareholder (or
shareholders whose shares are aggregated) who has beneficially owned any
Restricted Shares for at least one year (including a shareholder who may be
deemed to be an affiliate of the Company), will be entitled to sell, within any
three-month period, that number of shares that does not exceed the
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greater of (i) 1% of the then outstanding shares of Common Stock or (ii) the
average weekly trading volume of the Common Stock during the four calendar weeks
preceding the date on which notice of such sale is given to the Securities and
Exchange Commission, provided certain public information, manner of sale and
notice requirements are satisfied. A shareholder who is deemed to be an
affiliate of the Company, including members of the Board of Directors and senior
management of the Company, will still need to comply with the restrictions and
requirements of Rule 144, other than the one-year holding period requirement, in
order to sell shares of Common Stock that are not Restricted Securities, unless
such sale is registered under the Securities Act. A shareholder (or shareholders
whose shares are aggregated) who is deemed not to have been an affiliate of the
Company at any time during the 90 days preceding a sale by such shareholder, and
who has beneficially owned Restricted Shares for at least two years, will be
entitled to sell such shares under Rule 144 without regard to the volume
limitations described above.
In addition, any employee, officer or director of or consultant to the
Company who purchased his or her shares pursuant to a written compensatory plan
or contract may be entitled to rely on the resale provisions of Rule 701. Rule
701 permits affiliates to sell their Rule 701 shares under Rule 144 without
complying with the holding period requirements of Rule 144. Rule 701 further
provides that non-affiliates may sell such shares in reliance on Rule 144
without having to comply with the public information, volume limitation or
notice provisions of Rule 144. In both cases, a holder of Rule 701 shares is
required to wait until 90 days after the date of this Prospectus.
Prior to this Offering, there has been no public trading market for the
Common Stock of the Company, and no predictions can be made of the effect, if
any, that future sales of shares or the availability of shares for sale will
have on the market price prevailing from time to time. Nevertheless, sales of
substantial amounts of the Common Stock in the public market could adversely
affect the then-prevailing market price.
REGISTRATION RIGHTS
See "Underwriting" for information concerning demand and piggyback
registration rights of the holder of the Underwriter's Warrants.
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement, the Company has agreed to sell 1,500,000 shares of Common Stock to
Strasbourger Pearson Tulcin Wolff Incorporated. The Underwriter will be
obligated to purchase all of such shares of Common Stock if any are purchased.
The Common Stock being offered by the Company to the public is being
offered at a price of $ per share as set forth on the cover page of this
Prospectus. The Common Stock is offered by the Underwriter subject to receipt
and acceptance by it, to the right to reject any order, in whole or in part, to
approval of certain legal matters by counsel and to certain other documents.
The Underwriter has advised that sales to certain dealers may be made at
the Offering Price less a concession not in excess of % or $ per share.
After the initial public offering, the Offering Price and other selling terms
may be changed by the Underwriter. The Underwriter does not intend to confirm
sales of more than one percent of the shares of Common Stock offered hereby to
any accounts over which it exercises discretionary authority.
The Company has agreed to sell the Common Stock to the Underwriter at a
discount of % of the Offering Price. The Company has also agreed to pay the
Underwriter a non-accountable expense allowance of 2% of the gross proceeds of
the Offering to be paid at closing, $100,000 of which has been advanced to the
Underwriter. In the event this Offering is not completed because the Company
prevents such completion or breaches any covenant, representation or warranty
contained in the Underwriting Agreement, the Underwriter shall be reimbursed for
all actual accountable out-of-pocket costs and expenses incident to the
performance of the Company's obligations set forth in the Underwriting
Agreement, including the accountable expenses of the Underwriter, including
legal fees, but in no event to exceed the sum of $180,000, less a credit for any
amounts previously paid to the Underwriter. In the event this Offering is not
completed because the Underwriter prevents its completion (unless such
prevention is based upon a breach by the Company of any covenant, representation
or warranty contained in the Underwriting Agreement), the Company shall not be
liable for the Underwriter's expenses, except that the Underwriter may retain
the $100,000 to the extent that the Underwriter has incurred accountable costs
previously paid to it.
Prior to the Offering, there has not been a market for the Common Stock.
Consequently, the Offering Price has been determined by negotiations between the
Company and the Underwriter. The major factors considered by the Company and the
Underwriter in determining the Offering Price of the Common Stock, in addition
to prevailing market conditions, were
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the Company's historical performance and growth rates; the history of, and
prospects for, the industry in which the Company operates; an assessment of the
Company's management, business potential and earning prospects; the market
prices of publicly traded common stocks of comparable companies; and the present
state of the Company's development. Based upon their analysis of these factors,
all of which are applicable to the Company, the Company and the Underwriter
believe that the Offering Price bears a relationship to the assets, book value
and other criteria of value applicable to the Company.
The Company has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act arising out of, or
based upon, any untrue statement or alleged untrue statement of any material
fact contained in this Prospectus or the Registration Statement on Form SB-2 of
which this Prospectus is a part. Insofar as indemnification for liabilities
arising under the Securities Act may be provided to officers, directors or
persons controlling the Company, the Company has been informed that, in the
opinion of the Commission, such indemnification is against public policy and
therefore unenforceable.
As part of the consideration to the Underwriter for its services in
connection with the Offering, the Company has agreed to grant to the Underwriter
Underwriter's Warrants to purchase 150,000 shares of Common Stock exercisable
for a period of four years, commencing 12 months after the date of this
Offering, at an exercise price of $ per share, subject to certain
adjustments. The exercise price of the Underwriter's Warrants was determined by
negotiation between the Company and Underwriter and should not be deemed to
reflect any estimate of the intrinsic value of either the Underwriter's Warrants
or the underlying Common Stock. The Underwriter's Warrants contain anti-dilution
provisions in event of any recapitalization, split-up of shares or certain stock
dividends, as well as certain registration rights. The Underwriter's Warrants
cannot be transferred, sold, assigned or hypothecated, in whole or in part
(other than by will or pursuant to the laws of descent and distribution) except
to officers of the Underwriter. Furthermore, if any of the Underwriter's
Warrants are transferred after one year following the effective date of the
Company's registration statement on Form SB-2 (the "Registration Statement") of
which this Prospectus forms a part, such warrants must be exercised immediately
upon transfer, and if not exercised immediately upon transfer, such warrants
will lapse. The Company has agreed that, upon the request of the then holder(s)
of a majority of the Underwriter's Warrants and the underlying securities, if
issued, which were originally issued to the Underwriter or its designees, made
at any time within the period commencing one year and ending four years after
the effective date of the Registration Statement of which this Prospectus forms
a part, the Company will file, at its sole expense, not more than once, a
registration statement under the Securities Act, registering or qualifying the
shares underlying the Underwriter's Warrants for public sale. The Company has
also agreed, with certain limitations, that if at any time within the period
commencing one year and ending four years after such effective date, it should
file a registration statement with the Commission pursuant to the Securities
Act, the Company, at its own expense (other than seller's commissions and the
expenses of seller's counsel or others hired by seller), will offer to said
holder(s) the opportunity to register or qualify the shares underlying the
Underwriter's Warrants. In addition, the Company has agreed to cooperate with
the holders of the Underwriter's Warrants and the underlying securities in
preparing and signing any other registration statement at the holder's expense
not more than once.
For the life of the Underwriter's Warrants, the holders thereof are given
the opportunity to profit from a rise in the market price of Common Stock which
may result in a dilution of the interest of the holders of Common Stock. The
Company may find it more difficult to raise additional equity capital if it
should be needed for the business of the Company while the Underwriter's
Warrants are outstanding. At any time when the holders of the Underwriter's
Warrants might be expected to exercise them, the Company would probably be able
to obtain additional equity capital on terms more favorable than those provided
by the Underwriter's Warrants. Any profit realized on the sale of the securities
issuable upon the exercise of the Underwriter's Warrants may be deemed
additional underwriting compensation. As described above, the Company has
granted to the Underwriter certain registration rights with respect to the
Underwriter's Warrants and the securities issuable thereunder.
The Company, its officers, directors and THE have agreed with the
Underwriter that such shareholders will not publicly sell or otherwise dispose
of any of their shares of Common Stock (nor any shares which may be issued upon
exercise of options or warrants granted to the shareholders) for a period of two
years from the closing of this Offering without the prior written consent of the
Underwriter, which consent cannot be unreasonably withheld.
The foregoing is a summary of certain terms of the Underwriting Agreement
and the Warrant Agreement relating to the Underwriter's Warrants, copies of
which were filed with the Commission as exhibits to the Registration Statement.
Reference is hereby made to such exhibits for a detailed description of the
provisions thereof as summarized above. See "Additional Information."
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In connection with the Offering, the Underwriter and selling group members
(if any) and its affiliates may engage in transactions that stabilize, maintain
or otherwise affect the market price of the Common Stock. Such transactions may
include stabilization transactions effected in accordance with Rule 104 of
Regulation M, pursuant to which such persons may bid for or purchase Common
Stock for the purpose of stabilizing its market price. The Underwriter also may
create a short position for the account of the Underwriter by selling more
Common Stock in connection with the Offering then it is committed to purchase
from the Company, and in such case may purchase Common Stock in the open market
following completion of the Offering to cover all or a portion of such short
position. In addition, the Underwriter may impose "penalty bids" under
contractual arrangements whereby it may reclaim from a dealer participating in
the Offering for its account, the selling concession with respect to the Common
Stock that is distributed in the Offering but subsequently purchased for its
account in the open market. Any of the transactions described in this paragraph
may result in the maintenance of the price of the Common Stock at a level above
that which might otherwise prevail in the open market. None of the transactions
described in this paragraph is required, and, if any is undertaken, may be
discontinued at any time.
LEGAL MATTERS
The legality of the shares of Common Stock offered hereby will be passed
upon for the Company by House Law Firm. Certain legal matters in connection with
the Offering will be passed upon for the Underwriter by Stroock & Stroock &
Lavan LLP.
EXPERTS
The consolidated financial statements of DSS and Subsidiary as of December
31, 1996 and for the period from May 17, 1996 (date of inception) to December
31, 1996, included in this Prospectus and in the related Registration Statement,
have been audited by The Daniel Professional Group, Inc., independent auditors,
as set forth in their report thereon, and are included in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.
The statements of operations, changes in stockholder's equity (deficit),
and cash flows for the six months ended June 30, 1996 and the year ended
December 31, 1995 of RPM included in this Prospectus and in the related
Registration Statement, have been audited by The Daniel Professional Group,
Inc., independent auditors, as set forth in their report thereon appearing
elsewhere herein and in the Registration Statement, and are included in reliance
upon such report given upon the authority of such firm as experts in accounting
and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
SB-2 under the Securities Act with respect to the shares of Common Stock offered
hereby. This Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto. For further
information with respect to the Company and the shares of Common Stock,
reference is hereby made to the Registration Statement and the exhibits and
schedules filed as a part thereof. Statements contained in this Prospectus as to
the contents of any contract or other document are not necessarily complete and,
in each instance, reference is made to the copy of such contract or other
document filed as an exhibit to the Registration Statement, each such statement
being qualified in all respects by such reference. The Registration Statement,
including exhibits and schedules thereto, may be inspected and copied at the
public reference facilities maintained by the Commission at 450 Fifth Street,
N.W., Washington, D.C., and at the Commission's Regional Offices located at 7
World Trade Center, New York, New York 10048 and 500 West Madison Street, Suite
1400, Northwestern Atrium Center, Chicago, Illinois 60661. Copies of such
materials may also be obtained at prescribed rates from the Public Reference
Section of the Commission, Washington, D.C. 20549. The Commission maintains a
site on the world wide web at http://www.sec.gov that contains reports, proxy
statements and information regarding registrants that file electronically with
the Commission.
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DIVERSIFIED SENIOR SERVICES, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Management's Responsibility for Financial Reporting.................................................................... F-2
DIVERSIFIED SENIOR SERVICES, INC.
Consolidated Financial Statements for the nine months ended September 30, 1997 and Consolidated Statements of
Operations, Changes in Shareholder's Deficit and Cash Flows for the period from May 17, 1996 (Date of Inception)
to September 30, 1996............................................................................................. F-3
Notes to Consolidated Financial Statements, September 30, 1997....................................................... F-8
Independent Auditors' Report......................................................................................... F-10
Consolidated Financial Statements for the period from May 17, 1996 (Date of Inception) to December 31, 1996.......... F-11
Notes to Consolidated Financial Statements, December 31, 1996........................................................ F-16
Supplemental Schedule of Consolidating Statements of Operations for the period from May 17, 1996 (Date of Inception)
to December 31, 1996.............................................................................................. F-23
RESIDENTIAL PROPERTIES MANAGEMENT, INC.
Independent Auditors' Report......................................................................................... F-24
Statements of Operations, Changes in Shareholder's Equity (Deficit), and Cash Flows for the six months ended June 30,
1996 and the year ended December 31, 1995......................................................................... F-25
Notes to Statements of Operations, Changes in Shareholder's Equity (Deficit), and Cash Flows for the six months ended
June 30, 1996 and the year ended December 31, 1995................................................................ F-29
</TABLE>
F-1
<PAGE>
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
The consolidated financial statements of Diversified Senior Services, Inc.
("DSS") and Residential Properties Management, Inc. ("RPM") have been prepared
by management, which is responsible for their integrity and objectivity. These
statements have been prepared in conformity with generally accepted accounting
principles ("GAAP") and, where appropriate, reflect estimates based on judgments
of management.
The system of internal controls for DSS and RPM is designed to provide
reasonable assurance that company assets are safeguarded from loss or
unauthorized use or disposition, and that transactions are executed in
accordance with management's authorization and properly recorded to permit the
preparation of financial statements in accordance with GAAP. This system is
augmented by careful selection and training of qualified personnel, proper
division of responsibilities, the dissemination of written policies and
procedures, and frequent review by management to monitor its effectiveness.
The Board of Directors oversees management's financial reporting
responsibilities and programs for ethical business conduct. As part of these
responsibilities, the directors meet periodically with management to discuss the
financial statements and administrative and financial controls.
<TABLE>
<S> <C>
/S/ WILLIAM G. BENTON /S/ G.L. CLARK, JR.
- ------------------------------------------------------ ------------------------------------------------------
WILLIAM G. BENTON G.L. CLARK, JR.
Chairman of the Board Vice President
and Chief Executive Officer and Chief Financial Officer
</TABLE>
F-2
<PAGE>
DIVERSIFIED SENIOR SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................................................................... $ 27,332 $ 31,132
Accounts receivable -- trade.................................................................. 123,268 133,649
Refundable income taxes....................................................................... 34,176 32,853
Prepaid expenses (Note 3)..................................................................... 164,732 20,191
------------- ------------
349,508 217,825
Furniture and equipment, net.................................................................... 65,188 88,451
Intangible assets, net.......................................................................... 85,459 89,927
Development costs............................................................................... 177,077 132,350
Accounts receivable -- affiliates (Note 2)...................................................... 253,616 253,616
------------- ------------
$ 930,848 $ 782,169
------------- ------------
------------- ------------
LIABILITIES
Current liabilities:
Accounts payable and accrued expenses......................................................... $ 158,836 $ 122,009
Interest payable -- bank...................................................................... 27,582 6,587
Note payable -- bank (Note 4)................................................................. 1,470,176 --
Deferred salaries............................................................................. 517,733 292,906
------------- ------------
2,174,327 421,502
Deferred bonuses................................................................................ 209,823 135,382
Accounts payable -- affiliates (Note 2)......................................................... 253,887 56,170
Note payable -- affiliate (Note 2).............................................................. -- 1,096,320
Note payable -- bank............................................................................ -- 931,622
------------- ------------
2,638,037 2,640,996
------------- ------------
SHAREHOLDER'S DEFICIT
Common stock, no par; authorized 100,000,000 shares; 1,800,000 shares issued and outstanding at
September 30, 1997 and 2,277,778 at December 31, 1996......................................... 100 100
Preferred stock, no par; authorized 100,000,000 shares; 178,386 shares issued and outstanding at
September 30, 1997 and -0- at December 31, 1996............................................... 891,930 --
Deemed distribution............................................................................. (1,335,790) (1,335,790)
Accumulated deficit............................................................................. (1,263,429) (523,137)
------------- ------------
(1,707,189) (1,858,827)
------------- ------------
$ 930,848 $ 782,169
------------- ------------
------------- ------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE>
DIVERSIFIED SENIOR SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS NINE MONTHS
ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997
------------- ------------- -------------
<S> <C> <C> <C>
Income:
Management fees............................................ $ 211,383 $ 207,120 $ 648,799
Reimbursement income....................................... 436,130 376,962 1,113,007
Home care income........................................... 55,855 3,636 122,018
------------- ------------- -------------
703,368 587,718 1,883,824
------------- ------------- -------------
Expenses:
Personnel related.......................................... 792,479 674,443 2,216,972
Administrative............................................. 73,120 57,447 187,379
Depreciation and amortization.............................. 15,515 10,231 47,057
Other...................................................... 26,507 32,284 67,488
------------- ------------- -------------
907,621 774,405 2,518,896
------------- ------------- -------------
Operating loss............................................... 204,253 186,687 635,072
Other expenses:
Interest expense........................................... 27,310 21,815 105,220
------------- ------------- -------------
Loss before provision for income tax benefit................. 231,563 208,502 740,292
Provision for income tax benefit........................... -- (44,352) --
------------- ------------- -------------
Net loss..................................................... $ 231,563 $ 164,150 $ 740,292
------------- ------------- -------------
------------- ------------- -------------
Net loss per share........................................... $ 0.13 $ 0.07 $ 0.35
------------- ------------- -------------
------------- ------------- -------------
Weighted number of shares outstanding........................ 1,800,000 2,277,778 2,116,769
------------- ------------- -------------
------------- ------------- -------------
<CAPTION>
FOR THE PERIOD
MAY 17, 1996
(DATE OF INCEPTION)
TO SEPTEMBER 30,
1996
-------------------
<S> <C>
Income:
Management fees............................................ $ 207,120
Reimbursement income....................................... 376,962
Home care income........................................... 3,636
-------------------
587,718
-------------------
Expenses:
Personnel related.......................................... 929,708
Administrative............................................. 57,447
Depreciation and amortization.............................. 10,231
Other...................................................... 32,284
-------------------
1,029,670
-------------------
Operating loss............................................... 441,952
Other expenses:
Interest expense........................................... 21,815
-------------------
Loss before provision for income tax benefit................. 463,767
Provision for income tax benefit........................... (44,352)
-------------------
Net loss..................................................... $ 419,415
-------------------
-------------------
Net loss per share........................................... $ 0.27
-------------------
-------------------
Weighted number of shares outstanding........................ 1,529,636
-------------------
-------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE>
DIVERSIFIED SENIOR SERVICES, INC. AND SUBSIDIARY
STATEMENTS OF CHANGES IN SHAREHOLDER'S DEFICIT
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
AND FOR THE PERIOD MAY 17, 1996 (DATE OF INCEPTION) TO SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
PREFERRED COMMON PREFERRED COMMON DEEMED ACCUMULATED TOTAL
SHARES SHARES STOCK STOCK DISTRIBUTION DEFICIT DEFICIT
--------- --------- --------- ------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock.......... -- 100 $ -- $100 $ -- $ -- $ 100
Consolidation of subsidiary, July
1, 1996......................... -- -- -- -- (1,209,060) 69,350 (1,139,710)
Issuance of common stock.......... -- 2,277,678 -- -- -- -- --
Deemed distribution related to
transfer of assets and
liabilities from affiliate...... -- -- -- -- (126,730) -- (126,730)
Net loss for the period May 17,
1996 (Date of Inception) to
September 30, 1996.............. -- -- -- -- -- (419,415) (419,415)
--------- --------- --------- ------ ------------ ----------- -----------
Balance, September 30, 1996....... -- 2,277,778 $ -- $100 $ (1,335,790) $ (350,065) $(1,685,755)
--------- --------- --------- ------ ------------ ----------- -----------
--------- --------- --------- ------ ------------ ----------- -----------
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.............. -- -- -- -- -- (740,292) (740,292)
--------- --------- --------- ------ ------------ ----------- -----------
Balance, September 30, 1997....... 178,386 1,800,000 $ 891,930 $100 $ (1,335,790) $(1,263,429) $(1,707,189)
--------- --------- --------- ------ ------------ ----------- -----------
--------- --------- --------- ------ ------------ ----------- -----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE>
DIVERSIFIED SENIOR SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS NINE MONTHS
ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997
------------- ------------- -------------
<S> <C> <C> <C>
Operating activities:
Net loss..................................................... $(231,563) $(164,150) $(740,292)
------------- ------------- -------------
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization.............................. 15,515 10,231 47,057
Changes in operating assets and liabilities:
Accounts receivable..................................... (22,897) (7,880) (24,869)
Prepaid expenses........................................ (3,914) (3,032) 3,668
Accounts payable, trade................................. 21,367 2,871 3,000
Accounts payable, affiliates............................ 5,527 25,451 44,327
Interest payable........................................ 16,096 -- 20,995
Deferred salaries and bonuses........................... 89,124 86,512 299,268
------------- ------------- -------------
Total adjustments..................................... 120,818 114,153 393,446
------------- ------------- -------------
Net cash used by operating activities...................... (110,745) (49,997) (346,846)
------------- ------------- -------------
Investing activities:
Purchase of furniture and equipment........................ -- (1,336) --
Investment in franchise fees............................... -- -- (15,000)
Development costs paid..................................... (22,974) (11,426) (44,726)
Payment of organization costs.............................. -- (5,034) --
Other...................................................... -- -- 35,250
------------- ------------- -------------
Net cash used by investing activities...................... (22,974) (17,796) (24,476)
------------- ------------- -------------
Financing activities:
Proceeds from bank line of credit.......................... 252,349 -- 538,554
Offering expenses prepaid.................................. (120,032) -- (120,032)
Advances and repayments to affiliates...................... 172,422 (38,996) 110,251
Advances and repayments from affiliates.................... (161,251) 109,471 (161,251)
Contribution of capital.................................... -- -- --
------------- ------------- -------------
Net cash provided by financing activities.................. 143,488 70,475 367,522
------------- ------------- -------------
Net increase (decrease) in cash.............................. 9,769 2,682 (3,800)
Cash and cash equivalents -- beginning....................... 17,563 100 31,132
Cash held by subsidiary at date of acquisition............... -- 4,510 --
------------- ------------- -------------
Cash and cash equivalents -- ending.......................... $ 27,332 $ 7,292 $ 27,332
------------- ------------- -------------
------------- ------------- -------------
Cash payments for interest................................... $ 14,999 $ -- $ 57,034
------------- ------------- -------------
------------- ------------- -------------
Cash payments for taxes...................................... $ -- $ -- $ --
------------- ------------- -------------
------------- ------------- -------------
<CAPTION>
FOR THE PERIOD
MAY 17, 1996
(DATE OF INCEPTION)
TO SEPTEMBER 30,
1996
-------------------
<S> <C>
Operating activities:
Net loss..................................................... $(419,415)
-------------------
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization.............................. 10,231
Changes in operating assets and liabilities:
Accounts receivable..................................... (7,880)
Prepaid expenses........................................ (3,032)
Accounts payable, trade................................. 2,871
Accounts payable, affiliates............................ 25,451
Interest payable........................................ --
Deferred salaries and bonuses........................... 341,777
-------------------
Total adjustments..................................... 369,418
-------------------
Net cash used by operating activities...................... (49,997)
-------------------
Investing activities:
Purchase of furniture and equipment........................ (1,336)
Investment in franchise fees............................... --
Development costs paid..................................... (11,426)
Payment of organization costs.............................. (9,586)
Other...................................................... --
-------------------
Net cash used by investing activities...................... (22,348)
-------------------
Financing activities:
Proceeds from bank line of credit.......................... --
Offering expenses prepaid.................................. --
Advances and repayments to affiliates...................... (38,996)
Advances and repayments from affiliates.................... 114,023
Contribution of capital.................................... 100
-------------------
Net cash provided by financing activities.................. 75,127
-------------------
Net increase (decrease) in cash.............................. 2,782
Cash and cash equivalents -- beginning....................... --
Cash held by subsidiary at date of acquisition............... 4,510
-------------------
Cash and cash equivalents -- ending.......................... $ 7,292
-------------------
-------------------
Cash payments for interest................................... $ --
-------------------
-------------------
Cash payments for taxes...................................... $ --
-------------------
-------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE>
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, 1997 AND FOR THE PERIOD
MAY 17, 1996 (DATE OF INCEPTION) TO SEPTEMBER 30, 1996
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:
<TABLE>
<S> <C>
Issuance of preferred stock.................................................. $ 891,930
Exchange of note payable -- affiliate........................................ (968,484)
---------
Reclassify remainder to account payable -- affiliates........................ $ (76,554)
---------
---------
</TABLE>
The preferred stock is nonvoting, is subordinate to the common stock for
payment of dividends, has a stated liquidation value of $5 per share which is
subordinate to a preferred distribution to holders of common stock equal to $10
per share, may be converted to common stock at $6 per share after September 30,
1999 and is not redeemable at the option of the holder.
On September 1, 1996, RPM, the subsidiary, acquired certain assets and
assumed certain liabilities of an affiliate, as follows:
<TABLE>
<S> <C>
Assets:
Management contract rights acquired........................................ $ 73,610
Reduction of accounts receivable from affiliate............................ $(110,903)
Liabilities:
Accounts payable to THE assumed............................................ $ (89,437)
Equity:
Deemed distribution........................................................ $ 126,730
</TABLE>
F-7
<PAGE>
DIVERSIFIED SENIOR SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
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 consolidated financial
statements and the footnotes thereto for the period from May 17, 1996 ("Date of
Inception") to December 31, 1996 of Diversified Senior Services, Inc. ("DSS" or
the "Company"). The interim financial statements for the period from May 17,
1996 to September 30, 1996 include the operations of the Company's subsidiary,
Residential Properties Management, Inc. ("RPM"), beginning July 1, 1996, the
date the Company acquired RPM.
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, 1997, are not
necessarily indicative of the results to be expected for the full year.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reporting amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of income and expenses during the reporting
period. Actual results could differ from those estimates.
NOTE 2: RELATED PARTY TRANSACTIONS
From time to time, the Company advances or borrows funds from the parent,
Taylor House Enterprises, Limited ("THE"), or other related entities. The
following schedule summarizes related party activities for the nine months ended
September 30, 1997.
<TABLE>
<CAPTION>
NOTE
DUE FROM DUE TO PAYABLE
AFFILIATES AFFILIATES AFFILIATE TOTAL
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Amounts due (to) from affiliates at December 31, 1996:
Management fees due from related partnerships........................ $ 253,616 $ -- $ -- $ 253,616
Amounts due to related partnership................................... -- (20,000) -- (20,000)
Amounts due to other related entities................................ -- (2,755) -- (2,755)
Advances due to affiliate............................................ -- (33,415) -- (33,415)
Issuance of note to parent........................................... -- -- (1,096,320) (1,096,320)
---------- ---------- ----------- -----------
253,616 (56,170) (1,096,320) (898,874)
Repayment to affiliate............................................... -- 33,415 -- 33,415
Computer equipment lease payments due parent......................... -- (3,636) -- (3,636)
Rent due 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
Reclassify remaining note to account payable......................... -- (76,554) 76,554 --
---------- ---------- ----------- -----------
Balance September 30, 1997........................................... $ 253,616 $ (253,887) $ -- $ (271)
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
</TABLE>
There was no interest income received from related parties during the nine
months ended September 30, 1997. 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 parent company in
exchange for a note payable to the parent in the amount of $891,930. The
remaining amount of $76,554 was reclassified to an account payable. The interest
rate on this note was 8.25% per annum and interest expense of $27,191 was
accrued for the nine months ended September 30, 1997.
Management fee income for the nine months ended September 30, 1997 includes
$215,067 earned from partnerships, a general partner of which is a beneficial
shareholder of THE; $30,715 of such fees are included in trade accounts
receivable at
F-8
<PAGE>
DIVERSIFIED SENIOR SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 2: RELATED PARTY TRANSACTIONS -- Continued
September 30, 1997. In addition, the Company was reimbursed for payments made
through its central payroll system for payroll and related expenses, by
partnerships related through common ownership, of $418,691 for the period ended
September 30, 1997.
On June 30, 1997, the Company retired 477,778 shares of common stock,
leaving 1,800,000 shares outstanding.
NOTE 3: PREPAID EXPENSES
The Company is currently undertaking a public offering of 1,500,000 shares
of common stock. Certain expenses, totaling $149,532, including $100,000 of the
underwriter's non-accountable expense allowance, have been incurred and are
included in prepaid expenses.
NOTE 4: NOTE PAYABLE
Note payable consists of the following at September 30, 1997:
<TABLE>
<S> <C>
Bank line of credit, bearing interest at prime (8.50% at September 30, 1997), payable
quarterly, originally maturing October 1997. The note is guaranteed by THE, and 61,303 shares
of Omega Healthcare Investors, Inc. common stock owned by THE are pledged as collateral for
the loan. In July and October 1997, the Company modified its line of credit by increasing the
authorized amount to $1.6 million and extending the maturity date to January 1998. $1,470,176
----------
</TABLE>
NOTE 5: PRO FORMA CONSOLIDATING STATEMENT OF OPERATIONS
The following pro forma consolidating statement of operations for the nine
months ended September 30, 1996 is presented as if the Company were incorporated
and had acquired RPM on January 1, 1996.
<TABLE>
<CAPTION>
CONSOLIDATED UNCONSOLIDATED PRO FORMA
DSS, INC. RPM, INC. CONSOLIDATED
SEPTEMBER 30, 1996(1) JUNE 30, 1996 SEPTEMBER 30, 1996
--------------------- -------------- ------------------
<S> <C> <C> <C>
Income:
Management fees................................................... $ 207,120 $ 394,746 $ 601,866
Reimbursement income.............................................. 376,962 685,213 1,062,175
Home care income.................................................. 3,636 -- 3,636
--------------------- -------------- ------------------
587,718 1,079,959 1,667,677
--------------------- -------------- ------------------
Expenses:
Personnel related................................................. 929,708 1,051,455 1,981,163
Administrative.................................................... 57,447 88,836 146,283
Depreciation and amortization..................................... 10,231 17,914 28,145
Other............................................................. 32,284 27,930 60,214
--------------------- -------------- ------------------
1,029,670 1,186,135 2,215,805
--------------------- -------------- ------------------
Operating loss...................................................... 441,952 106,176 548,128
Other (income) expenses:
Interest and other income......................................... -- (15,955) (15,955)
Interest and other expense........................................ 21,815 65,760 87,575
--------------------- -------------- ------------------
Loss before provision for income tax benefit........................ 463,767 155,981 619,748
Provision for income tax benefit.................................. (44,352) (42,000) (86,352)
--------------------- -------------- ------------------
Net loss............................................................ $ 419,415 $ 113,981 $ 533,396
--------------------- -------------- ------------------
--------------------- -------------- ------------------
</TABLE>
- ---------------
(1) The consolidated statement of operations for the period ended September 30,
1996 includes the operations of RPM for the three months ended September 30,
1996.
NOTE 6: PROVISION FOR INCOME TAXES
A provision for income tax benefit has not been established since the
earnings of the parent and the amount of loss carryforward which could be used
to offset such earnings cannot be reasonably estimated at September 30, 1997.
F-9
<PAGE>
REPORT OF INDEPENDENT AUDITORS
TO THE BOARD OF DIRECTORS OF
DIVERSIFIED SENIOR SERVICES, INC.
Winston-Salem, North Carolina
We have audited the accompanying consolidated balance sheet of Diversified
Senior Services, Inc. and Subsidiary (the "Company") as of December 31, 1996,
and the related consolidated statements of operations, changes in shareholder's
deficit and of cash flows for the period from inception on May 17, 1996 to
December 31, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Diversified
Senior Services, Inc. and Subsidiary as of December 31, 1996, and the results of
its operations and cash flows for the period then ended, as described above, in
conformity with generally accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental schedule of
consolidating statements of operations for the period from May 17, 1996 to
December 31, 1996 is presented for the purposes of additional analysis and is
not a required part of the basic financial statements. Such information has been
subjected to the auditing procedures applied in the audit of the basic financial
statements and, in our opinion, is fairly stated in all material respects in
relation to the basic financial statements taken as a whole.
THE DANIEL PROFESSIONAL GROUP, INC.
August 6, 1997, except for Notes 2
and 5 as to which the date is
September 25, 1997
Winston-Salem, North Carolina
F-10
<PAGE>
DIVERSIFIED SENIOR SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents..................................................................................... $ 31,132
Accounts receivable -- trade.................................................................................. 133,649
Refundable income taxes....................................................................................... 32,853
Prepaid expenses.............................................................................................. 20,191
----------
217,825
Furniture and equipment, net (Note 3)........................................................................... 88,451
Intangible assets, net (Note 4)................................................................................. 89,927
Development costs............................................................................................... 132,350
Accounts receivable -- affiliates (Note 2)...................................................................... 253,616
----------
$ 782,169
----------
----------
LIABILITIES
Current liabilities:
Accounts payable and accrued expenses......................................................................... $ 122,009
Interest payable.............................................................................................. 6,587
Deferred salaries............................................................................................. 292,906
----------
421,502
Deferred bonuses................................................................................................ 135,382
Accounts payable -- affiliates (Note 2)......................................................................... 56,170
Note payable -- affiliate (Notes 2, 5 and 9).................................................................... 1,096,320
Note payable -- bank (Note 5)................................................................................... 931,622
----------
2,640,996
----------
SHAREHOLDER'S DEFICIT
Preferred stock, no par; authorized 100,000,000 shares; no shares issued and outstanding........................
Common stock, no par; authorized 100,000,000 shares; 2,277,778 shares issued and outstanding.................... 100
Deemed distribution (Note 2).................................................................................... (1,335,790)
Accumulated deficit............................................................................................. (523,137)
----------
(1,858,827)
----------
$ 782,169
----------
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-11
<PAGE>
DIVERSIFIED SENIOR SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE PERIOD FROM MAY 17, 1996 (DATE OF INCEPTION) TO DECEMBER 31, 1996
<TABLE>
<S> <C>
Income:
Management fees............................................................................................... $ 438,680
Reimbursement income.......................................................................................... 781,838
Home care income.............................................................................................. 18,797
----------
1,239,315
----------
Expenses:
Personnel related............................................................................................. 1,651,388
Administrative................................................................................................ 111,232
Depreciation and amortization................................................................................. 25,264
Other......................................................................................................... 64,490
----------
1,852,374
----------
Operating loss.................................................................................................. 613,059
Other expenses:
Interest expense.............................................................................................. 67,428
----------
Loss before provision for income tax benefit.................................................................... 680,487
Provision for income tax benefit.............................................................................. (88,000)
----------
Net loss........................................................................................................ $ 592,487
----------
----------
Net loss per share.............................................................................................. $ .32
----------
----------
Weighted number of shares outstanding........................................................................... 1,838,236
----------
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-12
<PAGE>
DIVERSIFIED SENIOR SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDER'S DEFICIT
FOR THE PERIOD FROM MAY 17, 1996 (DATE OF INCEPTION) TO DECEMBER 31, 1996
<TABLE>
<CAPTION>
ACCUMULATED
COMMON COMMON DEEMED EARNINGS TOTAL
SHARES STOCK DISTRIBUTION (DEFICIT) DEFICIT
--------- -------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance, May 17, 1996..................................... -- $ -- $ -- $ -- $ --
Issuance of common stock.................................. 100 100 -- -- 100
Consolidation of subsidiary, July 1, 1996................. -- 100 (1,209,060) 69,250 (1,139,710)
Reclassification of common stock.......................... -- (100 ) -- 100 --
Issuance of common stock.................................. 2,277,678 -- -- -- --
Deemed distribution related to transfer of assets and
liabilities from affiliate.............................. -- -- (126,730) -- (126,730)
Net loss for the period ended December 31, 1996........... -- -- -- (592,487) (592,487)
--------- -------- ------------ ----------- -----------
Balance, December 31, 1996................................ 2,277,778 $ 100 $ (1,335,790) $(523,137) $(1,858,827)
--------- -------- ------------ ----------- -----------
--------- -------- ------------ ----------- -----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-13
<PAGE>
DIVERSIFIED SENIOR SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM MAY 17, 1996 (DATE OF INCEPTION) TO DECEMBER 31, 1996
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<S> <C>
Operating activities:
Net loss......................................................................................................... $(592,487)
---------
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation and amortization.................................................................................. 25,264
Changes in operating assets and liabilities:
Accounts receivable......................................................................................... (14,615)
Prepaid expenses............................................................................................ (11,930)
Accounts payable, trade..................................................................................... 24,200
Accounts payable, affiliates................................................................................ (30,173)
Interest payable............................................................................................ 6,587
Deferred salaries and bonuses............................................................................... 428,288
---------
Total adjustments......................................................................................... 427,621
---------
Net cash used by operating activities.......................................................................... (164,866)
---------
Investing activities:
Purchase of furniture and equipment............................................................................ (2,903)
Development costs paid......................................................................................... (58,499)
Payment of organization costs.................................................................................. (9,586)
Other.......................................................................................................... (35,250)
---------
Net cash used by investing activities.......................................................................... (106,238)
---------
Financing activities:
Contribution of capital........................................................................................ 100
Proceeds from bank line of credit.............................................................................. 931,622
Advances and repayments to affiliates.......................................................................... (668,991)
Advances and repayments from affiliates........................................................................ 48,882
Payment of finance costs....................................................................................... (13,887)
---------
Net cash provided by financing activities...................................................................... 297,726
---------
Net increase in cash............................................................................................. 26,622
Cash and cash equivalents -- beginning........................................................................... --
Cash held by subsidiary at date of acquisition................................................................... 4,510
---------
Cash and cash equivalents -- ending.............................................................................. $ 31,132
---------
---------
Cash payments for interest....................................................................................... $ 7,862
---------
---------
Cash payments for income taxes................................................................................... $ --
---------
---------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-14
<PAGE>
DIVERSIFIED SENIOR SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS -- CONTINUED
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
FOR THE PERIOD FROM MAY 17, 1996 (DATE OF INCEPTION) TO DECEMBER 31, 1996
On July 1, 1996, Taylor House Enterprises Limited ("THE"), the parent,
exchanged 100% of the stock of Residential Properties Management, Inc. ("RPM")
for 2,277,678 shares of DSS in a non-cash transaction.
On September 1, 1996, RPM, the subsidiary, acquired certain assets and
assumed certain liabilities of an affiliate, as follows:
<TABLE>
<S> <C>
Assets:
Management contract rights acquired........................................................ $ 73,610
Reduction of accounts receivable from affiliate............................................ $(110,903)
Liabilities:
Accounts payable to THE assumed............................................................ $ (89,437)
Equity:
Deemed distribution........................................................................ $ 126,730
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-15
<PAGE>
DIVERSIFIED SENIOR SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 1: ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Diversified Senior Services, Inc. (the "Company"), a North Carolina
corporation, was formed on May 17, 1996, to continue the operation of apartment
management for the low income elderly and other properties, to provide home care
for residents of the apartments and others, to manage assisted living facilities
for the low income elderly, and to develop and construct or acquire and
refinance assisted living facilities and apartments for the elderly. It began
operations on July 1, 1996 and its operations are currently being conducted in
North Carolina. The Company is owned by Taylor House Enterprises, Limited
("THE"), a privately owned North Carolina corporation. In July 1996, THE
exchanged 100% of the stock of Residential Properties Management, Inc. ("RPM"),
a wholly-owned subsidiary of THE, for 2,277,678 shares of common stock of the
Company. RPM manages approximately 2500 housing units in North Carolina, South
Carolina, West Virginia, and Pennsylvania for the owners of THE and for third
parties.
The following significant accounting policies have been followed in the
preparation of the Company's financial statements.
CONSOLIDATION
The consolidated financial statements include the assets, liabilities, and
operations of RPM, a 100% owned subsidiary of the Company. All significant
inter-company transactions have been eliminated in consolidation.
CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all
highly liquid investments purchased within three months of maturity to be cash
equivalents.
ACCOUNTS RECEIVABLE -- TRADE
Accounts receivable -- trade consists of management fees and reimbursements
for administrative services due from partnerships whose properties are managed
by RPM, and home care income which is due primarily from Medicaid of North
Carolina. The general partners of the partnerships are liable for the payment of
the receivables if the partnerships do not have adequate cash flow; therefore,
the Company considers such accounts receivable to be fully collectible. The
Company and its subsidiary provide services to customers and clients on a
noncollateralized basis.
FURNITURE AND EQUIPMENT
Furniture and equipment are stated at cost. Depreciation is determined
using the straight line method and is based on the estimated useful lives of the
related assets of three (3) to five (5) years. Expenditures for maintenance and
repairs which do not improve or extend the life of an asset are expensed as
incurred. Major renewals and betterments are charged to the property accounts.
Upon retirement or sale of an asset, its cost and related accumulated
depreciation are removed from the property accounts and any gain or loss is
recorded as income or expense.
INTANGIBLE ASSETS
Management contract rights represent the contractual rights purchased to
allow the Company to manage various apartment or housing projects and are
amortized on a straight line basis over the lives of the contracts, which
approximates seven (7) years.
Finance costs consist of expenses incurred for the bank line of credit, and
are amortized over the life of the loan.
Organization costs include expenses incurred during the start up of the
Company, and are amortized ratably over sixty (60) months, beginning July 1,
1996.
F-16
<PAGE>
DIVERSIFIED SENIOR SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 1: ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
DEVELOPMENT COSTS
Development costs are expenses that are capitalized during the development
stage on new assisted living facilities. The costs are reimbursed upon the
completion of construction and sale of the facilities to the permanent owner of
the real estate. Costs for abandoned sites are written off when the sites are
considered not feasible.
NET INCOME (LOSS) PER SHARE
Net income (loss) per share is computed based on the weighted average
number of common shares outstanding for the period.
ADVERTISING
The costs of advertising and marketing programs are expensed as incurred.
ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with generally
accepted accounting principles ("GAAP") requires management to make estimates
and assumptions that affect the reported amounts 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.
INCOME TAXES
The Company is a C corporation and files its federal income tax return as a
part of a consolidated group with THE as the parent. Federal tax expense or
benefit is allocated based on net income or loss for each entity in the
consolidated group. North Carolina state income tax regulations do not permit
filing of consolidated income tax returns. Accordingly, the Company and its
subsidiary file separate state corporate income tax returns.
The Company uses the asset and liability approach for financial accounting
and reporting for income taxes and deferred tax assets and liabilities. If it is
more likely than not that some portion or all of a deferred tax asset will not
be realized, a valuation allowance is recognized.
INCOME RECOGNITION
Management fee income is assessed as a percentage of rent collected at
apartments. Income is recognized monthly as rent collections are made.
Reimbursement income consists of amounts reimbursed or due to the Company
from properties managed for the services of management and maintenance personnel
employed by the Company.
Home care income is recognized at the time the service is provided.
PREFERRED STOCK
The Company's Articles of Incorporation provide authority for the issuance
of 100,000,000 shares of preferred stock, no par value. The Company has not
issued such stock, nor have attributes or preferences been established as of
December 31, 1996.
NOTE 2: RELATED PARTY TRANSACTIONS
On July 1, 1996, the Company, a 100% owned subsidiary of THE, acquired 100%
of RPM from THE. RPM is a management company formed in 1989 to manage
residential apartments, many of which are subsidized through various Housing and
Urban Development ("HUD"), Rural Economic and Community Development ("RECD"),
and tax credit programs. The acquisition was accomplished by the exchange of
2,277,678 shares of common stock of DSS for 100% of the stock (100 shares) of
RPM. No value was assigned to the stock at the time of acquisition, as RPM had
no positive book value at the date of acquisition. The acquisition was treated
as a combination of entities under common control and the financial
F-17
<PAGE>
DIVERSIFIED SENIOR SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 2: RELATED PARTY TRANSACTIONS -- Continued
statements are presented on a basis similar to a pooling of interests. The
results of operations are included in the financial statements of DSS from July
1, 1996 to December 31, 1996. In addition, a pro forma financial statement has
been included in Note 10 which includes a full year of operations of RPM as if
DSS were incorporated and had acquired RPM on January 1, 1996.
On September 1, 1996, RPM acquired certain management contract rights from
an entity related through common ownership. In connection with the transfer of
these assets, RPM reduced its receivable due from the affiliate by $110,903 and
assumed the affiliate's account payable due THE in the amount of $89,437. The
value of the asset acquired was $73,610. The asset is stated at the transferor's
historical cost basis of $73,610 in the accompanying financial statements. The
difference between the book value of the assets and liabilities acquired of
$126,730 was treated as a deemed distribution and included in the equity section
of the balance sheet.
Development costs totaling $50,000 were incurred by THE on behalf of the
Company during the period ended December 31, 1996.
RPM leases certain computer equipment from THE under operating lease
agreements expiring in 2001. These lease agreements are included in the lease
information disclosed in Note 8.
From time to time, the Company advances or borrows funds from the parent,
THE, or other related entities.
The following schedule summarizes the related party activities for the
period ended December 31, 1996.
<TABLE>
<CAPTION>
NOTE
DUE FROM DUE TO PAYABLE
AFFILIATES AFFILIATES AFFILIATE TOTAL
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Amounts due (to) from affiliates:
Amounts due to (from) RPM at date of acquisition:
Management fees due from related partnerships................... $ 257,673 $ -- $ -- $ 257,673
Advances due from affiliate..................................... 50,441 -- 50,441
Amounts due to related partnership.............................. -- (20,000) -- (20,000)
Amounts due to other related entities........................... -- (2,755) -- (2,755)
Advances due to parent.......................................... -- (520,059) (1,114,116) (1,634,175)
---------- ----------- ----------- -----------
308,114 (542,814) (1,114,116) (1,348,816)
Working capital advances to affiliate........................... 38,996 -- -- 38,996
Receipts from related partnerships.............................. (4,057) -- -- (4,057)
Acquisition of management contract rights from affiliate........ (89,437) -- -- (89,437)
Assumption of affiliate's liability to parent................... -- (110,903) -- (110,903)
Development costs incurred by parent............................ -- (50,000) -- (50,000)
Repayment of development costs.................................. -- 50,000 -- 50,000
Computer equipment lease payments due parent.................... -- (4,848) -- (4,848)
Working capital advances from parent............................ -- (44,825) -- (44,825)
Accrued interest to parent...................................... -- -- (52,979) (52,979)
Repayments to parent............................................ -- 559,220 70,775 629,995
Tax benefit of operating losses due from parent................. -- 88,000 -- 88,000
---------- ----------- ----------- -----------
Balance, December 31, 1996........................................... $ 253,616 $ (56,170) $(1,096,320) $ (898,874)
---------- ----------- ----------- -----------
---------- ----------- ----------- -----------
</TABLE>
There was no interest income received from related parties during the
period ended December 31, 1996. Accounts payable to related parties bear no
interest and have no scheduled repayment terms. Interest expense of $52,979 was
accrued on the note payable to affiliate for the period ended December 31, 1996.
See Note 5 for the terms of the note payable to affiliate.
Management fee income includes $143,774 earned from partnerships, a general
partner of which is a beneficial shareholder of THE; $30,835 of such income is
included in trade accounts receivable at December 31, 1996. In addition, the
F-18
<PAGE>
DIVERSIFIED SENIOR SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 2: RELATED PARTY TRANSACTIONS -- Continued
Company was reimbursed for payments made through its central payroll system for
payroll and related expenses, by partnerships which are related through common
ownership, of $250,354 for the period ended December 31, 1996.
NOTE 3: FURNITURE AND EQUIPMENT
The Company has furniture and equipment as follows at December 31, 1996:
<TABLE>
<S> <C>
Computer equipment................................................ $ 84,679
Office furniture.................................................. 39,794
--------
124,473
Less accumulated depreciation..................................... 36,022
--------
$ 88,451
--------
--------
</TABLE>
Depreciation expense for the period ended December 31, 1996 was $18,108.
NOTE 4: INTANGIBLE ASSETS
Intangible assets consist of the following at December 31, 1996:
<TABLE>
<S> <C>
Management contract rights......................................... $73,610
Finance costs...................................................... 13,887
Organization costs................................................. 9,586
-------
$97,083
Less accumulated amortization...................................... 7,156
-------
$89,927
-------
-------
</TABLE>
Amortization expense for the period ended December 31, 1996 was $7,156.
NOTE 5: NOTES PAYABLE
Notes payable consist of the following at December 31, 1996:
<TABLE>
<S> <C>
Bank line of credit, bearing interest at prime (8.25% at December 31, 1996), payable
quarterly, originally maturing October 1997. The note is guaranteed by THE, and 61,303
shares of Omega Healthcare Investors, Inc. common stock owned by THE are pledged as
collateral for the loan. In July 1997, the Company modified its line of credit by
increasing the authorized amount to $1.5 million and extending the maturity date to
January 1998.......................................................................... $ 931,622
Note payable to THE, bearing 8.25% interest, payable 366 days after demand.............. 1,096,320
----------
Notes payable due during 1998........................................................... $2,027,942
----------
----------
</TABLE>
NOTE 6: SAVINGS INCENTIVE PLAN
The Company participates in a defined contribution savings incentive plan
covering substantially all of its full time employees. The Company is required
to provide a 50% matching contribution to each employee participant for
contributions up to the first 5% of compensation. On January 1, 1996, the plan
was amended to cover substantially all employees of the controlled group of
companies owned by THE. The Company's required contribution for the period ended
December 31, 1996 was $6,085.
F-19
<PAGE>
DIVERSIFIED SENIOR SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 7: PROVISION FOR INCOME TAXES
Deferred taxes are recorded based upon differences between the financial
statement and tax bases of assets and liabilities and for available tax loss
carryforwards. The primary temporary difference between the financial statement
and tax bases of assets and liabilities consists of accrued compensation for the
Company's majority beneficial owner and start up costs deferred for tax
purposes. In addition, the Company and Subsidiary have available deferred tax
assets related to state income tax loss carryforwards. A valuation allowance is
provided to reduce the deferred tax assets to a level which, more likely than
not, will be realized. The net deferred assets reflect management's estimate of
the amount which will be realized from future profitability. At December 31,
1996, deferred tax assets of DSS and RPM were $168,938, and $17,274,
respectively, totaling $186,212. The Company has established a valuation
allowance of 100% of the assets. Deferred tax assets of RPM totaled $11,259 on
July 1, 1996, the date it was acquired by DSS. Again, management established a
valuation allowances of 100% of the deferred assets. There were no deferred tax
liabilities at December 31, 1996.
DSS and RPM had state loss carryforwards of $181,247 and $222,892
respectively, available at December 31, 1996 to be applied against future
taxable income. The tax loss carryforwards are subject to examination by taxing
authorities and if not previously utilized, expire December 31, 2001.
The Company files a consolidated federal return with its parent, THE;
therefore, loss carryforwards for federal purposes have been utilized.
The provision for income tax benefit of $88,000 is for losses used by the
parent in the federal consolidated income tax return for the year ended December
31, 1996.
NOTE 8: COMMITMENTS AND CONTINGENCIES
Various litigation occurs from time to time in the normal course of
business of the Company. These issues are not considered to be significant to
the financial statements of the Company and management does not contemplate
losses in regard to such issues. There was no outstanding litigation at December
31, 1996.
The Company has various operating leases for office space and equipment.
Future minimum lease payments of $70,042 are as follows for the years ending
December 31:
<TABLE>
<S> <C>
1997............................................................... $36,869
1998............................................................... $15,558
1999............................................................... $ 9,673
2000............................................................... $ 4,848
2001............................................................... $ 3,094
</TABLE>
Rent expense for the period ended December 31, 1996 was $43,292. Beginning
in May 1997, the Company entered into a month-to-month lease with THE, the
parent, for office space for its corporate headquarters with required monthly
rent payments of $2,700. In addition, RPM leases certain computer equipment from
THE under operating lease agreements expiring in 2001, with monthly payments of
$404.
NOTE 9: SUBSEQUENT EVENTS
During the period January 1, 1997 to August 6, 1997, the Company has
accelerated its development activities. As of August 6, 1997, the Company has
control, through options or direct ownership, of several tracts of land
throughout North Carolina for development of assisted living facilities. The
Company has obtained favorable market feasibility analyses on three of the
sites. The Company will hold these properties as nominee for the non-profit
owner until such time as the proposed bond financing for such property is ready
to close.
Effective January 1, 1997, the Board of Directors approved five-year
employment agreements with certain officers of the Company. Under the terms of
the agreements, the Company agreed to assume responsibility for accrued but
unpaid salaries incurred by the Company's parent relating to the startup
activities of the Company of $271,263 during 1996 and $148,882 during 1997.
These salaries have been recorded as expense during the periods.
F-20
<PAGE>
DIVERSIFIED SENIOR SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 9: SUBSEQUENT EVENTS -- Continued
In addition, officers are entitled to a bonus in the amount of 50% of the
stated amounts of the unpaid salaries in consideration for the deferral. Again,
these bonuses have been recorded as expenses during the periods. The agreements
permit the bonus amount to be used for the purchase of stock ranging from 50% to
100% of the offering price of the shares on the public market.
The agreements provide for the payment to each executive officer of a lump
sum severance payment if the Company terminates such executive's employment
during the term of the agreements other than for cause, or if the employment is
terminated for certain reasons, including a change of control of the Company.
The lump sum payment is equal to three times the amount of such executive's
average base salary for the previous five years.
Effective January 1, 1997, the Directors and shareholder adopted the
Company's 1997 Stock Incentive Plan for 500,000 shares of common stock, which
authorizes the Board (or future committee) to issue stock options, stock
appreciation rights, restricted stock and deferred stock subject to the Plan and
such other terms as set by the Board. As of August 6, 1997, no grants have been
made.
As permitted by generally accepted accounting principles, the Company has
adopted APB Opinion No. 25 intrinsic value based method of accounting for its
stock-based compensation arrangements. The difference between the option price
and the fair price of the stock will be recorded as compensation expense on the
exercise date.
The Company currently proposes to undertake a public offering of 1,500,000
shares of common stock. The Company has entered into an engagement letter with
an investment banking firm for a firm underwriting of the stock. The Company has
agreed to sell the stock to the underwriter at a discount of 10% of the public
offering price. The Company has also agreed to pay the underwriter a
non-accountable expense allowance of up to 3% of the gross proceeds of the
Offering of which $100,000 has been paid. The Company is obligated to pay up to
$180,000 of the underwriter's expense if the stock is not sold. As additional
compensation, the Company will grant the underwriter warrants to purchase
150,000 shares of common stock exercisable for four years, commencing 12 months
after the closing of the offering, at an exercise price equal to 120% of the
public offering price. In addition, the Company will contract with the
underwriter for advisory services for two years after the completion of the
offering for $50,000 per year. The entire $100,000 obligation will be prepaid at
the completion of the equity offering.
On June 30, 1997, the Company retired 477,778 shares of its common stock,
leaving 1,800,000 shares outstanding.
On September 24, 1997, the Board of Directors classified a series of
200,000 shares of convertible, preferred stock and authorized the issuance of
178,386 shares to the parent company to be exchanged for a note payable to the
parent in the amount of $891,930 on September 30, 1997. The preferred stock may
be converted to common stock at $6 per share after September 30, 1999.
F-21
<PAGE>
DIVERSIFIED SENIOR SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 10: PRO FORMA CONSOLIDATING STATEMENT OF OPERATIONS
The following consolidating statement of operations includes the full year
of operations of RPM as if it were acquired on January 1, 1996, and as if DSS
were incorporated on January 1, 1996.
<TABLE>
<CAPTION>
PRO FORMA
DSS, INC. RPM, INC. CONSOLIDATED
--------- ---------- ----------
<S> <C> <C> <C>
Income:
Management fees.................... $ -- $ 833,426 $ 833,426
Reimbursement income............... -- 1,467,051 1,467,051
Home care income................... 18,797 -- 18,797
--------- ---------- ----------
18,797 2,300,477 2,319,274
--------- ---------- ----------
Expenses:
Personnel related.................. 559,285 2,143,558 2,702,843
Administrative..................... 17,058 183,010 200,068
Depreciation and amortization...... 3,930 39,248 43,178
Other.............................. 16,621 75,798 92,419
--------- ---------- ----------
596,894 2,441,614 3,038,508
--------- ---------- ----------
Operating loss....................... 578,097 141,137 719,234
Other (income) expenses:
Interest and other income.......... -- (15,955) (15,955)
Interest and other expense......... 14,449 118,739 133,188
--------- ---------- ----------
Loss before provision for income tax
benefit............................ 592,546 243,921 836,467
Provision for income tax benefit... (61,600) (68,400) (130,000)
--------- ---------- ----------
Net loss............................. $ 530,946 $ 175,521 $ 706,467
--------- ---------- ----------
--------- ---------- ----------
Net loss per share................... $ .31
----------
----------
Weighted number of shares
outstanding........................ 2,277,778
----------
----------
</TABLE>
F-22
<PAGE>
DIVERSIFIED SENIOR SERVICES, INC. AND SUBSIDIARY
SUPPLEMENTAL SCHEDULE OF CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE PERIOD FROM MAY 17, 1996 (DATE OF INCEPTION) TO DECEMBER 31, 1996
<TABLE>
<CAPTION>
DSS, INC. RPM, INC.(1) CONSOLIDATED
--------- ------------ ----------
<S> <C> <C> <C>
Income
Management fees.................... $ -- $ 438,680 $ 438,680
Reimbursement income............... -- 781,838 781,838
Home care income................... 18,797 -- 18,797
--------- ------------ ----------
18,797 1,220,518 1,239,315
--------- ------------ ----------
Expenses:
Personnel related.................. 559,285 1,092,103 1,651,388
Administrative..................... 17,058 94,174 111,232
Depreciation and amortization...... 3,930 21,334 25,264
Other.............................. 16,621 47,869 64,490
--------- ------------ ----------
596,894 1,255,480 1,852,374
--------- ------------ ----------
Operating loss....................... 578,097 34,962 613,059
Other expenses:
Interest and other expenses........ 14,449 52,979 67,428
--------- ------------ ----------
Loss before provision for income tax
benefit............................ 592,546 87,941 680,487
Provision for income tax benefit... (61,600) (26,400) (88,000)
--------- ------------ ----------
Net loss............................. $ 530,946 $ 61,541 $ 592,487
--------- ------------ ----------
--------- ------------ ----------
</TABLE>
- ---------------
(1) Operations from the date of acquisition, July 1, 1996 to December 31, 1996
F-23
<PAGE>
REPORT OF INDEPENDENT AUDITORS
TO THE BOARD OF DIRECTORS OF
RESIDENTIAL PROPERTIES MANAGEMENT, INC.
Winston-Salem, North Carolina
We have audited the accompanying statements of operations, changes in
shareholder's equity (deficit) and cash flows of Residential Properties
Management, Inc. (the "Company") for the six month period ended June 30, 1996
and the year ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidenced supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the stockholder's equity (deficit) of Residential
Properties Management, Inc. as of June 30, 1996 and December 31, 1995, and the
results of its operations and cash flows for the periods then ended, as
described above, in conformity with generally accepted accounting principles.
THE DANIEL PROFESSIONAL GROUP, INC.
August 6, 1997, except for Notes 2
and 5 as to which the date is
September 25, 1997
Winston-Salem, North Carolina
F-24
<PAGE>
RESIDENTIAL PROPERTIES MANAGEMENT, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS ENDED FOR THE YEAR
JUNE 30, ENDED
1996 DECEMBER 31, 1995
------------ -----------------
<S> <C> <C>
Income
Management fees.......................................................................... $ 394,746 $ --
Reimbursement income..................................................................... 685,213 --
------------ -----------------
1,079,959 --
------------ -----------------
Expenses:
Personnel related........................................................................ 1,051,455 --
Administrative........................................................................... 88,836 --
Depreciation............................................................................. 17,914 --
Other.................................................................................... 27,930 --
------------ -----------------
1,186,135 --
------------ -----------------
Operating loss............................................................................. (106,176) --
Other income (expenses):
Interest and other income................................................................ 15,955 52,507
Gain on sale of stock available for sale................................................. -- 99,108
Interest and other expense............................................................... (65,760) (19,690)
------------ -----------------
Income (loss) before provision for income tax benefit (expenses)........................... (155,981) 131,925
Provision for income tax benefit (expense)............................................... 42,000 (45,100)
------------ -----------------
Net income (loss).......................................................................... $ (113,981) $ 86,825
------------ -----------------
------------ -----------------
Net earnings (loss) per share.............................................................. $ (1,140) $ 868
------------ -----------------
------------ -----------------
Shares outstanding......................................................................... 100 100
------------ -----------------
------------ -----------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-25
<PAGE>
RESIDENTIAL PROPERTIES MANAGEMENT, INC.
STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY (DEFICIT)
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
UNREALIZED RETAINED TOTAL
COMMON COMMON PAID-IN DEEMED GAIN ON EARNINGS EQUITY
SHARES STOCK CAPITAL DISTRIBUTION INVESTMENTS (DEFICIT) (DEFICIT)
------- ------- -------- ------------ ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1995............ 100 $ 100 $ 87,314 -- $ 309,164 $ 96,406 $ 492,984
Unrealized loss on securities
available for sale................ -- -- -- -- (38,950) -- (38,950)
Net income for the year ended
December 31, 1995................. -- -- -- -- -- 86,825 86,825
------- ------- -------- ------------ ----------- --------- -----------
Balance, December 31, 1995.......... 100 100 87,314 -- 270,214 183,231 540,859
Transfer securities available for
sale to parent.................... -- -- (87,314) -- (270,214) -- (357,528)
Deemed distribution resulting from
transfer of assets and liabilities
from affiliate.................... -- -- -- (1,209,060) -- -- (1,209,060)
Net loss for the six months ended
June 30, 1996..................... -- -- -- -- -- (113,981) (113,981)
------- ------- -------- ------------ ----------- --------- -----------
Balance, June 30, 1996.............. 100 $ 100 $ -- $ (1,209,060) $ -- $ 69,250 $(1,139,710)
------- ------- -------- ------------ ----------- --------- -----------
------- ------- -------- ------------ ----------- --------- -----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-26
<PAGE>
RESIDENTIAL PROPERTIES MANAGEMENT, INC.
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS ENDED
JUNE 30, FOR THE YEAR
1996 DECEMBER 31, 1995
------------ -----------------
<S> <C> <C>
Operating activities:
Net income (loss).......................................................................... $ (113,981) $ 86,825
------------ -----------------
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation............................................................................. $ 17,914 $ --
Gain on sale of investments.............................................................. -- (99,108)
Changes in operating assets and liability:
Accounts receivable................................................................... 40,137 --
Dividends receivable.................................................................. -- 13,912
Interest receivable................................................................... -- (16,000)
Prepaid expenses...................................................................... (10,639) --
Accounts payable...................................................................... 97,809 2,498
Advances to affiliates................................................................ 23,020 19,590
------------ -----------------
Total adjustments................................................................... 168,241 (79,108)
------------ -----------------
Net cash provided by operating activities................................................ 54,260 7,717
------------ -----------------
Investing activities:
Proceeds from sale of investments........................................................ -- 134,396
Other.................................................................................... (3,315) 4,985
------------ -----------------
Net cash provided (used) by investing activities......................................... (3,315) 139,381
------------ -----------------
Financing activities:
Advances and repayments to affiliates.................................................... (50,441) (344,773)
Advances and repayments from affiliates.................................................. 2,005 --
Increase in margin payable............................................................... -- 185,509
------------ -----------------
Net cash used by financing activities.................................................... (48,436) (159,264)
------------ -----------------
Net increase (decrease) in cash............................................................ 2,509 (12,166)
Cash and cash equivalents -- beginning..................................................... 2,001 14,167
------------ -----------------
Cash and cash equivalents -- ending........................................................ $ 4,510 $ 2,001
------------ -----------------
------------ -----------------
Cash payments for interest................................................................. $ -- $ --
------------ -----------------
------------ -----------------
Cash payments for income taxes............................................................. $ -- $ --
------------ -----------------
------------ -----------------
</TABLE>
F-27
<PAGE>
RESIDENTIAL PROPERTIES MANAGEMENT, INC.
STATEMENTS OF CASH FLOWS -- CONTINUED
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND THE YEAR ENDED DECEMBER 31, 1995
On January 1, 1996, the Company's investment in securities available for
sale and associated margin account payable were transferred to THE, the parent,
in a non-cash transaction as follows:
<TABLE>
<S> <C>
Assets:
Investment in securities, at market............................ $(494,693)
Liabilities:
Margin payable................................................. $ 185,509
Accounts payable THE........................................... $ (48,344)
Equity:
Unrealized gains on investment................................. $ 270,214
Paid in capital in excess of par............................... $ 87,314
</TABLE>
In addition, as described in Note 5 to the financial statements, the
Company acquired certain assets and assumed certain liabilities of an affiliate,
in a non-cash transaction as follows:
<TABLE>
<S> <C>
Assets:
Management contract rights................................... $ --
Land......................................................... $ 70,536
Furniture and equipment...................................... $ 121,569
Accounts receivable -- trade................................. $ 119,023
Accounts receivable -- affiliate............................. $ (253,198)
Liabilities:
Accounts payable THE......................................... $(1,266,990)
Reduction in shareholder's equity:
Deemed distribution.......................................... $ 1,209,060
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-28
<PAGE>
RESIDENTIAL PROPERTIES MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND THE YEAR ENDED DECEMBER 31, 1995
NOTE 1: ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Residential Properties Management, Inc. (the "Company"), a North Carolina
corporation, was formed on March 29, 1989, to manage government subsidized
multi-family and elderly resident rental apartments through management contracts
with the owners of the real estate. The apartments are subsidized through Rural
Economic and Community Development, Section 515, and Housing and Urban
Development, Section 8 programs. The Company also manages properties developed
under the Low-Income Housing Tax Credit program as well as conventional
apartments and homes. The Company's operations are located primarily in North
Carolina, South Carolina, West Virginia and Pennsylvania.
The following significant accounting policies have been followed in the
preparation of the Company's financial statements.
CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all
highly liquid investments purchased within three months of maturity to be cash
equivalents.
ACCOUNTS RECEIVABLE -- TRADE
Accounts receivable -- trade consists of management fees and reimbursements
for administrative services due from partnerships whose properties are managed
by the Company. The general partners of the partnerships are liable for the
payment of the receivables if the partnerships do not have adequate cash flow;
therefore, the Company considers such accounts receivable to be fully
collectable. The Company provides services to customers on a noncollateralized
basis.
FURNITURE AND EQUIPMENT
Furniture and equipment are stated at cost. Depreciation is determined
using the straight line method and is based on estimated useful lives of the
related assets of three (3) to five (5) years. Expenditures for maintenance and
repairs which do not improve or extend the life of an asset are expensed as
incurred. Major renewals and betterments are charged to the property accounts.
Upon retirement or sale of an asset, its cost and related accumulated
depreciation are removed from the property accounts and any gain or loss is
recorded in income or expense.
INCOME TAXES
The Company is a C corporation and files its federal income tax return as
part of a consolidated group with its parent, Taylor House Enterprises, Limited
("THE"). Federal tax expense or benefit is allocated based upon the net income
or loss of each entity of the consolidated group. North Carolina state income
tax regulations do not permit filing of consolidated income tax returns.
Accordingly, the Company files a separate state corporate income tax return.
The Company uses the asset and liability approach for financial accounting
and reporting for income taxes and deferred tax assets and liabilities. If it is
more likely than not that some portion or all of a deferred tax asset will not
be realized, a valuation allowance is recognized.
INCOME RECOGNITION
Management fee income is assessed as a percentage of rent collected at the
apartments. Income is recognized in the month rent collections are made.
Reimbursement income consists of amounts reimbursed or due to the Company
from the properties managed for the services of management and maintenance
personnel employed by the Company.
ADVERTISING
The costs of advertising and marketing programs are expensed as incurred.
F-29
<PAGE>
RESIDENTIAL PROPERTIES MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE 1: ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
NET INCOME (LOSS) PER SHARE
Net income (loss) per share is computed based on the weighted average
number of common shares outstanding for the respective periods.
MARKETABLE SECURITIES
The Company follows SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." SFAS No. 115 requires certain investments to be
categorized as either trading, available for sale, or held to maturity. Trading
securities are reported at fair value, with changes in fair value included in
earnings. Available for sale securities are reported at fair value, with net
unrealized gains and losses recorded as a special component of stockholders'
equity. Held to maturity debt securities are carried at amortized cost. Fair
values are determined based upon quoted market prices. The cost of securities
sold is determined using the average cost method.
At December 31, 1995, all of the Company's investments were in equity
securities, classified as available for sale securities.
ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with generally
accepted accounting principles ("GAAP") requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of income and expenses during the reporting
period. Actual results could differ from those estimates.
NOTE 2: RELATED PARTY TRANSACTIONS
As discussed in Note 5, the Company acquired assets consisting of
management contract rights, trade accounts receivable, land, furniture and
equipment from an entity related through common ownership.
From time to time, the Company advances or borrows funds from the parent or
other related entities. In addition, due to filing federal consolidated income
tax returns, the parent sometimes funds the income tax expense of the Company.
F-30
<PAGE>
RESIDENTIAL PROPERTIES MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE 2: RELATED PARTY TRANSACTIONS -- Continued
The following schedule summarizes related party activities for the six
months ended June 30, 1996 and for the year ended December 31, 1995.
<TABLE>
<CAPTION>
NOTE
DUE FROM DUE TO PAYABLE
AFFILIATES AFFILIATES AFFILIATE TOTAL
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Amounts due (to) from affiliates at January 1, 1995:
Management fees due from related partnerships................... $ 257,673 $ -- -- $ 257,673
Advances due from affiliate..................................... 220,540 -- -- 220,540
Interest receivable from affiliate.............................. 16,658 -- -- 16,658
Amounts due to related partnership.............................. -- (20,000) -- (20,000)
Amounts due to other related entities........................... -- (2,755) -- (2,755)
Advances due to parent.......................................... -- (618,999) -- (618,999)
----------- ----------- ----------- -----------
Balance, January 1, 1995.......................................... 494,871 (641,754) -- (146,883)
Interest assessed to affiliate.................................. 16,000 -- -- 16,000
Advance to parent............................................... -- 340,693 -- 340,693
Payment of income taxes by parent............................... -- (19,590) -- (19,590)
Repayment of advances to parent................................. -- 4,080 -- 4,080
----------- ----------- ----------- -----------
Balance, December 31, 1995........................................ 510,871 (316,571) -- 194,300
Issuance of note to parent...................................... -- 293,816 (293,816) --
Reduction in accounts receivable affiliate(1)................... (253,198) -- -- (253,198)
Assumption of affiliate's liability to parent................... -- (511,710) (755,280) (1,266,990)
Transfer of securities and associated margin account to
parent....................................................... -- (48,344) -- (48,344)
Working capital advance to affiliate............................ 50,441 -- -- 50,441
Working capital advance from parent............................. -- (2,005) -- (2,005)
Accrued interest to parent...................................... -- -- (65,020) (65,020)
Tax benefit of operating losses due from parent................. -- 42,000 -- 42,000
----------- ----------- ----------- -----------
Balance June 30, 1996............................................. $ 308,114 $ (542,814) $(1,114,116) $(1,348,816)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
- ---------------
(1) Represents portion of purchase price of assets from affiliate.
Interest income from related party notes receivable was $16,000 for the
year ended December 31, 1995. There was no interest income received from related
parties during the six months ended June 30, 1996. Note payable to parent bears
interest at 8.25% and is due 366 days after demand. Interest expense from note
payable affiliate was $65,020 for the six months ended June 30, 1996.
Management fee income includes $140,522 for the six months ended June 30,
1996 earned from partnerships, a general partner of which is a beneficial
shareholder of the Company; $20,141 of such fees are included in trade accounts
receivable at June 30, 1996. In addition, the Company was reimbursed for
payments made through its central payroll system for payroll and related
expenses, by partnerships related through common ownership of $222,959 for the
period ended June 30, 1996.
F-31
<PAGE>
RESIDENTIAL PROPERTIES MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE 3: FURNITURE AND EQUIPMENT
The Company has furniture and equipment as follows at June 30, 1996:
<TABLE>
<S> <C>
Computer equipment........................................................................ $ 84,679
Office furniture and equipment............................................................ 36,890
--------
121,569
Less accumulated depreciation............................................................. 17,914
--------
$103,655
--------
--------
</TABLE>
The Company held no furniture and equipment at June 30, 1995. Depreciation
expense was $17,914 for the six months ended June 30, 1996.
NOTE 4: INVESTMENT IN EQUITY SECURITIES
At December 31, 1995, the Company held equity securities consisting of
common stock in Omega Healthcare Investors, Inc. ("Omega"). In January 1996, the
Omega stock and related accounts were transferred to the parent at book value.
The following information is presented with regard to the stock:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-----------------
<S> <C>
Fair value......................................................................... $ 494,693
Unrealized gains................................................................... $(270,214)
Unrealized losses.................................................................. $ --
</TABLE>
Market values were based on quoted market prices. The change in the
unrealized gains for the year ended December 31, 1995 was a decrease of $38,750.
Proceeds from the sale of securities were $134,396 for the year ended
December 31, 1995, and gross realized gains of $99,108 have been recognized. The
average cost method is used to determine cost basis when calculating realized
gains and losses.
Margin payable at December 31, 1995 to a securities firm bears interest at
the prime rate and is payable on demand. The stock in Omega is collateral for
the margin account.
NOTE 5: ACQUISITION OF ASSETS
On January 1, 1996, the Company acquired certain assets, consisting of
management contract rights, trade accounts receivable, land, and furniture and
equipment from an affiliate, and assumed certain liabilities to THE. The
difference between the book value of the assets acquired, the reduction of the
amount due from affiliate and the liability assumed is recorded as a deemed
distribution in the equity section of the balance sheet. The assets acquired are
stated at the transferor's historical cost basis at date of transfer. The
transaction occurred as follows:
<TABLE>
<S> <C>
Management contracts................................................................... $ --
Land................................................................................... 70,536
Furniture and equipment................................................................ 121,569
Accounts receivable.................................................................... 119,023
Reduction in receivable from affiliate................................................. (253,198)
Liability to THE....................................................................... (1,266,990)
Deemed distribution.................................................................... $ 1,209,060
</TABLE>
NOTE 6: SAVINGS INCENTIVE PLAN
The Company participates in a defined contribution savings incentive plan
covering substantially all of its full time employees. The Company is required
to provide a 50% matching contribution to each employee participant for
contributions up to the first 5% of compensation. On January 1, 1996 the plan
was amended to cover substantially all employees of the
F-32
<PAGE>
RESIDENTIAL PROPERTIES MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE 6: SAVINGS INCENTIVE PLAN -- Continued
controlled group of companies owned by THE. The Company's required contributions
for the period ended June 30, 1996 were $5,528. The Company did not participate
in the plan during 1995.
NOTE 7: PROVISION FOR INCOME TAXES
Deferred taxes are recorded based upon differences between the financial
statement and tax bases of assets and liabilities and for available tax loss
carryforwards. As there are no significant temporary differences between the
financial statement and tax bases of assets and liabilities, deferred tax assets
are related primarily to state tax loss carryforwards. A valuation allowance is
provided to reduce the deferred tax assets to a level which, more likely than
not, will be realized. At June 30, 1996, deferred tax assets totaled $11,259.
The Company has established a valuation allowance of 100% of this asset. There
were no deferred tax assets or liabilities at December 31, 1995.
The provision for income tax expense (benefit) attributable to continuing
operations consists of the following:
<TABLE>
<CAPTION>
JUNE 30, 1996 DECEMBER 31, 1995
------------- -----------------
<S> <C> <C>
Currently payable (refundable):
State income tax.................................................. $ -- $ 8,900
Federal income tax (benefit)...................................... (42,000) 36,200
------------- -----------------
Provision for income tax expense (benefit).......................... $ (42,000) $45,100
------------- -----------------
------------- -----------------
</TABLE>
The Company had state loss carryforwards available of $145,277 at June 30,
1996 to be applied against future taxable income. The tax loss carryforward is
subject to examination by taxing authorities and if not previously utilized,
will expire December 31, 2001.
NOTE 8: COMMITMENTS AND CONTINGENCIES
Various litigation occurs from time to time in the normal course of
business. These issues are not considered to be significant to the financial
statements of the Company and management does not contemplate losses with regard
to such issues. There was no outstanding litigation at June 30, 1996.
The Company has various operating leases for office space and equipment.
Future minimum lease payments of $101,135 are as follows at June 30, 1996:
<TABLE>
<S> <C>
Six months ending December 31, 1996............................................ $31,093
Years ending December 31, 1997............................................ $36,869
1998............................................ $15,558
1999............................................ $ 9,673
2000............................................ $ 4,848
2001............................................ $ 3,094
</TABLE>
Total rent expense for the period ended June 30, 1996 was $33,169. The
Company incurred no lease expense during 1995. Beginning in May, 1997, the
Company entered into a month-to-month lease with THE, the parent, for office
space for its corporate headquarters with required monthly rent payments of
$1,350. In addition the Company leases certain computer equipment from the
parent under operating lease agreements expiring in 2001 with monthly payments
of $404.
F-33
<PAGE>
- ------------------------------------------------------------
- ------------------------------------------------------------
- ------------------------------------------------------------
- ------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED ON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR BY THE UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE
SECURITIES OFFERED BY THIS PROSPECTUS, OR AN OFFER TO SELL OR A SOLICITATION OF
AN OFFER TO BUY ANY SECURITIES BY ANY PERSON IN ANY JURISDICTION IN WHICH SUCH
OFFER OR SOLICITATION IS NOT AUTHORIZED OR IS UNLAWFUL. THE DELIVERY OF THIS
PROSPECTUS SHALL NOT, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE OF THIS
PROSPECTUS.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary................................... 3
Risk Factors......................................... 7
Dilution............................................. 13
Use of Proceeds...................................... 14
Dividend Policy...................................... 14
Capitalization....................................... 15
Management's Discussion and Analysis of Financial
Condition and Results of Operations................ 16
Business............................................. 20
Management........................................... 28
Principal Shareholders............................... 31
Certain Transactions................................. 32
Description of Securities............................ 33
Shares Eligible for Future Sale...................... 35
Underwriting......................................... 36
Legal Matters........................................ 38
Experts.............................................. 38
Additional Information............................... 38
Index to Financial Statements........................ F-1
</TABLE>
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
1,500,000 SHARES
DIVERSIFIED SENIOR
SERVICES, INC.
----------------
PROSPECTUS
----------------
STRASBOURGER PEARSON
TULCIN WOLFF
INCORPORATED
61 BROADWAY, SUITE 2800
NEW YORK, NEW YORK 10006
(212) 952-7500
, 1997
- ------------------------------------------------------------
- ------------------------------------------------------------
- ------------------------------------------------------------
- ------------------------------------------------------------
<PAGE>
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The North Carolina Business Corporation Act ("NCBCA") allows a
corporation's articles of incorporation to contain a provision limiting a
director's personal liability to the corporation and its shareholders for
monetary damages. No such provision may limit a director's liability for: (i)
acts or omissions known by the director to conflict with the best interests of
the corporation; (ii) liability for unlawful distributions; (iii) any
transactions from which the director received an improper personal benefit; or
(iv) acts or omissions occurring prior to the effective date of such provision
of the articles of incorporation. The Registrant's Articles of Incorporation
limit the personal liability of its directors for monetary damages to the
fullest extent permitted by the NCBCA.
The NCBCA contains provisions setting forth conditions under which a
corporation may indemnify its directors, officers, employees and agents from any
liability incurred in their activities on behalf of the corporation. The NCBCA
permits indemnification unless, in connection with a proceeding by or in the
right of the corporation, the person seeking indemnification is adjudged liable
to the corporation or, in connection with a proceeding charging the receipt of
an improper personal benefit, the person seeking indemnification is adjudged to
have improperly received a benefit.
ARTICLE SIX of the Registrant's Articles of Incorporation provide that: "To
the fullest extent permitted by applicable law, as it now exists or may
hereafter be amended, the Corporation shall indemnify all persons serving as
Directors and Officers of the Corporation against all liability and litigation
expense, including but not limited to reasonable attorneys' fees, arising out of
their status as such or their activities in the foregoing capacities, regardless
of when such status existed or activity occurred and regardless of whether or
not they are Directors or Officers of the Corporation at the time such
indemnification is sought or obtained. Without limiting the generality of the
foregoing, such persons may also recover from the Corporation all reasonable
costs, expense and attorney's fees in connection with the enforcement of rights
to indemnification granted by this Article. The provisions of this Article are
in addition to and not in limitation of the power of the Corporation to receive
the benefit, any other or further indemnification, insurance, elimination of
liability or other right or benefit which is either required by the North
Carolina Business Corporation Act or permitted thereby and duly adopted by the
Corporation in accordance therewith."
ARTICLE SEVEN of the Registrant's Articles of Incorporation provide that:
"To the fullest extent permitted by applicable law, as it now exists or may
hereafter be amended, no Director of the Corporation shall have any personal
liability arising out of any action, whether by or in the right of the
Corporation or otherwise, for monetary damages for breach of his or her duty as
a Director. This Article shall not impair any right to receive indemnity or
insurance from the Corporation or any third party which any Director may now or
hereafter have. Any repeal or modification of this Article shall not impair or
otherwise adversely affect any limitation on, or elimination of, the personal
liability of a Director effected hereby with respect to acts or omissions
occurring prior to such repeal or modification."
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The Registrant estimates that expenses payable by it in connection with the
offering described in this Registration Statement (other than the underwriting
discount and commissions) will be as follows:
<TABLE>
<S> <C>
SEC filing fee......................................................................... $ 3,563.64
Nasdaq filing fee...................................................................... 3,000.00
Printing and engraving expenses........................................................ 30,000.00
Accounting fees and expenses........................................................... 25,000.00
Legal fees and expenses................................................................ 75,000.00
Blue sky qualification fees and expenses............................................... 10,000.00
Transfer Agent......................................................................... 10,000.00
Miscellaneous.......................................................................... 48,936.36
-----------
Total............................................................................. $205,500.00
-----------
-----------
</TABLE>
II-1
<PAGE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
The Registrant was formed in May 1996 as a wholly-owned subsidiary of
Taylor House Enterprises, Limited and began operations in July 1996. The
Registrant was initially capitalized with $100 and its parent, Taylor House
Enterprises, Limited, received 100 shares of Common Stock. In July 1996, Taylor
House Enterprises, Limited exchanged all of the stock of its wholly-owned
subsidiary Residential Property Management, Inc. for 2,277,678 shares of the
Registrant. Effective June 30, 1997, Taylor House Enterprises, Limited returned
477,778 shares of Common Stock to the Registrant which the Registrant retired
leaving 1,800,000 shares of Common Stock issued and outstanding.
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) The following exhibits are filed as part of this Registration
Statement:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- ----------------------------------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement
+ 3.1 Articles of Incorporation of the Registrant
+ 3.2 Bylaws of the Registrant, as amended
4.1 Specimen stock certificate of the Company's Common Stock
4.2 Form of Underwriter's Warrant Agreement
5 Opinion of House Law Firm
+10.1 Employment Agreement dated as of January 1, 1997 between the Company and William G. Benton, as amended
+10.2 Employment Agreement dated as of January 1, 1997 between the Company and Susan L. Christiansen, as amended
+10.3 Employment Agreement dated as of January 1, 1997 between the Company and G. L. Clark, Jr., as amended
+10.5 The Company's 1997 Stock Incentive Plan
+10.6 Loan Agreement dated July 21, 1997 between the Company and Centura Bank
23.1 Consent of The Daniel Professional Group, Inc.
23.2 Consent of House Law Firm (included in its opinion filed as Exhibit 5)
+24 Power of Attorney (included on the signature page of the Company's Registration Statement on Form SB-2)
</TABLE>
- ---------------
+ Previously filed
(b) Financial Statement Schedules:
Schedules for which provision is made in the applicable accounting
regulations of the Commission are not required under the related instructions or
are not applicable, and therefore have been omitted.
ITEM 28. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions, or otherwise, the Company has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company of expenses
incurred or paid by a director, officer or controlling person of the Company in
the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of a
registration statement in reliance upon Rule 430A and contained in the form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of the registration
statement as of the time it was declared effective.
II-2
<PAGE>
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
The undersigned registrant hereby undertakes that it will:
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the Securities
Act;
(ii) Reflect in the prospectus any facts or events which, individually or
together, represent a fundamental change in the information in the registration
statement;
(iii) Include any additional or changed material information on the plan of
distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered and the offering of the securities at the time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
II-3
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this Amendment
No. 2 to the Registration Statement to be signed on its behalf by the
undersigned in the City of Winston-Salem, State of North Carolina, on the 13th
day of November, 1997.
DIVERSIFIED SENIOR SERVICES, INC.
By: /s/_____SUSAN L. CHRISTIANSEN______
SUSAN L. CHRISTIANSEN,
PRESIDENT AND CHIEF OPERATING OFFICER
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------------------ --------------------------------- ----------------------------
<S> <C> <C>
* Chairman of the Board and Chief November 13, 1997
----------------------
WILLIAM G. BENTON Executive Officer
/s/SUSAN L. CHRISTIANSEN Chief Operating Officer and November 13, 1997
------------------------
SUSAN L. CHRISTIANSEN Director
* Chief Financial Officer, November 13, 1997
--------------------
G.L. CLARK, JR. Treasurer and Director
* Director November 13, 1997
----------------------
PERRY C. CRAVEN
* Director November 13, 1997
---------------------
WALTER H. ETTINGER, JR.
*by Susan L. Christiansen, Attorney-in-Fact
</TABLE>
II-4
Exhibit 1.1
1,500,000 Shares
DIVERSIFIED SENIOR SERVICES, INC.
Common Stock
UNDERWRITING AGREEMENT
New York, New York
November __, 1997
Strasbourger Pearson Tulcin
Wolff Incorporated
61 Broadway
Suite 2800
New York, New York 10006
Diversified Senior Services, Inc., a North Carolina
corporation (the "Company"), hereby confirms its agreement with you. The Company
proposes to issue and sell to you (the "Underwriter") pursuant to this
Underwriting Agreement (the "Agreement") an aggregate of 1,500,000 shares (the
"Shares") of the Company's Common Stock, no par value per share (the "Common
Stock").
You have advised the Company that you desire to purchase the
Shares. The Company confirms the agreement made by it with respect to the
purchase of the Shares by the Underwriter, as follows:
1. Representations and Warranties of the Company and THE. The
Company and Taylor House Enterprises, Limited ("THE") represent and warrant to,
and agree with, the Underwriter that:
(a) A registration statement on Form SB-2 (File No.
333-34367) with respect to the Shares, including a prospectus subject to
completion, has been filed by the Company with the Securities and Exchange
Commission (the "Commission") under the Securities Act of 1933, as amended (the
"Act") and in conformity with the requirements of the Act and the rules and
regulations of the Commission thereunder (the "Rules and Regulations"), and one
or more amendments to such registration statement may have been so filed and
such registration statement has been delivered to you. After the execution of
this Agreement, the Company will
<PAGE>
file with the Commission either (i) if such registration statement, as it
may have been amended, has been declared by the Commission to be effective under
the Act, either (A) if the Company relies on Rule 434 under the Act, a Term
Sheet (as hereinafter defined) relating to the Shares, that shall identify the
Preliminary Prospectus (as hereinafter defined) that it supplements containing
such information as is required or permitted by Rules 434, 430A and 424(b) under
the Act or (B) if the Company does not rely on Rule 434 under the Act, a
prospectus in the form most recently included in an amendment to such
registration statement (or, if no such amendment shall have been filed, in such
registration statement), with such changes or insertions as are required by Rule
430A under the Act or permitted by Rule 424(b) under the Act, and in the case of
either clause (i)(A) or (i)(B) of this sentence as have been provided to and
approved by you prior to the execution of this Agreement, or (ii) if such
registration statement, as it may have been amended, has not been declared by
the Commission to be effective under the Act, an amendment to such registration
statement, including a form of prospectus, a copy of which amendment has been
furnished to and approved by you prior to the execution of this Agreement. The
Company may also file a related registration statement with the Commission
pursuant to Rule 462(b) under the Act for the purpose of registering certain
additional Shares, which registration shall be effective upon filing with the
Commission. As used in this Agreement, the term "Registration Statement" means
the registration statement initially filed relating to the Shares, as amended at
the time when it was or is declared effective, including all financial schedules
and exhibits thereto and including any information omitted therefrom pursuant to
Rule 430A under the Act and included in the Prospectus (as hereinafter defined),
and including any registration statement filed with the Commission pursuant to
Rule 462(b); the term "Preliminary Prospectus" means each prospectus subject to
completion filed with such registration statement or any amendment thereto
(including the prospectus subject to completion, if any, included in the
Registration Statement or any amendment thereto at the time it was or is
declared effective); the term "Prospectus" means:
i) if the Company relies on Rule 434 under the Act,
the Term Sheet relating to the Shares that is first filed
pursuant to Rule 424(b)(7) under the Act, together with the
Preliminary Prospectus identified therein that such Term Sheet
supplements;
ii) if the Company does not rely on Rule 434 under
the Act, the prospectus first filed with the Commission
pursuant to Rule 424(b) under the Act; or
2
<PAGE>
iii) if the Company does not rely on Rule 434 under
the Act and if no prospectus is required to be filed pursuant
to Rule 424(b) under the Act, the prospectus included in the
Registration Statement;
and the term "Term Sheet" means any term sheet that satisfies the requirements
of Rule 434 under the Act. Any reference herein to the "date" of a Prospectus
that includes a Term Sheet shall mean the date of such Term Sheet.
(b) The Commission has not issued any order
preventing or suspending use of the Registration Statement or any Preliminary
Prospectus. When any Preliminary Prospectus was filed with the Commission it (i)
contained all statements required to be stated therein in accordance with, and
complied in all material respects with the requirements of, the Act and the
Rules and Regulations and (ii) did not include any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. When the Registration
Statement or any amendment thereto was or is declared effective, it (i)
contained or will contain all statements required to be stated therein in
accordance with, and complied or will comply in all material respects with the
requirements of, the Act and the Rules and Regulations and (ii) did not or will
not include any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the statements
therein not misleading. When the Prospectus or any Term Sheet that is a part
thereof or any amendment or supplement to the Prospectus is filed with the
Commission pursuant to Rule 424(b) (or, if the Prospectus or part thereof or
such amendment or supplement is not required to be so filed, when the
Registration Statement or the amendment thereto containing such amendment or
supplement to the Prospectus was or is declared effective) and on the Closing
Date, the Prospectus, as amended or supplemented at any such time, (i) contained
or will contain all statements required to be stated therein in accordance with,
and complied or will comply in all material respects with the requirements of,
the Act and the Rules and Regulations and (ii) did not or will not include any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary in order to make the statements therein, in
the light of the circumstances under which they were made, not misleading. The
foregoing provisions of this paragraph (b) do not apply to statements or
omissions made in any Preliminary Prospectus, the Registration Statement or any
amendment thereto or the Prospectus or any amendment or supplement thereto in
reliance upon and in conformity with written information furnished to the
Company by you specifically for use therein. It is understood that the
3
<PAGE>
statements set forth in the Prospectus on the cover page with respect to fees
and discounts, paragraph three (3) under the heading "Underwriting" and the
identity of counsel to the Underwriter under the heading "Legal Matters"
constitute the only information furnished in writing by or on behalf of the
Underwriter for inclusion in the Registration Statement, the Preliminary
Prospectus and Prospectus, as the case may be.
(c) If the Company has elected to rely on Rule
462(b) and the Registration Statement has not been declared effective (i) the
Company has filed a Registration Statement in compliance with, and that is
effective upon filing pursuant, to Rule 462(b) and has received confirmation of
its receipt and (ii) the Company has given irrevocable instructions for
transmission of the applicable filing fee in connection with the filing of the
Rule 462(b) Registration Statement, in compliance with Rule 111 promulgated
under the Act or the Commission has received payment of such filing fee.
(d) Each of the Company and its wholly-owned
subsidiary, Residential Properties Management, Inc. ("Subsidiary") has been duly
organized and is validly existing as a corporation in good standing under the
laws of the jurisdiction of its incorporation, with full power and authority
(corporate and other) to own its properties and conduct its business as
described in the Registration Statement and Prospectus and is duly qualified or
licensed to do business as a foreign corporation and is in good standing in each
other jurisdiction in which the nature of its business or the character or
location of its properties requires such qualification, except where the failure
to so qualify will not materially affect the condition (financial or otherwise),
business, properties, prospects, net worth or results of operations of the
Company and the Subsidiary, taken as a whole. Residential Properties Management,
Inc. is the only subsidiary of the Company, whether direct or indirect. The
Company does not control, directly or indirectly, any corporation (other than
the Subsidiary), partnership, joint venture, association or other business
organization.
(e) The authorized, issued and outstanding capital
stock of the Company is as set forth in the Prospectus under "Capitalization;"
the shares of issued and outstanding capital stock of the Company set forth
thereunder have been duly authorized, validly issued and are fully paid and
nonassessable; except as set forth in the Prospectus, no options, warrants or
other rights to purchase, agreements or other obligations to issue, or
agreements or other rights to convert any obligation into, any shares of capital
stock of the Company have been
4
<PAGE>
granted or entered into by the Company; and the Common Stock conforms to all
statements relating thereto contained in the Registration Statement and
Prospectus.
(f) The Shares and the shares of Common Stock to be
issued upon exercise of the Underwriter's Warrants (as hereinafter defined) when
issued and delivered pursuant to this Agreement, will be duly authorized,
validly issued, fully paid and nonassessable and free of preemptive rights of
any security holder of the Company. The Underwriter's Warrants when issued, paid
for and delivered in accordance with the terms of the Warrant Agreement (as
hereinafter defined), will be duly authorized, validly issued, fully paid and
nonassessable and free of preemptive rights of any security holder of the
Company. Neither the filing of the Registration Statement nor the offering or
sale of the Shares as contemplated in this Agreement gives rise to any rights,
other than those which have been waived or satisfied, for or relating to the
registration of any shares of Common Stock, except as described in the
Registration Statement.
(g) Each of this Agreement and the Warrant Agreement
have been duly and validly authorized, executed and delivered by the Company
and, assuming due execution by the other party hereto and thereto, constitute
valid and binding obligations of the Company enforceable against the Company in
accordance with their terms, except as enforceability may be limited by
applicable bankruptcy, insolvency or other laws affecting the rights of
creditors generally and the discretion of the courts in granting equitable
remedies. The Company has full power and lawful authority to authorize, issue
and sell the Shares to be sold by it hereunder on the terms and conditions set
forth herein. No consent, approval, authorization or order of, or any filing or
declaration with, any governmental authority is required for the consummation of
the transactions contemplated by this Agreement or in connection with the
issuance and sale of the Shares or the Underwriter's Warrants by the Company,
except such as have been obtained under the Act or the Rules and Regulations and
such as may be required under state securities or Blue Sky laws or the bylaws
and rules of the National Association of Securities Dealers, Inc. (the "NASD")
in connection with the purchase and distribution by the Underwriter of the
Shares and the Underwriter's Warrants to be sold by the Company.
(h) Except as described in the Prospectus, neither
the Company nor the Subsidiary is in violation, breach or default (which
includes any event that has occurred which,
5
<PAGE>
with notice or lapse of time or both, would constitute a default) of or under,
and consummation of the transactions herein contemplated and the fulfillment of
the terms of this Agreement or the terms of any agreement contemplated hereby
will not conflict with, or result in a breach of, any of the terms or provisions
of, or constitute a default under, or result in the creation or imposition of
any lien, charge or encumbrance upon any of the property or assets of the
Company or the Subsidiary pursuant to the terms of any indenture, mortgage, deed
of trust, loan agreement or other agreement or instrument to which the Company
or the Subsidiary is a party or by which the Company or the Subsidiary may be
bound or to which any of the property or assets of the Company or the Subsidiary
is subject, nor will such action result in any violation of the provisions of
the articles of incorporation or any order, rule or regulation applicable to the
Company or the Subsidiary of any court or any regulatory authority or other
governmental body having jurisdiction over the Company or the Subsidiary.
(i) Subject to the qualifications stated in the
Prospectus, the Company or the Subsidiary has good and marketable title to all
properties and assets described in the Prospectus as owned by them, free and
clear of all liens, charges, encumbrances or restrictions, except such as are
not materially significant or important in relation to its business; all of the
material leases and subleases under which the Company or the Subsidiary is the
lessor or sublessor of properties or assets or under which the Company or the
Subsidiary holds properties or assets as lessee or sublessee as described in the
Prospectus are in full force and effect, and, except as described in the
Prospectus, neither the Company nor the Subsidiary is in default in any material
respect with respect to any of the terms or provisions of any of such leases or
subleases, and no claim has been asserted by anyone adverse to rights of the
Company or the Subsidiary as lessor, sublessor, lessee or sublessee under any of
the leases or subleases mentioned above, or affecting or questioning the right
of the Company or the Subsidiary to continued possession of the leased or
subleased premises or assets under any such lease or sublease except as
described or referred to in the Prospectus; and the Company or the Subsidiary
owns or leases all such properties described in the Prospectus as are necessary
to its operations as now conducted and, except as otherwise stated in the
Prospectus, as proposed to be conducted as set forth in the Prospectus.
(j) The Company (either directly or through its
Subsidiary) has valid and subsisting options to purchase the properties
described in the Registration Statement and Prospectus (or, if the Prospectus is
not in existence, the most
6
<PAGE>
recent Preliminary Prospectus) under the caption "Business Development Division"
as being subject to such purchase options, which purchase options expire in the
manner described in the Registration Statement and Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus). The
Company has entered into purchase and sale agreements dated
______________________ (collectively, the "North Carolina Purchase Agreements")
with each of ___________________________ (collectively, the "Sellers") for the
purchase by the Company of _______________________________. Title insurance in
favor of the Company or the Subsidiary is in full force and effect with respect
to each such property described in the Registration Statement and Prospectus
(or, if the Prospectus is not in existence, the most recent Preliminary
Prospectus) as owned by the Company, in amounts at least equal to the purchase
price paid by the Company or any Subsidiary for such property.
(k) The Company has full right, power and authority
to enter into each North Carolina Purchase Agreement and to consummate the
transactions provided for thereof; each North Carolina Purchase Agreement has
been duly authorized, executed and delivered by the Company; each North Carolina
Purchase Agreement is a valid and binding agreement of the Company enforceable
in accordance with its terms, except as limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other laws now or hereafter in effect
relating to or affecting creditors' rights generally or by general principles of
equity relating to the availability of remedies; none of the execution or
delivery of any North Carolina Purchase Agreement by the Company, the
performance by the Company of its obligations thereunder, or the consummation by
the Company of the transactions contemplated therein, conflicts or will conflict
with or results or will result in any breach or violation of any of the terms or
provisions of, or constitute a default under, or result in the creation or
imposition of any encumbrance upon, any property or assets of the Company or the
Subsidiary pursuant to (A) the terms of the articles of incorporation or bylaws
of the Company, in each case as amended, as the case may be; (B) the terms of
any contract or other agreement to which the Company is (or, upon consummation
of the transactions contemplated by the North
7
<PAGE>
Carolina Purchase Agreements, will be) a party or by which it is bound or to
which any of its assets or properties is (or, upon consummation of the
transactions contemplated by the North Carolina Purchase Agreements, will be)
subject, the conflict, breach or violation of which would, individually or in
the aggregate, have a material adverse effect on the condition (financial or
otherwise), business, properties, prospects, net worth or results of operations
of the Company and the Subsidiary, taken as a whole, as if the transactions
contemplated by the North Carolina Purchase Agreements had been consummated; (C)
any statute, rule or regulation of any governmental authority having (or that,
upon consummation of the transactions contemplated by the North Carolina
Purchase Agreement, will have) jurisdiction over the Company or the Subsidiary
or any of their respective activities or properties, the conflict, breach or
violation of which would, individually or in the aggregate, have a material
adverse effect on the condition (financial or otherwise), business, properties,
prospects, net worth or results of operations of the Company and the Subsidiary,
taken as a whole, as if the transactions contemplated by the North Carolina
Purchase Agreements had been consummated; or (D) the terms of any judgment,
decree or order of any arbitrator or governmental authority having (or that,
upon consummation of the transactions contemplated by the North Carolina
Purchase Agreement, will have) such jurisdiction, the conflict, breach or
violation of which would, individually or in the aggregate, have a material
adverse effect on the condition (financial or otherwise), business, properties,
prospects, net worth or results of operations of the Company and the Subsidiary,
taken as a whole, as if the transactions contemplated by the North Carolina
Purchase Agreements had been consummated;
(l) The Daniel Professional Group, Inc., who has
given its report on certain financial statements filed and to be filed with the
Commission as a part of the Registration Statement, which are incorporated in
the Prospectus, are with respect to the Company and the Subsidiary, independent
public accountants as required by the Act and the Rules and Regulations.
(m) The consolidated financial statements and the
related notes of the Company and the Subsidiary, the financial statements and
the related notes of the Subsidiary, any supplementary financial information,
any related schedules and the pro forma financial statements of the Company and
the Subsidiary set forth in the Registration Statement and the Prospectus
present fairly (i) the consolidated financial position and results of operations
and changes in financial position of the Company and the Subsidiary on the basis
stated in the Registration Statement, at the respective dates and for the
respective periods to which they apply and (ii) the financial position and
results of operations and changes in financial position of the Subsidiary on the
basis stated in the Registration Statement, at the respective dates and for the
respective periods to which they apply. Said financial statements and notes,
supplementary financial information, related schedules and pro forma financial
statements have been prepared in accordance with generally accepted accounting
principles ("GAAP") applied on a basis which is consistent
8
<PAGE>
during the periods involved. The financial data with respect to the Company and
the Subsidiary set forth in the Prospectus under the captions "Summary Financial
Information," "Capitalization," and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" fairly present, on the basis
stated in the Prospectus, the information set forth therein and have been
compiled on a basis consistent with that of the audited financial statements
included in the Prospectus. No other financial statements are required by Form
SB-2 or otherwise to be included in the Registration Statement or the
Prospectus. There has been no material adverse change in the condition
(financial or otherwise), business, properties, prospects, net worth or results
of operations of the Company and the Subsidiary, taken as a whole, from the
latest information set forth in the Registration Statement or the Prospectus,
except as properly described in the Prospectus; and there is no fact known to
the Company which could reasonably be expected to have a material and adverse
effect on the future prospects of the Company or the Subsidiary (other than
political or economic matter of general applicability or as properly described
in the Prospectus).
(n) Subsequent to the respective dates as of which
information is given in the Registration Statement and Prospectus, neither the
Company nor the Subsidiary has paid or declared any dividends or other
distributions of any kind on any class of its capital stock nor has incurred any
liabilities or obligations, direct or contingent, not in the ordinary course of
business, or entered into any transaction not in the ordinary course of
business, which is material to the business of the Company and the Subsidiary,
taken as a whole, and there has not been any change in the capital stock of, or
any material incurrence of long-term debt by the Company or the Subsidiary or
any material issuance of options, warrants or other rights to purchase the
capital stock of the Company or the Subsidiary or any material adverse change or
any material development involving, so far as the Company can now reasonably
foresee, a prospective adverse change in the condition (financial or otherwise),
net worth, results of operations, business, key personnel or properties of the
Company or the Subsidiary which would be material to the business or condition
(financial or otherwise) of the Company and the Subsidiary, taken as a whole,
and neither the Company nor the Subsidiary has become a party to, and neither
the business nor the property of the Company or the Subsidiary has become the
subject of, any material litigation whether or not in the ordinary course of
business.
(o) Except as set forth in the Prospectus, there is
not now pending or threatened, any action, suit or proceeding
9
<PAGE>
to which the Company or the Subsidiary is a party before or by any court or
governmental agency or body, which might result in any material adverse change
in the condition (financial or otherwise), business, properties, prospects, net
worth, or results of operations of the Company and the Subsidiary, taken as a
whole, nor are there any actions, suits or proceedings related to environmental
matters or related to discrimination on the basis of age, sex, religion or race;
and no labor disputes involving the employees of the Company or the Subsidiary
exist or are threatened which might be expected to materially adversely affect
the condition (financial or otherwise), business, properties, prospects, net
worth or results of operations of the Company and the Subsidiary, taken as a
whole.
(p) Except as disclosed in the Prospectus, the
Company and the Subsidiary have sufficient licenses, permits, certificates and
other governmental authorizations as are required for the conduct of its
business or the ownership of its property as described in the Prospectus and are
in all material respects complying therewith. Neither the Company nor the
Subsidiary has received any notice of proceedings relating to the revocation or
modification of any such certificate, authorization or permit nor, to the
knowledge of the Company, none of the activities or business of the Company or
the Subsidiary are in violation of, or cause the Company or the Subsidiary to
violate, any law, rule, regulation or order of the United States, any state,
county or locality, or of any agency or body of the United States or of any
state, county or locality, the violation of which would have a material adverse
impact upon the condition (financial or otherwise), business, properties,
prospects, net worth or results of operations of the Company and the Subsidiary,
taken as a whole. Without limiting the generality of the foregoing, except as
disclosed in the Prospectus, each of the facilities or apartment complexes
operated or managed by the Company or the Subsidiary so designated as
participating in the Housing and Urban Development ("HUD") program or the Rural
Development ("RD") program are certified to participate in such programs.
(q) Neither the Company nor the Subsidiary have
directly or indirectly, at any time (i) made any contributions to any candidate
for political office, or failed to disclose fully any such contribution in
violation of law or (ii) made any payment to any state, federal or foreign
governmental officer or official, or other person charged with similar public or
quasi-public duties, other than payments or contributions required or allowed by
applicable law. The Company's and the Subsidiary's internal accounting controls
and procedures are
10
<PAGE>
sufficient to cause the Company and the Subsidiary to comply in all material
respects with the Foreign Corrupt Practices Act of 1977, as amended.
(r) On the Closing Date (as hereinafter defined) all
transfer or other taxes (including franchise, capital stock or other tax, other
than income taxes, imposed by any jurisdiction), if any, which are required to
be paid in connection with the sale and transfer of the Shares to the
Underwriter hereunder will have been fully paid or provided for by the Company
and all laws imposing such taxes will have been fully complied with.
(s) There is no document or contract of a character
required to be described in the Registration Statement or Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus) or to be
filed as an exhibit to the Registration Statement which is not described or
filed as required.
(t) The Company has not taken nor will take,
directly or indirectly, any action designed to cause or result in, or which has
constituted or which might reasonably be expected to constitute, the
stabilization or manipulation of the price of the Shares. The Company has not
distributed and will not distribute any offering material in connection with the
offering and sale of the Shares other than the Preliminary Prospectus and the
Registration Statement, the Prospectus or other materials permitted or required
by the Act.
(u) The Company has not entered into any agreement
pursuant to which any person is entitled, either directly or indirectly, to
compensation from the Company for services as a finder in connection with the
public offering referred to herein.
(v) There are no holders of shares of Common Stock
or other securities of the Company having rights to register such Common Stock
or other securities under the Registration Statement.
(w) The Company has entered into employment
contracts with its principal executive officers, including William G. Benton,
Susan L. Christiansen and G.L. Clark, Jr., and the description of such
employment agreements in the Prospectus is true, correct and complete.
(x) No labor dispute with the employees of the
Company or the Subsidiary exists or is threatened or imminent that could result
in a material adverse change in the condition
11
<PAGE>
(financial or otherwise), business, properties, prospects, net worth or results
of operations of the Company and the Subsidiary, taken as a whole, except as
described in or contemplated by the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus).
(y) The Company and the Subsidiary own or possess,
or can acquire on reasonable terms, all material patents, patent applications,
trademarks, service marks, trade names, licenses, copyrights and proprietary or
other confidential information currently employed by them in connection with
their respective businesses, and neither the Company nor the Subsidiary has
received any notice of infringement of or conflict with asserted rights of any
third party with respect to any of the foregoing which, singly or in the
aggregate, if the subject of an unfavorable decision, ruling or finding, would
result in a material adverse change in the condition (financial or otherwise),
business, properties, prospects, net worth or results of operations of the
Company and the Subsidiary, taken as a whole, except as described in or
contemplated by the Prospectus (or, if the Prospectus is not in existence, the
most recent Preliminary Prospectus).
(z) The Company and the Subsidiary are insured by
insurers of recognized financial responsibility against such losses and risks
and in such amounts as are prudent and customary in the businesses in which they
are engaged; neither the Company nor the Subsidiary has been refused any
insurance coverage sought or applied for; and neither the Company nor the
Subsidiary has any reason to believe that it will not be able to renew its
existing insurance coverage as and when such coverage expires or to obtain
similar coverage from similar insurers as may be necessary to continue its
business at a cost that would not materially and adversely affect the condition
(financial or otherwise), business, properties, prospects, net worth or results
of operations of the Company and the Subsidiary, taken as a whole, except as
described in or contemplated by the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus).
(aa) The Subsidiary is not prohibited, directly or
indirectly, from paying any dividends to the Company, from making any other
distribution on such Subsidiary's capital stock, from repaying to the Company
any loans or advances to such Subsidiary from the Company or from transferring
any of such Subsidiary's property or assets to the Company, except as described
in or contemplated by the Prospectus (or, if the Prospectus is not in existence,
the most recent Preliminary Prospectus).
12
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(bb) The Company will conduct its operations in a
manner that will not subject it to registration as an investment company under
the Investment Company Act of 1940, as amended, and this transaction will not
cause the Company to become an investment company subject to registration under
such Act.
(cc) Each of the Company and the Subsidiary have
filed all foreign, federal, state and local tax returns that are required to be
filed or has requested extensions thereof (except in any case in which the
failure so to file would not have a material adverse effect on the Company and
the Subsidiary, taken as a whole) and have paid all taxes required to be paid
and any other assessment, fine or penalty levied, to the extent that any of the
foregoing is due and payable, except for any such assessment, fine or penalty
that is currently being contested in good faith or as described in or
contemplated by the Prospectus (or, if the Prospectus is not in existence, the
most recent Preliminary Prospectus).
(dd) Any certificate signed by any officer of the
Company and delivered to the Underwriter or to counsel for the Underwriter shall
be deemed a representation and warranty made by the Company to the Underwriter
as to the matters covered thereby and shall be deemed incorporated herein in its
entirety and shall be effective as if such representation and warranty were made
herein.
(ee) Except for the shares of capital stock of the
Subsidiary owned by the Company, neither the Company nor the Subsidiary owns any
shares of stock or any other equity securities of any corporation or has any
equity interest in any firm, partnership, association or other entity, except as
described in or contemplated by the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus).
(ff) The books, records and accounts and systems of
internal accounting controls of the Company and the Subsidiary currently comply
with the requirements of Section 13(b)(2) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"). The Company and the Subsidiary each
maintain a system of internal accounting controls sufficient to provide
reasonable assurance that (1) transactions are executed in accordance with
management's general or specific authorizations; (2) transactions are recorded
as necessary to permit preparation of financial statements in conformity with
generally accepted accounting principles and to maintain asset accountability;
(3) access to assets is permitted only in accordance with management's general
or specific authorization; and (4) the
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recorded accountability for assets is compared with the existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(gg) No statement, representation, warranty or
covenant made by the Company in this Agreement or made in any certificate or
document required by this Agreement to be delivered to the Underwriter is or
will be, when made, inaccurate, untrue or incorrect in any material respect,
unless such statement, representation, warranty or covenant is qualified as to
materiality, in which case it is not or will not be, when made, inaccurate,
untrue or incorrect.
(hh) The Shares have been approved for listing on
the NASDAQ SmallCap Market, subject only to notice of issuance.
(ii) The business, operations and facilities of the
Company and the Subsidiary have been and are being conducted in compliance in
all material respects with all applicable laws, ordinances, rules, regulations,
licenses, permits, approvals, plans, authorizations or requirements relating to
occupational safety and health, or pollution, or protection of health or the
environment (including, without limitation, those relating to emissions,
discharges, releases or threatened releases of pollutants, contaminants or
hazardous or toxic substances, materials or wastes into ambient air, surface
water, groundwater or land, or relating to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling of
chemical substances, pollutants, contaminants or hazardous or toxic substances,
materials or wastes, whether solid, gaseous or liquid in nature) of any
governmental department, commission, board, bureau, agency or instrumentality of
the United States or any state or political subdivision thereof, and all
applicable judicial or administrative agency or regulatory decrees, awards,
judgments and orders relating thereto; and neither the Company nor the
Subsidiary has received any notice from any governmental instrumentality or any
third party alleging any violation thereof or liability thereunder (including,
without limitation, liability for costs of investigating or remediating sites
containing hazardous substances and/or damages to natural resources), which
violation would have, or could reasonably be expected to have, a material
adverse effect on the condition (financial or otherwise), business, properties,
prospects, net worth or results of operations of the Company and the Subsidiary,
taken as a whole. The intended use and occupancy of each of the facilities owned
or operated by the Company or the Subsidiary complies in all material respects
with all applicable codes and zoning laws and regulations and there is no
pending or, to the knowledge of the
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Company, threatened condemnation, zoning change, environmental or other
proceeding or action that will in any material respect adversely affect the size
of, use of, improvements on, construction on, or access to such facilities.
(jj) Each executive officer, director and
shareholder of the Company has delivered to the Underwriter an agreement (the
"Lockup Agreement"), in substantially the form of Annex I, to the effect that
he, she or it will not, for a period of two years after the date hereof, without
the prior written consent of the Underwriter, offer to sell, sell, contract to
sell, grant any option to purchase or otherwise dispose (or announce any offer,
sale, grant of any option to purchase or other disposition) of any shares of
Common Stock or securities convertible into, or exchangeable or exercisable for,
shares of Common Stock, except for bona fide private sales or transfers of
shares of Common Stock to purchasers or transferees provided that such person
agrees in writing to be bound by the terms of the Lockup Agreement.
(kk) No transaction has occurred between or among
the Company or any of its affiliates, officers or directors or any affiliate or
affiliates of any such officer or director that is required to be described in
and is not described in the registration Statement and the Prospectus.
2. Purchase, Delivery and Sale of the Shares.
-----------------------------------------
(a) Subject to the terms and conditions of this
Agreement, and upon the basis of
the representations, warranties and agreements herein contained, the Company
agrees to issue and sell to the Underwriter, and the Underwriter agrees to buy
from the Company, at $______ per share, at the place and time hereinafter
specified, 1,500,000 shares of Common Stock.
(b) Delivery of the Shares against payment therefor
shall take place at the offices of Stroock & Stroock & Lavan LLP, 180 Maiden
Lane, New York, New York (or at such other place as may be designated by
agreement between you and the Company) at 10:00 a.m., New York time, on November
__, 1997, or at such later time and date as you may designate but not later than
ten (10) days from the effective date of the Registration Statement (the
"Effective Date"), such time and date of payment and delivery for the Shares
being herein called the "Closing Date."
(c) The Company will make the certificates for the
Shares to be purchased by the Underwriter hereunder available to you for
inspection at least one (1) full business
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day prior to the Closing Date. The certificates shall be in such names and
denominations as you may request at least two (2) full business days prior to
the Closing Date. Time shall be of the essence, and delivery of the certificates
representing the Shares at the time and place specified in this Agreement is a
further condition to the obligations of the Underwriter.
Definitive certificates in negotiable form
for the Shares, to be purchased by the Underwriter hereunder will be delivered
by the Company to you on the Closing Date, against payments of the purchase
price therefor, by certified or bank cashier's checks in New York Clearing House
funds, payable to the order of the Company.
It is understood that the Underwriter
proposes to offer the Shares to be purchased hereunder to the public, upon the
terms and conditions set forth in the Registration Statement, after the
Registration Statement becomes effective.
(d) On the Closing, the Company will further issue
and sell to you or, at your direction, to your respective bona fide officers,
for a total purchase price of $______, warrants entitling the holders thereof
to purchase 150,000 shares of Common Stock (which number is equal to 10% of the
amount of Shares purchased pursuant to this Agreement), at an initial exercise
price of $_, per share (the "Underwriter's Warrants") for a period of four (4)
years, such period to commence twelve (12) months after the Effective Date. Such
Underwriter's Warrants shall contain such other terms and provisions as may be
set forth in an agreement with respect thereto (the "Warrant Agreement")
executed and delivered by the Company and you simultaneously with the execution
and delivery of this Agreement. As provided in the Warrant Agreement, you may
designate that the Underwriter's Warrants be issued in varying amounts directly
to your respective bona fide officers and not to you. Such designation will be
made by you only if you determine that such issuances would not violate the
interpretations of the National Association of Securities Dealers, Inc. relating
to the review of corporate financing arrangements. The holders of the
Underwriter's Warrants will be entitled to the registration rights set forth in
Section 10 of the Warrant Agreement.
3. Covenants of the Company. The Company covenants and agrees
with the Underwriter as to the matters set forth in subparagraphs (a) through
(p) below and the Company and THE,
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jointly and severally, agree with the Underwriter as to the matters set forth in
subparagraphs (q) and (r) below:
(a) The Company will use its best efforts to cause the
Registration Statement, if not effective at the time of execution of this
Agreement, and any amendments thereto to become effective as promptly as
possible. If required, the Company will file the Prospectus or any Term Sheet
that constitutes a part thereof and any amendment or supplement thereto with the
Commission in the manner and within the time period required by Rules 434 and
424(b) under the Act. During any time when a prospectus relating to the Shares
is required to be delivered under the Act, the Company (i) will comply with all
requirements imposed upon it by the Act and the Rules and Regulations to the
extent necessary to permit the continuance of sales of or dealings in the Shares
in accordance with the provisions hereof and of the Prospectus, as then amended
or supplemented, and (ii) except as required by law, will not file with the
Commission the Prospectus, Term Sheet or the amendment referred to in the second
sentence of Section 1(a) hereof, any amendment or supplement to such Prospectus,
Term Sheet or any amendment to the Registration Statement of which the
Underwriter previously have been advised and furnished with a copy for a
reasonable period of time prior to the proposed filing and as to which filing
the Underwriter shall not have given their consent. The Company will prepare and
file with the Commission, in accordance with the Rules and Regulations, promptly
upon request by the Underwriter or counsel for the Underwriter, any amendments
to the Registration Statement or amendments or supplements to the Prospectus
that may be necessary or advisable in connection with the distribution of the
Shares by the Underwriter, and will use its best efforts to cause any such
amendment to the Registration Statement to be declared effective by the
Commission as promptly as possible. The Company will advise the Underwriter,
promptly after receiving notice thereof, of the time when the Registration
Statement or any amendment thereto has been filed or declared effective or the
Prospectus or any amendment or supplement thereto has been filed and will
furnish the Underwriter with copies of such documents and provide evidence
satisfactory to the Underwriter of each such filing or effectiveness.
The Company will advise the Underwriter, promptly
after receiving notice or obtaining knowledge thereof, of (i) the issuance by
the Commission of any stop order suspending the effectiveness of the
Registration Statement or any amendment thereto or any stop order or any order
preventing or suspending the use of any Preliminary Prospectus or the Prospectus
or any amendment or supplement thereto, (ii) the suspension of the qualification
of the Shares for offering or sale in any
17
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jurisdiction, (iii) the institution, threatening or contemplation of any
proceeding for any such purpose or (iv) any request made by the Commission for
amending the Registration Statement, for amending or supplementing the
Prospectus or for additional information. The Company will use its best efforts
to prevent the issuance of any such stop order and, if any such order or stop
order is issued, to obtain the withdrawal thereof as promptly as possible.
The Company has caused to be delivered to you copies
of each Preliminary Prospectus, and the Company has consented and hereby
consents to the use of such copies for the purposes permitted by the Act. The
Company authorizes the Underwriter and dealers to use the Prospectus in
connection with the sale of the Shares for such period as, in the opinion of
counsel to the Underwriter, the use thereof is required to comply with the
applicable provisions of the Act and the Rules and Regulations. In case of the
happening, at any time within such period as a Prospectus is required under the
Act to be delivered in connection with sales by an underwriter, of any event of
which the Company has knowledge and which materially affects the Company or the
securities of the Company or which, in the opinion of counsel for the Company or
counsel for the Underwriter, should be set forth in an amendment of the
Registration Statement or a supplement to the Prospectus in order to make the
statements therein not then misleading, in light of the circumstances existing
at the time the Prospectus is required to be delivered to a purchaser of the
Shares, or in case it shall be necessary to amend or supplement the Prospectus
to comply with law or with the Rules and Regulations, the Company will notify
you promptly and forthwith prepare and furnish to you copies of such amended
Prospectus or of such supplement to be attached to the Prospectus, in such
quantities as you may reasonably request, in order that the Prospectus, as so
amended or supplemented, will not contain any untrue statement of a material
fact or omit to state any material fact necessary in order to make the
statements in the Prospectus, in light of the circumstances under which they
were made, not misleading. The preparation and furnishing of any such amendment
or supplement to the Registration Statement or amended Prospectus or supplement
to be attached to the Prospectus shall be without expense to the Underwriter,
except that in case the Underwriter is required, in connection with the sale of
the stock, to deliver a Prospectus ninety (90) days or more after the effective
date of the Registration Statement, the Company will upon request of and at the
expense of the Underwriter, amend or supplement the Registration Statement and
Prospectus and furnish the Underwriter with reasonable quantities of
prospectuses complying with Section 10(a)(3) of the Act.
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<PAGE>
The Company will comply with the Act, the Rules and
Regulations and the Exchange Act and the rules and regulations thereunder in
connection with the offering and issuance of the Shares.
(b) The Company will use its best efforts to qualify
to register the Shares for sale under the securities or "blue sky" laws of such
jurisdictions as the Underwriter may reasonably designate and will make such
application and furnish such information as may be required for that purpose and
to comply with such laws, provided the Company shall not be required to qualify
as a foreign corporation or a dealer in securities or to execute a general
consent to service of process in any jurisdiction in any action other than one
arising out of the offering or sale of the Shares. The Company will, from time
to time, prepare and file such statements and reports as are or may be required
to continue such qualification in effect for so long a period as the Underwriter
may reasonably request.
(c) If the sale of the Shares provided for herein is
not consummated for any reason caused by the Company, the Company shall pay all
costs and expenses incident to the performance of the Company's obligations
hereunder including, but not limited to, all of the expenses itemized in Section
8, including the accountable expenses of the Underwriter, including legal fees,
but in no event shall such costs and expenses exceed the sum of $180,000, less a
credit for any amounts previously paid to the Underwriter.
(d) For so long as the Company is a reporting
company under either Section 12(g) or 15(d) of the Exchange Act, the Company, at
its expense, will furnish to its stockholders an annual report (including
financial statements audited by independent public accountants) in reasonable
detail and, at its own expense, will furnish to you during the period ending
five (5) years from the date hereof; (i) as soon as practicable after the end of
each fiscal year, a balance sheet of the Company as at the end of such fiscal
year, together with statements of income, changes in stockholders' equity and
cash flows of the Company for such fiscal year, all in reasonable detail and
accompanied by a copy of the certificate or report thereon of independent
accountants; (ii) as soon as they are available, a copy of all reports
(financial or other) mailed to security holders; (iii) as soon as they are
available, a copy of all nonconfidential reports and financial statements
furnished to or filed with the Commission; and (iv) such other information as
you may from time to time reasonably request.
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(e) In the event the Company has an active
subsidiary or subsidiaries, such financial statements referred to in subsection
(d) above will be furnished on a consolidated basis to the extent the accounts
of the Company and its subsidiary or subsidiaries are consolidated in reports
furnished to its stockholders generally.
(f) The Company will deliver to you at or before the
Closing Date two (2) signed copies of the Registration Statement, including all
financial statements and exhibits filed therewith, and of all amendments
thereto, and will deliver to the Underwriter such number of copies of the
Registration Statement, including financial statements but without exhibits, as
the Underwriter may reasonably request. The Company will deliver to or upon the
order of the Underwriter, from time to time until the effective date of the
Registration Statement, as many copies of any Preliminary Prospectus as the
Underwriter may reasonably request. The Company will deliver to the Underwriter
on the effective date of the Registration Statement and thereafter for so long
as a Prospectus is required to be delivered under the Act, from time to time, as
many copies of the Prospectus, in final form, or as thereafter amended or
supplemented, as the Underwriter may from time to time reasonably request.
(g) The Company will make generally available to its
security holders and deliver to you as soon as it is practicable to do so, but
in no event later than ninety (90) days after the end of twelve (12) months
after its current fiscal quarter, an earnings statement (which need not be
audited) covering a period of at least twelve (12) consecutive months beginning
after the effective date of the Registration Statement, which shall satisfy the
requirements of Section 11(a) of the Act.
(h) The Company will apply the net proceeds from the
sale of the Shares for the purposes set forth under "Use of Proceeds" in the
Prospectus, and will file such reports with the Commission with respect to the
sale of the Shares and the application of the proceeds therefrom as may be
required pursuant to Rule 463 under the Act.
(i) The Company will promptly, upon your written
request, prepare and file with the Commission any amendments or supplements to
the Registration Statement, Preliminary Prospectus or Prospectus and take any
other action which, in the reasonable opinion of Stroock & Stroock & Lavan LLP,
counsel to the Underwriter, may be reasonably necessary or advisable in
connection with the distribution of the Shares, and will use its
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best efforts to cause the same to become effective as promptly as possible.
(j) The Company will reserve and keep available that
maximum number of its authorized but unissued shares of Common Stock which are
issuable upon exercise of the Underwriter's Warrants outstanding from time to
time.
(k) Upon completion of this offering, the Company
will make all filings required, including registration under the Exchange Act,
to obtain the listing of its Common Stock on the NASDAQ SmallCap Market, and
will effect and will use its best efforts to maintain such listings for at least
five (5) years from the date of this Agreement.
(l) The Company represents that it has not taken and
agrees that it will not take, directly or indirectly, any action designed to or
which might reasonably be expected to cause or result in the stabilization or
manipulation of the price of the Shares or to facilitate the sale or resale of
the Shares. The Company has not distributed and will not distribute any offering
material in connection with the offering and sale of the Shares other than the
Preliminary Prospectus and the Registration Statement, the Prospectus or other
materials permitted or required by the Act.
(m) On the Closing Date and simultaneously with the
delivery of the Shares, the Company shall execute and deliver to Strasbourger
Pearson Tulcin Wolff Incorporated and its designees the Underwriter's Warrants
for an initial exercise price of $ per share. The Underwriter's Warrants
will be in the form as filed as an exhibit to the Registration Statement.
(n) During the one hundred eighty (180) day period
commencing on the Closing Date, the Company will not, without the prior written
consent of the Underwriter, grant options to purchase shares of Common Stock at
a price less than the initial public offering price except as may be provided by
the Company's currently existing stock option plan as described in the
Prospectus. To the extent that such stock option plan allows, the Company may
issue shares upon exercise of the options.
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(o) For a period of two (2) years from the Effective
Date, the Company, at its expense, shall cause its regularly engaged independent
certified public accountants to review (but not audit) the Company's financial
statements for each of the first three (3) fiscal quarters prior to the
announcement of quarterly financial information, the filing of the Company's
10-QSB quarterly report and the mailing of quarterly financial information to
stockholders.
(p) Pending completion of the offering and for a
period of ninety (90) days thereafter, the Company will not issue press releases
or engage in other publicity without the Underwriter's prior consent.
(q) For a period of two years from the Closing Date,
the Company will not, nor will it allow, without the prior written consent of
the Underwriter, the executive officers, directors or certain holders of any
class of equity securities of the Company to, sell, grant any option or warrant
for the sale, or otherwise dispose of, directly or indirectly, any shares of
Common Stock or other equity securities of the Company (including any shares
obtained through the exercise of options granted under the Company's Stock
Incentive Plan (as such term is defined in the Prospectus) or any securities
convertible into, exercisable for or exchangeable for shares of Common Stock or
other equity securities of the Company, provided, however, that with respect to
any issuances of securities by the Company such consent may not be unreasonably
withheld, and the Company may issue options for up to 400,000 shares of Common
Stock under its Stock Incentive Plan without such consent.
(r) On the Closing Date, the Company will furnish
you with (a) Lockup Agreement, in the form of Annex I hereto, from each of the
officers, directors and certain holders of any class of equity securities of the
Company not to sell any shares of Common Stock or other equity securities of the
Company, held by each prior to the Effective Date or obtained through exercise
of options granted under the Stock Incentive Plan, for a period of twenty-four
(24) months from the Closing Date, without your prior written consent, which
consent may not be unreasonably withheld; provided that the aforementioned
restrictions do not apply to private sales or transactions of Common Stock to
purchasers or transferees who agree in writing to be bound by the terms set
forth herein.
4. Conditions of Underwriter's Obligations. The obligations of
the Underwriter to purchase and pay for the Shares which it has agreed to
purchase hereunder, are subject to the accuracy (as of the date hereof and as of
the Closing Date of and compliance with the representations and warranties of
the Company herein, to the performance by the Company of its obligations
hereunder, and to the following conditions:
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(a) The Registration Statement shall have become
effective, and you shall have received notice thereof not later than 10:00 a.m.,
New York time, on the day following the date of this Agreement, or at such later
time or on such later date as to which you may agree in writing; on or prior to
the Closing Date, no stop order suspending the effectiveness of the Registration
Statement shall have been issued, and no proceedings for that or any similar
purpose shall have been instituted or shall be pending or, to your knowledge or
to the knowledge of the Company, shall be contemplated by the Commission; any
request on the part of the Commission for additional information shall have been
complied with to the reasonable satisfaction of Stroock & Stroock & Lavan LLP,
counsel to the Underwriter; and no stop order shall be in effect denying or
suspending the effectiveness of such qualification, nor shall any stop order
proceedings with respect thereto be instituted or pending or threatened under
such law.
(b) On the Closing Date, you shall have received the
opinion, dated as of the Closing Date, of House Law Firm, counsel for the
Company, in form and substance satisfactory to counsel for the Underwriter, to
the effect that:
(i) Each of the Company and the
Subsidiary has been duly organized and is validly existing as
a corporation in good standing under the laws of the
jurisdiction of its incorporation, with full power and
authority (corporate and other) to own its properties and
conduct its business as described in the Registration
Statement and Prospectus and is duly qualified or licensed to
do business as a foreign corporation and is in good standing
in each other jurisdiction in which the nature of its
business or the character or location of its properties
requires such qualification, except where the failure to so
qualify would not have a material adverse effect on the
condition (financial or otherwise), business, properties,
prospects, net worth or results of operations of the Company
and the Subsidiary, taken as a whole.
(ii) (a) Each of the Company and the
Subsidiary has obtained, or is in the process of obtaining,
all licenses, permits and other governmental authorizations
as are required for to the conduct of its business or the
ownership of its properties as described in the Prospectus;
(b) such licenses, permits and other governmental
23
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authorizations obtained are in full force and effect; (c)
each of the Company and the Subsidiary is in all material
respects in compliance therewith.
(iii) The authorized capitalization
of the Company is as set forth under "Capitalization" in the
Prospectus; all shares of the Company's outstanding stock
requiring authorization for issuance by the Company's board
of directors have been duly authorized, validly issued, are
fully paid and nonassessable and conform to the description
thereof contained in the Prospectus; the outstanding shares
of Common Stock of the Company have not been issued in
violation of the preemptive rights of any shareholder, and
the shareholders of the Company do not have any preemptive
rights or other rights to subscribe for or to purchase, nor
are there any restrictions upon the voting or transfer of any
of the Shares; the Shares conform to the description thereof
contained in the Prospectus; the Shares have been duly
authorized and, when issued and delivered pursuant to this
Agreement, will be duly and validly issued, fully paid,
nonassessable, free of preemptive rights and no personal
liability will attach to the ownership thereof; and to the
best of such counsel's knowledge, neither the filing of the
Registration Statement nor the offering or sale of the Shares
as contemplated by this Agreement gives rise to any
registration rights or other rights, other than those which
have been waived or satisfied for or relating to the
registration of any shares of Common Stock
(iv) This Agreement and the Warrant
Agreement, have been duly and validly authorized, executed
and delivered by the Company and, assuming due execution and
delivery of this Agreement and the Warrant Agreement by the
other parties thereto, payment by the Underwriter for the
Shares offered pursuant to this Agreement and payment by the
Underwriter for the Underwriter's Warrants, are the valid and
legally binding obligations of the Company, except as
enforceability may be limited by bankruptcy, insolvency or
similar laws affecting the enforcement of creditors' rights
in general; and except that no opinion is expressed as to the
enforceability of the indemnity provisions contained in
Section 6 or the contribution provisions contained in Section
7 of this Agreement.
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(v) The certificates evidencing the
Shares are in due and proper form; the Underwriter's Warrants
will be exercisable for shares of Common Stock of the Company
in accordance with the terms of the Warrant Agreement and at
the prices therein provided for; the shares of Common Stock
of the Company issuable upon exercise of the Underwriter's
Warrants have been duly authorized and reserved for issuance
upon such exercise, and such shares, when issued upon
exercise in accordance with the terms of such warrants and at
the price provided for, will be duly and validly issued,
fully paid and nonassessable.
(vi) Such counsel knows of no
pending or threatened legal or governmental proceedings to
which either the Company or the Subsidiary is a party which
could materially adversely affect the condition (financial or
otherwise), business, properties, prospects, net worth or
results of operations of the Company and the Subsidiary,
taken as a whole, or which question the validity of the
Common Stock of the Company, the Shares, this Agreement, the
Warrant Agreement, the Underwriter's Warrants or of any
action taken or to be taken by the Company pursuant to this
Agreement, the Warrant Agreement, or the Underwriter's
Warrants, and no such proceedings are known to such counsel
to be contemplated against the Company or the Subsidiary;
there are no governmental proceedings or regulations required
to be described or referred to in the Registration Statement
which are not so described or referred to.
(vii) The Company is not in
violation of or default under, nor will the execution and
delivery of this Agreement, the Warrant Agreement or the
Underwriter's Warrants, and the incurrence of the obligations
herein or therein set forth and the consummation of the
transactions herein or therein contemplated, result in a
violation of, or constitute a default under the Company's
articles of incorporation or by-laws, in the performance or
observance of any material obligations, agreements, covenants
or conditions contained in any bond, debenture, note or other
evidence of indebtedness or in any contract, indenture,
mortgage, loan agreement, lease, joint venture or other
agreement or instrument to which the Company or the
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Subsidiary is a party or by which the Company or the
Subsidiary or any of their properties may be bound or in
violation of any material order, rule, regulation, writ,
injunction, or decree of any domestic government,
governmental instrumentality or court.
(viii) The Registration Statement
has become effective under the Act, and no stop order
suspending the effectiveness of the Registration Statement is
in effect, and no proceedings for that purpose have been
instituted or are pending before, or threatened by, the
Commission; the Registration Statement and the Prospectus
(except for the financial statements and other financial data
contained therein, or omitted therefrom, as to which such
counsel need express no opinion) comply as to form in all
material respects with the applicable requirements of the Act
and the Rules and Regulations.
(ix) All descriptions in the
Registration Statement and the Prospectus, and any amendment
or supplement thereto, of contracts and other documents are
accurate and fairly present the information required to be
shown, and such counsel is familiar with all contracts and
other documents referred to in the Registration Statement,
and such counsel does not know of any contracts or documents
of a character required to be summarized or described therein
or to be filed as exhibits thereto which are not so
summarized, described or filed.
(x) No authorization, approval,
consent, or license of any governmental or regulatory
authority or agency is necessary in connection with the
authorization, issuance, transfer, sale or delivery of the
Shares by the Company, in connection with the execution,
delivery and performance of this Agreement or the Warrant
Agreement by the Company, or in connection with the taking of
any action contemplated herein or therein, or the issuance of
the Underwriter's Warrants or the Common Stock underlying the
Underwriter's Warrants, other than registrations or
qualifications of such stock under applicable state or
foreign securities or "Blue Sky" laws and registration under
the Act.
(xi) The statements in the
Registration Statement under the captions "Business,"
"Management," "Principal Shareholders," "Certain
Transactions,"
26
<PAGE>
"Description of Securities and Shares Eligible for Future
Sale" have been reviewed by such counsel and, insofar as they
refer to descriptions of agreements, statements of law,
descriptions of statutes, licenses, rules or regulations or
legal conclusions, are correct in all material respects.
Such counsel shall also state that such
counsel has participated in the preparation of the Registration Statement and
the Prospectus, and nothing has come to the attention of such counsel to cause
such counsel to have reason to believe that the Registration Statement or any
amendment thereto at the time it became effective contained any untrue statement
of a material fact required to be stated therein or omitted to state any
material fact required to be stated therein or necessary to make the statements
therein not misleading or that the Prospectus or any supplement thereto contains
any untrue statement of a material fact or omits to state a material fact
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading (except, in the case of both the
Registration Statement and any amendment thereto and the Prospectus and any
supplement thereto, for the financial statements, notes thereto and other
financial information and statistical data contained therein, as to which such
counsel need express no opinion).
Such opinion shall also cover such matters
incident to the transactions contemplated hereby as the Underwriter or counsel
for the Underwriter shall reasonably request. In rendering such opinion, such
counsel may rely upon certificates of any officer of the Company or public
officials as to matters of fact; and may rely as to all matters of law other
than the law of the United States or of the State of North Carolina upon
opinions of counsel satisfactory to you, in which case the opinion shall state
that they have no reason to believe that you and they are not entitled to so
rely.
(c) All corporate proceedings and other
legal matters relating to this Agreement, the Registration Statement, the
Prospectus and other related matters shall be satisfactory to or approved by
Stroock & Stroock & Lavan LLP, counsel to the Underwriter, and you shall have
received from such counsel a signed opinion, dated as of the Closing Date, with
respect to the validity of the issuance of the Shares, the form of the
Registration Statement and Prospectus (other than the financial statements,
notes thereto and other financial data contained therein), the execution of this
Agreement and other related matters as you may reasonably require. The Company
shall have
27
<PAGE>
furnished to counsel for the Underwriter such documents as they may
reasonably request for the purpose of enabling them to render such opinion.
(d) You shall have received a letter on and as of
Effective Date of the Registration Statement and again on and as of the Closing
Date from The Daniel Professional Group, Inc., independent public accountants
for the Company, substantially in the form approved by you.
(e) At the Closing Date, (i) the representations and
warranties of the Company contained in this Agreement shall be true and correct
with the same effect as if made on and as of the Closing Date, and the Company
shall have performed all of its obligations hereunder and satisfied all the
conditions on its part to be satisfied at or prior to such Closing Date; (ii)
the Registration Statement and the Prospectus and any amendments or supplements
thereto shall contain all statements which are required to be stated therein in
accordance with the Act and the Rules and Regulations and in all material
respects conform to the requirements thereof, and neither the Registration
Statement nor the Prospectus nor any amendment or supplement thereto shall
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein
not misleading; (iii) there shall have been, since the respective dates as of
which information is given, no material adverse change in the condition
(financial or otherwise), business, properties, prospects, net worth, results of
operations, capital stock, long-term or short-term debt or general affairs of
the Company and the Subsidiary, taken as a whole, from that set forth in the
Registration Statement and the Prospectus, except changes which the Registration
Statement and Prospectus indicate might occur after the effective date of the
Registration Statement, and neither the Company nor the Subsidiary shall have
incurred any material liabilities or agreement not in the ordinary course of
business other than as referred to in the Registration Statement and Prospectus;
(iv) except as set forth in the Prospectus, no action, suit or proceeding at law
or in equity shall be pending or threatened against the Company or the
Subsidiary which would be required to be set forth in the Registration
Statement, and no proceedings shall be pending or threatened against the Company
or the Subsidiary before or by any commission, board or administrative agency in
the United States or elsewhere, wherein an unfavorable decision, ruling or
finding would materially adversely affect the condition (financial or
otherwise), business, properties, prospects, net worth or results of operations
of the Company and the Subsidiary, taken as a whole; and (v) you shall receive
at the Closing Date a certificate signed by each of the Chairman of
28
<PAGE>
the Board or the President and the principal financial or accounting officer of
the Company, dated as of the Closing Date, evidencing compliance with the
provisions of this subsection (e).
(f) If any of the conditions herein provided for in
this Section shall not have been fulfilled as of the date indicated, this
Agreement and all obligations of the Underwriter under this Agreement may be
canceled at, or at any time prior to, the Closing Date by the Underwriter by
notifying the Company of such cancellation in writing or by telegram at or prior
to the Closing Date. Any such cancellation shall be without liability of the
Underwriter to the Company.
5. Conditions of the Company's Obligations. The obligation of
the Company to sell and deliver the Shares is subject to the following
conditions:
(a) The Registration Statement shall have become
effective not later than 10:00 a.m., New York time, on the day following the
date of this Agreement, or on such later date as the Company and the Underwriter
may agree to in writing.
(b) At the Closing Date no stop orders suspending
the effectiveness of the Registration Statement shall have been issued under the
Act or any proceedings therefor initiated or threatened by the Commission.
6. Indemnification.
---------------
(a) The Company and THE, jointly and severally,
agree to indemnify and hold harmless the Underwriter and each person, if any,
who controls the Underwriter within the meaning of the Act, the Underwriter's
counsel and the Company's counsel against any losses, claims, damages or
liabilities, joint or several (which shall, for all purposes of this Agreement,
include, but not be limited to, all reasonable costs of defense and
investigation and all attorneys' fees), to which the Underwriter, any
controlling person, the Underwriter's counsel or the Company's counsel may
become subject, under the Act or otherwise, insofar, as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon any untrue statement or alleged untrue statement of any material fact
contained in (i) the Registration Statement, any Preliminary Prospectus, the
Prospectus, or any amendment or supplement thereto; (ii) any "Blue Sky"
application or other document executed by the Company specifically for the
purpose or based upon written information furnished by the Company filed in any
state or other jurisdiction in order to qualify any or all
29
<PAGE>
of the Shares, under the securities laws thereof (any such application, document
or information being hereinafter called a "Blue Sky Application"), or arise out
of or are based upon the omission or alleged omission to state in the
Registration Statement, any Preliminary Prospectus, Prospectus, or any amendment
or supplement thereto, or in any Blue Sky Application, a material fact required
to be stated therein or necessary to make the statements therein not misleading;
provided, however, that the Company and THE will not be liable in any such case
to the extent, but only to the extent, that any such loss, claim, damage or
liability arises out of or is based upon an untrue statement or alleged untrue
statement or omission or alleged omission made in reliance upon and in
conformity with written or oral information furnished to the Company by or on
behalf of the Underwriter or oral misrepresentations or omissions in connection
therewith specifically for use in the preparation of the Registration Statement
or any such amendment or supplement thereof or any such Blue Sky Application or
any such Preliminary Prospectus or the Prospectus of any such amendment or
supplement thereto. The Company and THE shall not be obligated to indemnify the
Underwriter for a violation of state securities or "Blue Sky" laws for liability
occasioned by reason of such Underwriter's (or its agent's) failure to have been
registered as a broker-dealer (or agent) or the failure of the securities to
have been registered or qualified in a jurisdiction where such Underwriter (or
its agent) is determined to have sold such security. This indemnity will be in
addition to any liability which the Company or THE may otherwise have.
(b) The Underwriter will indemnify and hold harmless
the Company, each of its directors, each nominee (if any) for director named in
the Prospectus, each of its officers who have signed the Registration Statement,
each person, if any, who controls the Company within the meaning of the Act, the
Underwriter's counsel and the Company's counsel against any losses, claims,
damages or liabilities (which shall, for all purposes of this Agreement,
include, but not be limited to, all costs of defense and investigation and all
attorneys' fees) to which the Company, any such director, nominee, officer or
controlling person, the Underwriter's counsel or the Company's counsel may
become subject under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon any untrue statement or alleged untrue statement of any material fact
contained in the Registration Statement, any Preliminary Prospectus, the
Prospectus, or any amendment or supplement thereto, or arise out of or are based
upon the omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, in each
30
<PAGE>
case to the extent, but only to the extent, that such untrue statement or
alleged untrue statement or omission or alleged omission was made in the
Registration Statement, any preliminary Prospectus, the Prospectus, or any
amendment or supplement thereto, in reliance upon and in conformity with written
information furnished to the Company by you specifically for use in the
preparation thereof. The Underwriter shall indemnify the Company for any
violation of state securities or "Blue Sky" laws for liability occasioned by
reason of such Underwriter's (or its agent's) failure to have been registered as
a broker-dealer (or agent) or the failure of the securities to have been
registered or qualified in a jurisdiction which such Underwriter (or agent) is
determined to have sold such security. This indemnity will be in addition to any
liability which the Underwriter may otherwise have.
(c) Promptly after receipt by an indemnified party
under this Section of notice of the commencement of any action, such indemnified
party will, if a claim in respect thereof is to be made against the indemnifying
party under this Section, notify in writing the indemnifying party of the
commencement thereof; but the omission so to notify the indemnifying party will
not relieve it from any liability which it may have to any indemnified party
otherwise than under this Section. In case any such action is brought against
any indemnified party, and it notifies the indemnifying party of the
commencement thereof, the indemnifying party will be entitled to participate in,
and, to the extent that it may wish, jointly with any other indemnifying party
similarly notified, to assume the defense thereof, subject to the provisions
herein stated, with counsel reasonably satisfactory to such indemnified party,
and after notice from the indemnifying party to such indemnified party of its
election so to assume the defense thereof, the indemnifying party will not be
liable to such indemnified party under this Section for any legal or other
expenses subsequently incurred by such indemnified party in connection with the
defense thereof other than the reasonable costs of investigation. The
indemnified party shall have the right to employ separate counsel in any such
action and to participate in the defense thereof, but the fees and expenses of
such counsel shall not be at the expense of the indemnifying party if the
indemnifying party has assumed the defense of the action with counsel reasonably
satisfactory to the indemnified party; provided that if the indemnified party is
the Underwriter or a person who controls the Underwriter within the meaning of
the Act, the fees and expenses of such counsel shall be at the expense of the
indemnifying party if (i) the employment of such counsel has been specifically
authorized in writing by the indemnifying party or (ii) the named parties to any
such action
31
<PAGE>
(including any impleaded parties) include both the Underwriter or such
controlling person and the indemnifying party and, the Underwriter reasonably
determines that it is advisable for the Underwriter or controlling persons to be
represented by separate counsel (in which case the indemnifying party shall not
have the right to assume the defense of such action on behalf of the Underwriter
or such controlling person, it being understood, however, that the indemnifying
party shall not, in connection with any one such action or separate but
substantially similar or related actions in the same jurisdiction arising out of
the same general allegations or circumstances, be liable for the reasonable fees
and expenses of more than one separate firm of attorneys for the Underwriter and
controlling persons, which firm shall be designated in writing by you). No
settlement of any action against an indemnified party shall be made without the
consent of the indemnifying party, which shall not be unreasonably withheld in
light of all factors of importance to such indemnified party.
7. Contribution. In order to provide for just and equitable
contribution under the Act in any case in which (i) the Underwriter makes claim
for indemnification pursuant to Section 6 hereof but it is judicially determined
(by the entry of a final judgment or decree by a court of competent jurisdiction
and the expiration of time to appeal or the denial of the last right of appeal)
that such indemnification may not be enforced in such case, notwithstanding the
fact that the express provisions of Section 6 provide for indemnification in
such case or (ii) contribution under the Act may be required on the part of the
Underwriter or the Company or THE in circumstances for which indemnification is
provided for pursuant to Section 6, then the Company and THE in the aggregate,
and the Underwriter shall contribute to the aggregate losses, claims, damages or
liabilities to which they may be subject (which shall for all purposes of this
Agreement include, but not be limited to, all reasonable costs of defense and
investigation and all reasonable attorneys' fees) in either such case (after
contribution from others) in such proportions that the Underwriter is
responsible in the aggregate for that portion of such losses, claims, damages or
liabilities represented by the percentage that the underwriting discount per
share appearing on the cover page of the Prospectus bears to the public offering
price appearing thereon, and the Company and THE shall be responsible for the
remaining portion; provided, however, that, if such allocation is not permitted
by applicable law, then the relative fault of the Company and THE and the
Underwriter, in the aggregate, in connection with the statements or omissions
which resulted in such damages and other relevant equitable
32
<PAGE>
considerations shall also be considered. The relative fault shall be determined
by reference to, among other things, whether in the case of an untrue statement
or a material fact or the omission to state a material fact, such statement or
omission relates to information supplied by the Company or the Underwriter, and
the parties' relevant intent, knowledge, access to information and opportunity
to correct or prevent such untrue statement or omission. The Company, THE and
the Underwriter agree that it would not be just and equitable if the respective
obligations of the Company, THE and the Underwriter to contribute pursuant to
this Section 7 were to be determined by pro rata or per capital allocation of
the aggregate damages (even if the Underwriter and its controlling persons in
the aggregate were treated as one entity for such purpose) or by any other
method of allocation that does not take account of the equitable considerations
referred to in the first sentence of this Section 7. No person guilty of a
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who is not guilty of such
fraudulent misrepresentation. For the purpose of this paragraph, each officer,
director, or other person who controls the Underwriter within the meaning of
Section 15 of the Act shall have the same rights to contribution as such
Underwiter and each officer, director, or other person, including but not
limited to THE, who controls the Company within the meaning of Section 15 of the
Act shall have the same rights to contribution as the Company . If the full
amount of the contribution specified in this paragraph is not permitted by law,
then the Underwriter and each person who controls the Underwriter shall be
entitled to contribution from the Company and THE to the full extent permitted
by law. The foregoing contribution agreement shall in no way affect the
contribution liabilities of any persons having liability under Section 11 of the
Act other than the Company and the Underwriter. No contribution shall be
requested with regard to the settlement of any matter from any party who did not
consent to the settlement; provided, however, that such consent shall not be
unreasonably withheld in light of all factors of importance to such party.
8. Costs and Expenses.
(a) Whether or not this Agreement becomes effective
or the sale of the Shares to the Underwriter is consummated, the Company will
pay all costs and expenses incident to the performance of this Agreement
including, but not limited to, the fees and expenses of counsel to the Company
and of the Company's accountants; the costs and expenses incident to the
preparation, printing, filing and distribution under the Act of the Registration
Statement (including the financial
33
<PAGE>
statements therein and all amendments and exhibits thereto), Preliminary
Prospectus and Prospectus, as amended or supplemented; all expenses, including
fees, disbursements and other charges of counsel to the Underwriter, in
connection with any filing required by the NASD relating to the offering of the
Shares contemplated hereby; all expenses, including fees, disbursements and
other charges of counsel to the Underwriter, in connection with the
qualification of the Shares under the state securities or blue sky laws which
the Underwriter shall designate; the cost of printing and furnishing to the
Underwriter copies of the Registration Statement, each Preliminary Prospectus,
the Prospectus, this Agreement, and the Blue Sky Memorandum and the cost of
printing the certificates representing the Shares. The Company shall pay any and
all taxes (including any transfer, franchise, capital stock or other tax imposed
by any jurisdiction) on sales to the Underwriter hereunder. The Company will
also pay all costs and expenses incident to the furnishing of any amended
Prospectus or of any supplement to be attached to the Prospectus as called for
in Section 3(a) of this Agreement except as otherwise set forth in said Section.
(b) In addition to the foregoing expenses the
Company shall at the Closing Date pay to Strasbourger Pearson Tulcin Wolff
Incorporated a non-accountable expense allowance equal to __% of the gross
proceeds of the sale of the Shares of which $________ has been paid. In the
event the transactions contemplated hereby are not consummated by reason of any
action by the Underwriter (except if such prevention is based upon a breach by
the Company of any covenant, representation or warranty contained herein or
because any other condition to the Underwriter's obligations hereunder required
to be fulfilled by the Company is not fulfilled), the Company shall not be
liable to the Underwriter for any out-of-pocket accountable expenses except that
the Underwriter may retain all monies paid to it prior to the termination of the
underwriting, but only to the extent of out-of-pocket accountable expenses
incurred by the Underwriter, and the Underwriter shall return to the Company all
monies received in excess of its out-of-pocket accountable expenses. In the
event the transactions contemplated hereby are not consummated by reason of any
action of the Company or because of a breach by the Company of any covenant,
representation or warranty contained herein, the Company shall be liable for the
out-of-pocket accountable expenses incurred by the Underwriter, including
attorneys' fees, but which in no event shall exceed the sum of $_______, less a
credit of any amounts previously paid by the Company to the Underwriter, and the
Underwriter shall return to the Company all monies received in excess of its
out-of-pocket accountable expenses.
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<PAGE>
(c) No person is entitled either directly or
indirectly to compensation from the Company, from the Underwriter or from any
other person for services as a finder in connection with the proposed offering,
and the Company agrees to indemnify and hold harmless the Underwriter against
any losses, claims, damages or liabilities, joint or several, which shall, for
all purposes of this Agreement, include, but not be limited to, all costs of
defense and investigation and all attorneys' fees, to which the Company, the
Underwriter or person may become subject insofar as such losses, claims, damages
or liabilities (or actions in respect thereof) arise out of or are based upon
the claim of any person (other than an employee of the party claiming indemnity)
or entity that he or it is entitled to a finder's fee in connection with the
proposed offering by reason of such person's or entity's influence or prior
contact with the indemnifying party.
9. Effective Date. This Agreement shall become effective upon
its execution, except that you may, at your option, delay its effectiveness
until 11:00 a.m., New York time, on the first full business day following the
Effective Date of the Registration Statement, or at such earlier time after the
Effective Date of the Registration Statement as you in your discretion shall
first commence the initial public offering by the Underwriter of any of the
Shares. The time of the initial public offering shall mean the time of release
by you of the first newspaper advertisement with respect to the Shares, or the
time when the Shares are first generally offered by you to dealers by letter or
telegram, whichever shall first occur. This Agreement may be terminated by you
at any time before it becomes effective as provided above, except that Sections
3(c), 6, 7, 8, 12, 13, 14 and 15 hereof shall remain in effect notwithstanding
such termination.
10. Termination.
(a) This Agreement, except for Sections 3(c), 6, 7,
8, 12, 13, 14 and 15 hereof, may be terminated by you at any time prior to the
Closing Date if in your judgment it is impracticable to offer for sale or to
enforce contracts made by the Underwriter for the resale of the Shares agreed to
be purchased hereunder by reason of (i) the Company having sustained a material
loss, whether or not insured, by reason of fire, earthquake, flood, accident or
other calamity, or from any labor dispute or court or government action, order
or decree; (ii) trading in securities on the New York Stock Exchange, the
American Stock Exchange, and/or the NASDAQ SmallCap Market having been generally
suspended or limited; (iii) material
35
<PAGE>
governmental restrictions having been imposed on trading in securities generally
(not in force and effect on the date hereof); (iv) a banking moratorium having
been declared by federal or New York State authorities; (v) an outbreak of major
international hostilities or other national or international calamity having
occurred; (vi) the passage by the Congress of the United States, or by any state
legislative body of similar impact, of any act or measure, or the adoption of
any orders, rules or regulations by any governmental body or any authoritative
accounting institute or board, or any governmental executive, which is
reasonably believed likely by the Underwriter to have a material impact on the
condition (financial or otherwise), business, properties, prospects or financial
statements of the Company or on the market for the securities offered hereby;
(vii) any material adverse change in the financial or securities markets in the
United States, particularly in the over-the-counter market, having occurred
since the date of this Agreement, or (viii) any material adverse change having
occurred, since the respective dates of which information is given in the
Registration Statement and Prospectus, in the condition (financial or
otherwise), business, properties, prospects, net worth or results of operations
of the Company, whether or not arising in the ordinary course of business.
(b) If you elect to prevent this Agreement from
becoming effective or to terminate this Agreement as provided in this Section 10
or in Section 9, the Company shall be promptly notified by you, by telephone or
telegram, confirmed by letter.
11. Warrants. At or before the Closing Date, the Company will
sell to Strasbourger Pearson Tulcin Wolff Incorporated the Underwriters'
Warrants to purchase an aggregate of 150,000 shares of the Common Stock of the
Company for an aggregate consideration of $_______ upon the terms and conditions
set forth in the Warrant Agreement. In the event of conflict in the terms of
this Agreement and the Underwriter's Warrants, the language of the Underwriter's
Warrants shall control.
12. Representations, Warranties and Agreements to Survive
Delivery. The respective indemnities, agreements, representations, warranties
and other statements of the Company, THE and the Underwriter set forth in or
made pursuant to this Agreement will remain in full force and effect, regardless
of any investigation made by or on behalf of the Underwriter, the Company or any
of its officers or directors or any controlling person and will survive delivery
of and payment for the Shares and the termination of this Agreement.
36
<PAGE>
13. Notices. Any communications specifically required
hereunder to be in writing, if sent to the Underwriter, will be mailed,
delivered or telegraphed and confirmed to them at Strasbourger Pearson Tulcin
Wolff Incorporated, 61 Broadway, Suite 2800, New York, New York 10006, with a
copy sent to Stroock & Stroock & Lavan LLP, 180 Maiden Lane, New York, New York
10038-4982, Attention: James R. Tanenbaum or if sent to the Company, will be
mailed, delivered or telegraphed and confirmed to it at Diversified Senior
Services, Inc., 915 West Fourth Street, Winston-Salem, North Carolina 27101,
Attention: Susan L. Christiansen, with a copy to House Law Firm, 3325 Healy
Drive, Winston-Salem, North Carolina 27103, Attention: Don R. House.
14. Parties in Interest. The Agreement herein set forth is
made solely for the benefit of the Underwriter, the Company and any person
controlling the Company or the Underwriter, and the directors of the Company,
nominees for directors (if any) named in the Prospectus, its officers who have
signed the Registration Statement, and their respective executors,
administrators, successors and assigns, and no other person shall acquire or
have any right under or by virtue of this Agreement. The term "successors and
assigns" shall not include any purchaser, as such purchaser, from the
Underwriter of the Shares.
15. Applicable Law. THIS AGREEMENT WILL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO
AGREEMENTS MADE AND TO BE ENTIRELY PERFORMED WITHIN NEW YORK.
37
<PAGE>
If the foregoing is in accordance with your understanding of
our agreement, kindly sign and return this agreement, whereupon it will become a
binding agreement among the Company, THE and the Underwriter in accordance with
its terms.
Very truly yours,
DIVERSIFIED SENIOR SERVICES, INC.
By:___________________________
Name:
Title:
TAYLOR HOUSE ENTERPRISES, LTD.
By:___________________________
Name:
Title:
The foregoing Underwriting Agreement is hereby confirmed and
accepted as of the date first above written.
STRASBOURGER PEARSON TULCIN
WOLFF INCORPORATED
By:__________________________
Name:
Title:
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<PAGE>
ANNEX I
FORM OF LOCK-UP
Strasbourger Pearson Tulcin Wolff
Incorporated
61 Broadway, Suite 2800
New York, New York 10006
Ladies and Gentlemen:
Reference is made to the Underwriting Agreement, dated
November __, 1997 (the "Underwriting Agreement"), between Diversified Senior
Services, Inc., a North Carolina corporation (the "Company"), and Strasbourger
Pearson Tulcin Wolff Incorporated (the "Underwriter"). Capitalized terms used
herein and not defined herein shall have the same meanings ascribed to them in
the Underwriting Agreement.
1. In consideration of the Underwriting Agreement, the
undersigned hereby agrees not to, without the prior written consent of the
Underwriter and except as set forth in Section 2, offer, sell or otherwise
dispose of any shares of the Company's Common Stock, without par value (the
"Common Stock"), or any securities convertible into or exercisable or
exchangeable for, or any rights to purchase or acquire, Common Stock owned by
the undersigned for a period of twenty-four (24) months after the date of the
Underwriting Agreement.
2. The restrictions set forth in Section 1 shall not apply to
private sales or transfers of Common Stock to purchasers or transferees who
agree in writing to be bound by the terms set forth herein.
Dated: November __, 1997
Very truly yours,
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<PAGE>
Exhibit 4.1
DSS-
DIVERSIFIED SENIOR SERVICES, INC. COMMON STOCK
NO PAR VALUE
INCORPORATED UNDER THE LAWS OF
THE STATE OF NORTH CAROLINA
CUSIP 255340 10 1
THIS CERTIFIES THAT
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK, NO PAR VALUE, OF
Diversified Senior Services, Inc. transferable upon the books of the Corporation
by the holder hereof in person or by duly authorized attorney upon surrender
of this certificate properly endorsed.
This certificate is not valid until countersigned and registered by the
Transfer Agent and Registrar:
IN WITNESS WHEREOF, Diversified Senior Services, Inc. has caused its
facsimile corporate seal and the facsimile signatures of its duly authorized
officers to be hereunto affixed.
CERTIFICATE OF STOCK
Dated:
(authorized signatures) (authorized signatures)
[COMPANY SEAL]
SECRETARY PRESIDENT
The Corporation is authorized to issue more than one class or series of stock.
Upon written request the Corporation will furnish without charge to each
stockholder a copy of the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock or series
thereof and the qualifications, limitations or restrictions of such preferences
and/or rights.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT - ______ Custodian _______
TEN ENT - as tenants by the entireties (Cust) (Minor)
JT TEN - as joint tenants with right of under Uniform Gifts to Minors
survivorship and not as tenants Act _________________________
in common (State)
Additional abbreviations may also be used though not in the above list.
For value received ________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
____________________________________________________________
____________________________________________________________
PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE
____________________________________________________________
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
________________________________________________________________ Shares
of the capital stock represented by the within Certificate, and do
hereby irrevocably constitute and appoint
________________________________________________________________ Attorney
to transfer the said stock on the books of the within-named Corporation
with full power of substitution in the premises.
Dated
_______________________________________________________
NOTICE THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND
WITH THE NAME AS WRITTEN UPON THE FACE OF THE CERTIFICATE
IN EVERY PARTICULAR WITHOUT ALTERATION OR ENLARGEMENT OR
ANY CHANGE WHATEVER
Signature(s) Guaranteed:
___________________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN
ELIGIBLE GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS
AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED
SIGNATURE GUARANTEE MEDALLION PROGRAM),
PURSUANT TO S.E.C. RULE 17Ad-13.
EXHIBIT 4.2
FORM OF
WARRANT AGREEMENT
By and Between
DIVERSIFIED SENIOR SERVICES, INC.
and
STRASBOURGER PEARSON TULCIN WOLFF INCORPORATED
Dated as of November __, 1997
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WARRANT AGREEMENT
WARRANT AGREEMENT dated as of November __, 1997 by and between
DIVERSIFIED SENIOR SERVICES, INC., a North Carolina corporation (the "Company"),
and STRASBOURGER PEARSON TULCIN WOLFF INCORPORATED ("Strasbourger").
The Company proposes to issue to Strasbourger warrants as
hereinafter described (the "Strasbourger Warrants") to purchase up to an
aggregate of 150,000 shares, subject to adjustment as provided in Section 8
hereof (such shares, as adjusted, being hereinafter referred to as the "Shares")
of the Company's Common Stock, no par value per share (the "Common Shares"),
each Strasbourger Warrant entitling the holder thereof to purchase one Common
Share. All capitalized terms used herein and not otherwise defined herein shall
have the same meanings as in that certain underwriting agreement, of even date
herewith, by and between the Company and Strasbourger (the "Underwriting
Agreement"). In this Agreement, the singular includes the plural and the plural
includes the singular.
NOW, THEREFORE, in consideration of the premises and the
mutual agreements herein set forth and for other good and valuable
consideration, the parties hereto agree as follows;
1. Issuance of Warrants; Form of Warrant. The Company will
issue, sell and deliver the Strasbourger Warrants to Strasbourger or its bona
fide officers for an aggregate price of $__________. The form of the
Strasbourger Warrants and the form of election to purchase Shares to be attached
thereto shall be substantially as set forth on Exhibit A attached hereto. The
Strasbourger Warrants shall be executed on behalf of the Company by the manual
or facsimile signature of the present or any future Chief Executive Officer,
President or any Vice President of the Company, under its corporate seal,
affixed or in facsimile, and attested by the manual or facsimile signature of
the present or any future Secretary or Assistant Secretary of the Company.
2. Registration. The Strasbourger Warrants shall be numbered
and shall be registered in a Strasbourger Warrant register (the "Strasbourger
Warrant Register"). The Company shall be entitled to treat the registered holder
of any Strasbourger Warrant on the Strasbourger Warrant Register (the "Holder")
as the owner in fact thereof for all purposes and shall not be bound to
recognize any equitable or other claim to or interest in such Strasbourger
Warrant on the part of any other person, and shall not be liable for any
registration of transfer of Strasbourger Warrants which are registered or are to
be
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registered in the name of a fiduciary or the nominee of a fiduciary unless made
with the actual knowledge that a fiduciary or nominee is committing a breach of
trust in requesting such registration of transfer, or with such knowledge of
such facts that its participation therein amounts to bad faith. The Strasbourger
Warrants shall be registered initially in the name of "Strasbourger Pearson
Tulcin Wolff Incorporated" in such denominations as Strasbourger may request in
writing to the Company; provided, however, that Strasbourger may designate that
all or a portion of the Strasbourger Warrants be issued in varying amounts
directly to its bona fide officers, and not to Strasbourger. Such designation
will only be made by Strasbourger if it determines that such issuances would not
violate the interpretation of the Board of Governors of the National Association
of Securities Dealers, Inc. (the "NASD") relating to the review of corporate
financing arrangements.
3. Transfer of Warrants. The Strasbourger Warrants will not be
sold, transferred, assigned or hypothecated, in part or in whole (other than by
will or pursuant to the laws of descent and distribution), except to officers of
Strasbourger and thereafter only upon delivery thereof duly endorsed by the
Holder or by his duly authorized attorney or representative, or accompanied by
proper evidence of succession, assignment or authority to transfer. In all cases
of transfer by an attorney, the original power of attorney, duly approved, or an
official copy thereof, duly certified, shall be deposited with the Company. In
case of transfer by executors, administrators, guardians or other legal
representatives, duly authenticated evidence of their authority shall be
produced, and may be required to be deposited with the Company in its
discretion. Upon any registration of transfer, the Company shall deliver a new
Strasbourger Warrant or Strasbourger Warrants to the persons entitled thereto.
The Strasbourger Warrants may be exchanged at the option of the Holder thereof
for another Strasbourger Warrant, or other Strasbourger Warrants, of different
denominations, of like tenor and representing in the aggregate the right to
purchase a like number of Common Shares upon surrender to the Company or its
duly authorized agent. Notwithstanding the foregoing, the Company shall have no
obligation to cause Strasbourger Warrants to be transferred on its books to any
person if such transfer would violate the Securities Act of 1933, as amended
(the "Act").
4. Term of Warrants; Exercise of Warrants. Each Strasbourger
Warrant entitles the registered owner thereof to purchase one Share at a
purchase price of $______ per Share (the "Exercise Price") at any time from the
first anniversary of the effective date of the Registration Statement until 5:00
p.m., New York City time, on ____________, 2002 (the "Warrant Expiration Date").
Prior to the Warrant Expiration Date, the Company will
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not take any action which would terminate the Strasbourger Warrants. The
Exercise Price and the Shares issuable upon exercise of the Strasbourger
Warrants are subject to adjustment upon the occurrence of certain events
pursuant to the provisions of Section 8 of this Agreement. Subject to the
provisions of this Agreement, each Holder shall have the right, which may be
exercised as set forth in such Strasbourger Warrants, to purchase from the
Company (and the Company shall issue and sell to such Holder) the number of
fully paid and nonassessable Common Shares specified in such Strasbourger
Warrants, upon surrender to the Company, or its duly authorized agent, of such
Strasbourger Warrants with the form of election to purchase attached thereto
duly completed and signed, with signatures guaranteed by a member firm of a
national securities exchange, a commercial bank or trust company located in the
United States or a member of the NASD and upon payment to the Company of the
Exercise Price, as adjusted in accordance with the provisions of Section 8 of
this Agreement, for the number of Shares in respect of which such Strasbourger
Warrants are then exercised.
Payment of such Exercise Price may be made at the Holder's election (i)
by certified or official bank check, (ii) in the event that the Holder holds
Common Shares of the Company and such Common Shares are listed on a domestic
stock exchange or quoted in the domestic over-the-counter market, by
transferring to the Company an amount of such Common Shares which, when
multiplied by the current market price of the Common Shares at the time of
exercise of such Strasbourger Warrant, equals the aggregate amount of the
consideration payable upon such exercise, (iii) by surrendering to the Company
the right to receive a portion of the number of Shares with respect to which
such Strasbourger Warrant is then being exercised equal to the product obtained
by multiplying such number of Shares by a fraction, the numerator of which is
the Exercise Price in effect on the date of such exercise and the denominator of
which is the current market price of the Common Shares in effect on such date,
or (iv) by a combination of the foregoing methods of payment selected by the
Holder. In any case where the consideration payable upon such exercise is being
paid in whole or in part pursuant to the provisions of clause (ii) or clause
(iii) of the preceding sentence, such exercise shall be accompanied by written
notice from the Holder specifying the manner of payment thereof, and in the case
of clause (ii), stating the amount of Common Shares of the Company to be applied
to such payment, and in the case of clause (iii), containing a calculation
showing the number of Shares with respect to which rights are being surrendered
thereunder and the net number of Shares to be issued after giving effect to such
surrender. No adjustment shall be made for any dividends on any Shares issuable
upon exercise of a Strasbourger Warrant. Upon each surrender of Strasbourger
Warrants and payment of the Exercise Price as aforesaid, the Company shall
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issue and cause to be delivered with all reasonable dispatch to or upon the
written order of the Holder of such Strasbourger Warrants and in such name or
names as such Holder may designate, a certificate or certificates for the number
of full Shares so purchased upon the exercise of such Strasbourger Warrants,
together with cash, as provided in Section 9 of this Agreement, in respect of
any fractional Shares otherwise issuable upon such surrender. Such certificate
or certificates shall be deemed to have been issued and any person so designated
to be named therein shall be deemed to have become a holder of record of such
Shares as of the date of the surrender of Strasbourger Warrants and payment of
the Exercise Price as aforesaid; provided, however, that if, at the date of
surrender of such Strasbourger Warrants and payment of such Exercise Price, the
transfer books for the Common Shares or other class of securities issuable upon
the exercise of such Strasbourger Warrants shall be closed, the certificates for
the Shares shall be issuable as of the date on which such books shall next be
opened (whether before, on or after the Warrant Expiration Date) and until such
date the Company shall be under no duty to deliver any certificate for such
Shares; provided, further, however, that the transfer books of record, unless
otherwise required by law, shall not be closed at any one time for a period
longer than twenty (20) days. The rights of purchase represented by the
Strasbourger Warrants shall be exercisable, at the election of the Holders
thereof, either in full or from time to time in part and, in the event that any
Strasbourger Warrant is exercised in respect of less than all of the Shares
issuable upon such exercise at any time prior to the Warrant Expiration Date, a
new Strasbourger Warrant or Strasbourger Warrants will be issued for the
remaining number of Shares specified in the Strasbourger Warrant so surrendered.
5. Payment of Taxes. The Company will pay all documentary
stamp taxes, if any, attributable to the issuance of Shares upon the exercise of
Strasbourger Warrants; provided, however, that the Company shall not be required
to pay any tax or taxes which may be payable in respect of any transfer involved
in the issue or delivery of any certificates for Shares in a name other than
that of the Holder of Strasbourger Warrants in respect of which such Shares are
issued.
6. Mutilated or Missing Warrants. In case any of the
Strasbourger Warrants shall be mutilated, lost, stolen or destroyed, the Company
may, in its discretion, issue and deliver in exchange and substitution for and
upon cancellation of the mutilated Strasbourger Warrant, or in lieu of and
substitution for the Strasbourger Warrant lost, stolen or destroyed, a new
Strasbourger Warrant of like tenor and representing an equivalent right or
interest, but only upon receipt of evidence reasonably satisfactory to the
Company of such mutilation, loss, theft or destruction of such Strasbourger
Warrant and indemnity, unless
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mutilated, also reasonably satisfactory to the Company. An applicant for such
substitute Strasbourger Warrants shall also comply with such other reasonable
regulations and pay such other reasonable charges as the Company may prescribe.
7. Reservation of Shares, etc. There have been reserved, and
the Company shall at all times keep reserved, out of the authorized and unissued
Common Shares, a number of Common Shares sufficient to provide for the exercise
of the rights of purchase represented by the outstanding Strasbourger Warrants.
American Stock Transfer & Trust Company, transfer agent for the Common Shares
(the "Transfer Agent"), and every subsequent transfer agent, if any, for the
Company's securities issuable upon the exercise of the Strasbourger Warrants
will be irrevocably authorized and directed at all times until the Warrant
Expiration Date to reserve such number of authorized and unissued Common Shares
as shall be required for such purpose. The Company will keep a copy of this
Agreement on file with the Transfer Agent and with every subsequent transfer
agent of the Company's securities issuable upon the exercise of the Strasbourger
Warrants. The Company will supply the Transfer Agent or any subsequent transfer
agent with duly executed certificates for such purpose and will itself provide
or otherwise make available any cash which may be distributable as provided in
Section 9 of this Agreement. All Strasbourger Warrants surrendered in the
exercise of the rights thereby evidenced shall be canceled, and such canceled
Strasbourger Warrants shall constitute sufficient evidence of the number of
Shares that have been issued upon the exercise of such Strasbourger Warrants. No
Common Shares shall be subject to reservation in respect of unexercised
Strasbourger Warrants subsequent to the Warrant Expiration Date.
8. Adjustments of Exercise Price and Number of Shares. The
Exercise Price and the number and kind of securities issuable upon exercise of
each Strasbourger Warrant shall be subject to adjustment from time to time upon
the happening of certain events, as follows:
(a) In case the Company shall (i) declare a dividend
on its Common Shares in Common Shares or make a distribution
of Common Shares, (ii) subdivide its outstanding Common
Shares, (iii) combine its outstanding Common Shares into a
smaller number of Common Shares or (iv) issue by
reclassification of its Common Shares other securities of the
Company (including any such reclassification in connection
with a consolidation or merger in which the Company is the
continuing corporation), the number of Shares purchasable upon
exercise of each Strasbourger Warrant immediately prior
thereto shall be adjusted so that the
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Holder of each Strasbourger Warrant shall be entitled to
receive the kind and number of Shares or other securities of
the Company which he would have owned or have been entitled
to receive after the happening of any of the events described
above, had such Strasbourger Warrant been exercised
immediately prior to the happening of such event or any
record date with respect thereto. An adjustment made pursuant
to this paragraph (a) shall become effective immediately
after the effective date of such event retroactive to
immediately after the record date, if any, for such event.
(b) In case the Company shall issue rights, options
or warrants to all holders of its Common Shares, without any
charge to such holders, entitling them (for a period expiring
within 45 days after the record date mentioned below in this
paragraph (b)) to subscribe for or to purchase Common Shares
at a price per share that is lower at the record date
mentioned below than the then current market price per Common
Share (as defined in paragraph (d) below), the number of
Shares thereafter purchasable upon exercise of each
Strasbourger Warrant shall be determined by multiplying the
number of Shares theretofore purchasable upon exercise of each
Strasbourger Warrant by a fraction, of which the numerator
shall be the number of Common Shares outstanding on such
record date plus the number of additional Common Shares
offered for subscription or purchase, and of which the
denominator shall be the number of Common Shares outstanding
on such record date plus the number of shares which the
aggregate offering price of the total number of Common Shares
so offered would purchase at the then current market price per
Common Share. Such adjustment shall be made whenever such
rights, options or warrants are issued, and shall become
effective retroactively to immediately after the record date
for the determination of shareholders entitled to receive such
rights, options or warrants.
(c) In case the Company shall distribute to all
holders of its Common Shares stock other than Common Shares or
evidences of its indebtedness or assets (excluding cash
dividends payable out of consolidated earnings or retained
earnings and dividends or distributions referred to in
paragraph (a) above) or rights, options or warrants or
convertible or exchangeable securities containing the right to
subscribe for or purchase Common Shares (excluding those
referred to in paragraph (b) above), then in each case the
number of Shares thereafter issuable upon the
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exercise of each Strasbourger Warrant shall be determined by
multiplying the number of Shares theretofore issuable upon
the exercise of each Strasbourger Warrant, by a fraction, of
which the numerator shall be the current market price per
Common Share (as defined in paragraph (d) below) on the
record date mentioned below in this paragraph (c), and of
which the denominator shall be the current market price per
Common Share on such record date, less the then fair value
(as determined by the Board of Directors of the Company,
whose determination shall be conclusive) of the portion of
the shares of stock other than Common Shares or assets or
evidences of indebtedness so distributed or of such
subscription rights, options or warrants, or of such
convertible or exchangeable securities applicable to one
Common Share. Such adjustment shall be made whenever any such
distribution is made, and shall become effective on the date
of distribution retroactive to immediately after the record
date for the determination of shareholders entitled to
receive such distribution.
(d) For the purpose of any computation under
paragraphs (b) and (c) of this Section 8, the current market
price per Common Share at any date shall be the average of the
daily closing prices for fifteen (15) consecutive trading days
commencing twenty (20) trading days before the date of such
computation. The closing price for each day shall be the last
reported sale price regular way or, in case no such reported
sale takes place on such day, the average of the closing bid
and asked prices regular way for such day, in either case on
the principal national securities exchange on which the shares
are listed or admitted to trading, or if they are not listed
or admitted to trading on any national securities exchange,
but are traded in the over-the-counter market, the closing
sale price of the Common Shares or, in case no sale is
publicly reported, the average of the representative closing
bid and asked quotations for the Common Shares on the Nasdaq
SmallCap Market or any comparable system, or if the Common
Shares are not listed on the Nasdaq SmallCap Market or a
comparable system, the closing sale price of the Common Shares
or, in case no sale is publicly reported, the average of the
closing bid and asked prices as furnished by two members of
the NASD selected from time to time by the Company for that
purpose.
(e) No adjustment in the number of Shares purchasable
hereunder shall be required unless such adjustment would
require an increase or decrease of at
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least one percent (1%) in the number of Shares purchasable
upon the exercise of each Strasbourger Warrant; provided,
however, that any adjustments which by reason of this
paragraph (e) are not required to be made shall be carried
forward and taken into account in any subsequent adjustment,
but not later than three years after the happening of the
specified event or events. All calculations shall be made to
the nearest one thousandth of a share. Anything in this
Section 8 to the contrary notwithstanding, the Company shall
be entitled, but shall not be required, to make such changes
in the number of Shares purchasable upon the exercise of each
Strasbourger Warrant, in addition to those required by this
Section 8, as it in its discretion shall determine to be
advisable in order that any dividend or distribution in
shares of Common Shares, subdivision, reclassification or
combination of Common Shares, issuance of rights, warrants or
options to purchase Common Shares, or distribution of shares
of stock other than Common Shares, evidences of indebtedness
or assets (other than distributions of cash out of
consolidated earnings or retained earnings) or convertible or
exchangeable securities hereafter made by the Company to the
holders of its Common Shares shall not result in any tax to
the holders of its Common Shares or securities convertible
into Common Shares.
(f) Whenever the number of Shares purchasable upon
the exercise of each Strasbourger Warrant is adjusted, as
herein provided, the Exercise Price shall be adjusted by
multiplying the Exercise Price in effect immediately prior to
such adjustment by a fraction, of which the numerator shall be
the number of Shares purchasable upon the exercise of each
Strasbourger Warrant immediately prior to such adjustment, and
of which the denominator shall be the number of Shares so
purchasable immediately thereafter.
(g) For the purpose of this Section 8, the term
"Common Shares" shall mean (i) the class of stock designated
as the Common Shares of the Company at the date of this
Agreement or (ii) any other class of stock resulting from
successive changes or reclassifications of such shares
consisting solely of changes in par value, or from no par
value to par value, or from par value to no par value. In the
event that at any time, as a result of an adjustment made
pursuant to paragraph (a) above, the Holders shall become
entitled to purchase any shares of capital stock of the
Company other than Common Shares, thereafter the number of
such
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other shares so purchasable upon exercise of each
Strasbourger Warrant and the Exercise Price of such shares
shall be subject to adjustment from time to time in a manner
and on terms as nearly equivalent as practicable to the
provisions with respect to the Shares contained in paragraphs
(a) through (f), inclusive, and paragraphs (h) through (m),
inclusive, of this Section 8, and the provisions of Sections
4, 5, 7 and 10, with respect to the Shares, shall apply on
like terms to any such other shares.
(h) Upon the expiration of any rights, options,
warrants or conversion rights or exchange privileges, if any
thereof shall not have been exercised, the Exercise Price and
the number of Common Shares purchasable upon the exercise of
each Strasbourger Warrant shall, upon such expiration, be
readjusted and shall thereafter be such as it would have been
had it originally been adjusted (or had the original
adjustment not been required, as the case may be) as if (i)
the only Common Shares so issued were the Common Shares, if
any, actually issued or sold upon the exercise of such rights,
options, warrants or conversion rights or exchange privileges
and (ii) such Common Shares, if any, were issued or sold for
the consideration actually received by the Company upon such
exercise plus the aggregate consideration, if any, actually
received by the Company for the issuance, sale or grant of all
of such rights, options, warrants or conversion rights or
exchange privileges whether or not exercised; provided,
however, that no such readjustment shall have the effect of
increasing the Exercise Price by an amount in excess of the
amount of the adjustment initially made in respect to the
issuance, sale or grant of such rights, options, warrants or
conversion rights or exchange privileges.
(i) The Company may, at its option, at any time
during the term of the Strasbourger Warrants, reduce the then
current Exercise Price to any amount deemed appropriate by the
Board of Directors of the Company.
(j) Whenever the number of Shares issuable upon the
exercise of each Strasbourger Warrant or the Exercise Price of
such Shares is adjusted, as herein provided, the Company shall
promptly mail by first class mail postage prepaid, to each
Holder notice of such adjustment or adjustments. The Company
shall retain a firm of independent public accountants (who may
be the regular accountants employed by the Company) to make
any computation required by this Section 8 and
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shall cause such accountants to prepare a certificate setting
forth the number of Shares issuable upon the exercise of each
Strasbourger Warrant and the Exercise Price of such Shares
after such adjustment, setting forth a brief statement of the
facts requiring such adjustment and setting forth the
computation by which such adjustment was made. Such
certificate shall be conclusive on the correctness of such
adjustment and each Holder shall have the right to inspect
such certificate during reasonable business hours.
(k) Except as provided in this Section 8, no
adjustment in respect of any dividends shall be made during
the term of the Strasbourger Warrants or upon the exercise of
the Strasbourger Warrants.
(l) In case of any consolidation of the Company with
or merger of, the Company with or into another corporation or
in case of any sale or conveyance to another corporation of
the property of the Company as an entirety or substantially as
an entirety, the Company or such successor or purchasing
corporation (or an affiliate of such successor or purchasing
corporation), as the case may be, agrees that each Holder
shall have the right thereafter upon payment of the Exercise
Price in effect immediately prior to such action to purchase
upon exercise of each Strasbourger Warrant the kind and amount
of shares and other securities and property (including cash)
which he would have owned or have been entitled to receive
after the happening of such consolidation, merger, sale or
conveyance had such Strasbourger Warrant been exercised
immediately prior to such action. The provisions of this
paragraph (l) shall similarly apply to successive
consolidations, mergers, sales or conveyances.
(m) Notwithstanding any adjustment in the Exercise
Price or the number or kind of shares purchasable upon the
exercise of the Strasbourger Warrants pursuant to this
Agreement, certificates for Strasbourger Warrants issued prior
or subsequent to such adjustment may continue to express the
same price and number and kind of Shares as are initially
issuable pursuant to this Agreement.
9. Fractional Interests. The Company shall not be required to
issue fractions of Shares on the exercise of Strasbourger Warrants. If more than
one Strasbourger Warrant shall be presented for exercise in full at the same
time by the same Holder, the number of Shares which shall be issuable upon the
exercise thereof shall be computed on the basis number of
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Shares issuable on exercise of the Strasbourger Warrants so presented.
If any fraction of a Share would, except for the provisions of this
Section 9, be issuable on the exercise of any Strasbourger Warrant (or
specified portions thereof), the Company shall purchase such fraction
for an amount in cash equal to the same fraction of the current market
price per Common Share (determined as provided in the second sentence
of Section 8(d) of this Agreement) on the date of exercise.
10. Registration Rights.
(a) Demand Registration Rights. The Company
covenants and agrees with Strasbourger and any other or subsequent Holders of
the Registrable Securities (as defined in paragraph (e) of this Section 10)
that, upon written request of the then Holder(s) of at least a majority of the
aggregate of the Registrable Securities which were originally issued on the date
hereof to Strasbourger or its designees, made at any time within the period
commencing one year and ending five years after the Effective Date, the Company
will file as promptly as practicable and, in any event, within 45 days after
receipt of such written request, at its sole expense, no more than once, a
post-effective amendment (the "Amendment") to the Registration Statement, or a
new Registration Statement or a Regulation A Offering Statement (an "Offering
Statement") under the Act, registering or qualifying the Registrable Securities
for sale. Within fifteen (15) days after receiving any such notice, the Company
shall give notice to the other Holders of the Registrable Securities advising
that the Company is proceeding with such Amendment, Registration Statement or
Offering Statement and offering to include therein the Registrable Securities of
such Holders. The Company shall not be obligated to any such other Holder unless
such other Holder shall accept such offer by notice in writing to the Company
within ten (10) days thereafter. No other securities of the Company shall be
entitled to be included in such Amendment, Registration Statement or Offering
Statement. The Company will use its best efforts, through its officers,
directors, auditors and counsel in all matters necessary or advisable, to file
and cause to become effective such Amendment, Registration Statement or Offering
Statement as promptly as practicable and for a period of two years thereafter to
reflect in the Amendment, Registration Statement or Offering Statement financial
statements which are prepared in accordance with Section 10(a)(3) of the Act and
any facts or events arising that, individually, or in the aggregate, represent a
fundamental and/or material change in the information set forth in the
Amendment, Registration Statement or Offering Statement to enable any Holders of
the Strasbourger Warrants to either sell such Strasbourger Warrants or to
exercise such Strasbourger Warrants and sell Shares, or to enable any holders of
Shares to sell such Shares, during said two-year period. The Holders may sell
the
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Registrable Securities pursuant to the Amendment, Registration Statement or the
Offering Statement without exercising the Strasbourger Warrants. If any
registration pursuant to this paragraph (a) is an underwritten offering, the
Holders of a majority of the Registrable Securities to be included in such
registration shall be entitled to select the underwriter or managing underwriter
(in the case of a syndicated offering) of such offering.
(b) Piggyback Registration Rights. The Company
covenants and agrees with Strasbourger and any other Holders or subsequent
Holders of the Registrable Securities that if, at any time within the period
commencing one year and ending five years after the Effective Date, it proposes
to file a Registration Statement or Offering Statement with respect to any class
of security (other than in connection with an offering to the Company's
employees) under the Act in a primary registration on behalf of the Company
and/or in a secondary registration on behalf of holders of such securities and
the registration form or Offering Statement to be used may be used for
registration of the Registrable Securities, the Company will give prompt written
notice (which, in the case of a Registration Statement or notification pursuant
to the exercise of demand registration rights other than those provided in
Section 10(a) of this Agreement, shall be within ten (10) business days after
the Company's receipt of notice of such exercise, in any event, shall be at
least 45 days prior to such filing) to, the Holders of Registrable Securities
(regardless of whether some of the Holders shall have theretofore availed
themselves of the right provided in Section 10(a) of this Agreement) at the
addresses appearing on the records of the Company of its intention to file a
Registration Statement or Offering Statement and will offer to include in such
registration statement or Offering Statement to the maximum extent possible, and
limited, in the case of a Regulation A offering, to the amount of the available
exemption, subject to sub-paragraphs (i) and (ii) of this paragraph (b), such
number of Registrable Securities with respect to which the Company has received
written requests for inclusion therein within ten (10) days after the giving of
notice by the Company. All registrations requested pursuant to this Section
10(b) are referred to herein as "Piggyback Registrations." All Piggyback
Registrations pursuant to this Section 10(b) will be made solely at the
Company's expense. This paragraph is not applicable to a Registration Statement
filed by the Company with the Commission on Forms S-4 or S-8 or any successor
forms.
(i) Priority on Primary Registrations. If a
Piggyback Registration includes an underwritten
primary registration on behalf of the Company and the
underwriter(s) for the offering being registered by
the Company shall determine in good
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faith and advise the Company in writing that in
its/their opinion the number of Registrable
Securities requested to be included in such
registration exceeds the number that can be sold in
such offering without materially adversely affecting
the distribution of such securities by the Company,
the Company will include in such registration (A)
first, the securities that the Company proposes to
sell and (B) second, the Registrable Securities
requested to be included in such registration,
apportioned pro rata among the Holders of
Registrable Securities and (C) third, securities of
the holders of other securities requesting
registration.
(ii) Priority on Secondary Registrations. If a
Piggyback Registration consists only of an
underwritten secondary registration on behalf of
holders of securities of the Company (other than
pursuant to Section 10(a)), and the underwriter(s)
for the offering being registered by the Company
advise the Company in writing that in its/their
opinion the number of Registrable Securities
requested to be included in such registration exceeds
the number which can be sold in such offering without
materially adversely affecting the distribution of
such securities by the Company, the Company will
include in such registration (A) first, the
securities requested to be included therein by the
holders requesting such registration and the
Registrable Securities requested to be included in
such registration above, pro rata, among all such
holders on the basis of the number of shares
requested to be included by each such holder and (B)
second, other securities requested to be included in
such registration.
Notwithstanding the foregoing, if any such
underwriter shall determine in good faith and advise the Company in writing that
the distribution of the Registrable Securities requested to be included in the
registration concurrently with the securities being registered by the Company
would materially adversely affect the distribution of such securities by the
Company, then the Holders of such Registrable Securities shall delay their
offering and sale for such period ending on the earliest of (1) 90 days
following the effective date of the Company's registration statement, (2) the
day upon which the underwriting syndicate, if any, for such offering shall have
been disbanded or, (3) such date as the Company, managing underwriter and
Holders of Registrable Securities shall otherwise agree. In
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<PAGE>
the event of such delay, the Company shall file such supplements, post-effective
amendments and take any such other steps as may be necessary to permit such
Holders to make their proposed offering and sale for a period of 120 days
immediately following the end of such period of delay. If any party disapproves
of the terms of any such underwriting, it may elect to withdraw therefrom by
written notice to the Company, the underwriter, and Strasbourger.
Notwithstanding the foregoing, the Company shall not be required to file a
registration statement to include Shares pursuant to this Section 10(b) if an
opinion of independent counsel, reasonably satisfactory to counsel for the
Company and counsel for Strasbourger, that the Shares proposed to be disposed of
may be transferred pursuant to the provisions of Rule 144 under the Act, shall
have been delivered to counsel for the Company.
(c) Other Registration Rights. In addition to the
rights above provided, the Company will cooperate with the then Holders of the
Registrable Securities in preparing and signing any Registration Statement or
Offering Statement, in addition to the Registration Statements and Offering
Statements discussed above, required in order to sell or transfer the
Registrable Securities and will supply all information required therefor, but
such additional Registration Statement or Offering Statement shall be at the
then Holders' cost, and expense; provided, however, that if the Company elects
to register or qualify additional Common Shares, the cost and expense of such
Registration Statement or Offering Statement will be pro rated between the
Company and the Holders of the Registrable Securities according to the aggregate
sales price of the securities being issued. Notwithstanding the foregoing, the
Company will not be required to file a Registration Statement or Offering
Statement at a time when the audited financial statements required to be
included therein are not available, which time shall be limited to the period
commencing 45 days after the end of a fiscal year and ending 90 days after the
end of such fiscal year.
(d) Action to be Taken by the Company. In connection
with the registration of Registrable Securities in accordance with paragraphs
(a), (b) or (c) of this Section 10, the Company agrees to:
(i) Bear the expenses of any registration or
qualification under paragraphs (a) or (b) of this
Section 10, including, but not limited to, legal,
accounting and printing fees; provided, however, that
in no event shall the Company be obligated to pay (A)
any fees and disbursements of special counsel for
Holders of Registrable Securities, or (B) any
underwriters' discount or commission in respect of
such Registrable Securities, or (C) upon the exercise
of and demand registration
14
<PAGE>
right provided for in paragraph (a) of this Section
10, the cost of and liability or similar insurance
required by an underwriter, to the extent that such
costs are attributable solely to the offering of such
Registrable Securities, payment of which shall, in
each case, be the sole responsibility of the Holders
of the Registrable Securities;
(ii) Use its best efforts to register or qualify
the Registrable Securities for offer or sale under
state securities or Blue Sky laws of such
jurisdictions as Strasbourger shall reasonably
request and to do any and all other acts and things
which may be necessary or advisable to enable the
holders to consummate the proposed sale, transfer or
other disposition of such securities in any
jurisdiction; and
(iii) Enter into a cross-indemnity agreement, in
customary form, with each underwriter, if any, and
each holder of securities included in such Amendment,
Registration Statement or Offering Statement,
(e) For purposes of this Section 10, (i) the term
"Holder" shall include holders of Shares, and (ii) the term "Registrable
Securities" shall mean the Strasbourger Warrants and the Shares, issued upon
exercise of the Strasbourger Warrants.
11. Notices to Holders.
(a) Nothing contained in this Agreement or in any of
the Strasbourger Warrants shall be construed as conferring upon the Holders
thereof the right to vote or to receive dividends or to consent or to receive
notice as shareholders in respect of the meetings of shareholders or the
election of directors of the Company or any other matter, or any rights
whatsoever as shareholders of the Company; provided, however, that in the event
that a meeting of shareholders shall be called to consider and take action on a
proposal for the voluntary dissolution of the Company, other than in connection
with a consolidation, merger or sale of all, or substantially all, or its
property, assets, business and good will as an entirety, then and in that event
the Company shall cause a notice thereof to be sent by first-class mail, postage
prepaid, at least twenty (20) days prior to the date filed as a record date or
the date of closing the transfer books in relation to such meeting, to each
registered Holder of Strasbourger Warrants at such Holder's address appearing in
the Strasbourger Warrant Register; but failure to mail or to receive such notice
or any defect therein
15
<PAGE>
or in the mailing thereof shall not affect the validity of any action taken in
connection with such voluntary dissolution. If such notice shall have been so
given and if such a voluntary dissolution shall be authorized at such meeting or
any adjournment thereof, then from and after the date on which such voluntary
dissolution shall have been duly authorized by the shareholders, the purchase
rights represented by the Strasbourger Warrants and all other rights with
respect thereto shall cease and terminate.
(b) In the event the Company intends to make any
distribution on its Common Shares (or other securities which may be issuable in
lieu thereof upon the exercise of Strasbourger Warrants), including, without
limitation, any such distribution to be made in connection with a consolidation
or merger in which the Company is the continuing corporation, or to issue
subscription rights or warrants to holders of its Common Shares, the Company
shall cause a notice of its intention to make such distribution to be sent by
first-class mail, postage prepaid, at least twenty (20) days prior to the date
fixed as a record date or the date of closing the transfer books in relation to
such distribution, to each registered Holder of Strasbourger Warrants at such
Holder's address appearing on the Strasbourger Warrant Register, but failure to
mail or to receive such notice or any defect therein or in the mailing thereof
shall not affect the validity of any action taken in connection with such
distribution.
12. Notices. Any notice pursuant to this Agreement to be given
or made by the Holder of any Strasbourger Warrant and/or the holder of any Share
to or on the Company shall be sufficiently given or made if sent by first-class
mail, postage prepaid, addressed as follows or to such other address as the
Company may designate by notice given in accordance with this Section 12, to the
Holders of Strasbourger Warrants and/or the holders of Shares:
Diversified Senior Services, Inc.
915 West Fourth Street
Winston-Salem, North Carolina 27101
Attn.: Susan L. Christiansen
with a copy to: House Law Firm 3325 Healy Dr.
Winston-Salem, North Carolina 27103
Attn.: Don R. House
Notices or demands authorized by this Agreement to be
given or made by the Company to or on the Holder of any Strasbourger Warrant
and/or the holder of any Share shall be sufficiently given or made (except as
otherwise provided in this
16
<PAGE>
Agreement) if sent by first-class mail, postage prepaid, addressed to such
Holder or such holder of Shares at the address of such Holder or such holder of
Shares as shown on the Strasbourger Warrant Register or the books of the
Company, as the case may be.
13. Governing Law. THIS AGREEMENT AND EACH STRASBOURGER
WARRANT ISSUED HEREUNDER SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE INTERNAL LAWS OF THE STATE OF NEW YORK WITHOUT REFERENCE TO PRINCIPLES OF
CONFLICT OF LAWS. The Company hereby agrees to accept service of process by
notice given to it pursuant to the provisions of Section 12.
14. Counterparts. This Agreement may be executed in any number
of counterparts, each of which so executed shall be deemed to be an original;
but such counterparts together shall constitute but one and the same agreement.
17
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed as of the day, month and year first above written.
(Corporate Seal) DIVERSIFIED SENIOR SERVICES, INC.
Attest: By:__________________________
Name:
Title:
- -----------------------------
Secretary
(Corporate Seal) STRASBOURGER PEARSON TULCIN
WOLFF INCORPORATED
Attest: By:__________________________
Name:
Title:
- --------------------------
18
<PAGE>
EXHIBIT A
No. ________ ________ Warrants
VOID AFTER 5:00 P.M. NEW YORK CITY TIME
ON _________, 2002
DIVERSIFIED SENIOR SERVICES, INC.
Warrant Certificate
THIS CERTIFIES THAT for value received ______________ or
registered assigns, is the owner of the number of warrants set forth above, each
of which entitles the owner thereof to purchase at any time from ____________,
1998, until 5:00 p.m., New York City time on _________, 2002 (the "Warrant
Expiration Date"), one fully paid and nonassessable Common Share, without par
value (the "Common Shares"), of Diversified Senior Services, Inc., a North
Carolina corporation (the "Company"), at the purchase price of $______ per share
(the "Exercise Price") upon presentation and surrender of this Warrant
Certificate with the Form of Election to Purchase duly executed. The number of
Warrants evidenced by this Warrant Certificate (and the number of shares which
may be purchased upon exercise thereof) set forth above, and the Exercise Price
per share set forth above, are the number and Exercise Price as of the date of
original issuance of the Warrants, based on the Common Shares of the Company as
constituted at such date. As provided in the Warrant Agreement referred to
below, the Exercise Price and the number or kind of shares which may be
purchased upon the exercise of the Warrants evidenced by this Warrant
Certificate are, upon the happening of certain events, subject to modification
and adjustment.
This Warrant Certificate is subject to, and entitled to the
benefits of, all of the terms, provisions and conditions of an agreement dated
as of ___________, 1997 (the "Warrant Agreement") between the Company and
Strasbourger Pearson Tulcin Wolff Incorporated which Warrant Agreement is hereby
incorporated herein by reference and made a part hereof and to which Warrant
Agreement reference is hereby made for a full description of the rights,
limitations of rights, duties and immunities hereunder of the Company and the
holders of the Warrant Certificates. Copies of the Warrant Agreement are on file
at the principal office of the Company.
<PAGE>
This Warrant Certificate, with or without other Warrant
Certificates, upon surrender at the principal office of the Company, may be
exchanged for another Warrant Certificate or Warrant Certificates of like tenor
and date evidencing Warrants entitling the holder to purchase a like aggregate
number of Common Shares as the Warrants evidenced by the Warrant Certificate or
Warrant Certificates surrendered entitled such holder to purchase. If this
Warrant Certificate shall be exercised in part, the holder hereof shall be
entitled to receive upon surrender hereof another Warrant Certificate or Warrant
Certificates for the number of whole Warrants not exercised.
No fractional Common Shares will be issued upon the exercise
of any Warrant or Warrants evidenced hereby, but in lieu thereof a cash payment
will be made, as provided in the Warrant Agreement.
No holder of this Warrant Certificate shall be entitled to
vote or receive dividends or be deemed the holder of Common Shares, any other
securities of the Company which may at any time be issuable on the exercise
hereof for any purpose, nor shall anything contained in the Warrant Agreement or
herein be construed to confer upon the holder hereof, as such, any of the rights
of a stockholder of the Company or any right to vote for the election of
directors or upon any matter submitted to stockholders at any meeting thereof,
or to give or withhold consent to any corporate action (whether upon any
recapitalization, issue of stock, reclassification of stock, change of par value
or change of stock to no par value, consolidation, merger, conveyance, or
otherwise) or, except as provided in the Warrant Agreement, to receive notice of
meetings, or to receive dividends or subscription rights or otherwise, until the
Warrant or Warrants evidenced by this Warrant Certificate shall have been
exercised and the shares shall have become deliverable as provided in the
Warrant Agreement.
If this Warrant shall be surrendered for exercise within any
period during which the transfer books for the Company's Common Shares or other
class of stock purchasable upon the exercise of this Warrant are closed for any
purpose, the Company shall not be required to make delivery of certificates for
shares purchasable upon such exercise until the date of the reopening of said
transfer books.
<PAGE>
IN WITNESS WHEREOF, Diversified Senior Services, Inc. has
caused the signature (or facsimile signature) of its President and its Secretary
to be printed hereon and its corporate seal (or facsimile) to be printed hereon.
Dated: __________________, 1997
DIVERSIFIED SENIOR SERVICES, INC.
By:___________________________
Name:
Title:
[Corporate Seal]
Attest:
- -----------------------------
Secretary
<PAGE>
FORM OF ELECTION TO PURCHASE
(To be executed if holder desires to exercise the Warrant Certificate.)
TO: _______________________
The undersigned hereby irrevocably elects to exercise Warrants
represented by this Warrant Certificate to purchase the Common Shares issuable
upon the exercise of such Warrants and requests that certificates for such
shares be issued in the name of: Please insert social security or other
identifying number
- --------------------------------
- -------------------------------
- -------------------------------------------------------------------------------
(Please print name and address)
- ------------------------------------------------------------------------------
If such number of Warrants shall not be all the Warrants evidenced by this
Warrant Certificate, a new Warrant Certificate for the balance remaining of such
Warrants shall be registered in the name of and delivered to:
Please insert social security number or other
identifying number
- ------------------------------
- ------------------------------
- -------------------------------------------------------------------------------
(Please print name and address)
Dated: ______________, 19
------------------------------
Signature
(signature must conform in all
respects to name of holder as
specified on the face of this
Warrant Certificate)
Signature Guaranteed:
<PAGE>
FORM OF
ASSIGNMENT
(To be executed by the registered holder if such holder desires to transfer the
Warrant Certificates.)
FOR VALUE RECEIVED, ________________________ hereby sells,
assigns and transfers unto [_____________________________] this Warrant
Certificate, together with all right, title and interest herein, and does hereby
irrevocably constitute and appoint ________________, to transfer the within
Warrant Certificate on the books of the within-named Company, with full power of
substitution.
Dated: _______________, 19
Signature __________________
Signature Guaranteed:
NOTICE
The signature of the foregoing Assignment must correspond to
the name as written upon the face of this Warrant Certificate in every
particular, without alteration or enlargement or any change whatsoever.
<PAGE>
HOUSE LAW FIRM
3325 HEALY DRIVE
WINSTON-SALEM, NORTH CAROLINA 27103
DON R. HOUSE
MARC W. INGERSOLL November 12, 1997
Diversified Senior Services, Inc. (910) 768-2225
915 West Fourth Street FAX (910) 768-3369
Winston-Salem, North Carolina 27101
Ladies and Gentlemen:
We are special counsel to Diversified Senior Services, Inc. (the
"Company") in connection with the Registration under the Securities Act of 1933,
as amended (the "Act") of 1,500,000 shares of commons stock, no par value per
share, of the Company registered on SEC Form SB-2 Registration Statement filed
on August 25, 1997 (File No. 333-34367). Except where otherwise noted,
capitalized terms used but not otherwise defined herein have the meanings given
them in the Legal Opinion Accord (the "Accord") of the American Bar Association
Section of Business Law (1991).
This Opinion Letter is governed by, and shall be interpreted in
accordance with the Accord. As a consequence, it is subject to a number of
qualifications, exceptions, definitions, limitations on coverage, and other
limitations, all as more particularly described in the Accord, and this Opinion
Letter should be read in conjunction therewith. The law covered by the opinions
expressed herein is limited to the laws of the State of North Carolina and the
Federal law of the United States.
1. The Company has been duly incorporated under the laws of the
State of North Carolina and is validly existing as a
corporation in good standing under the laws of that state.
2. The Common Stock and Warrants, upon their issuance, sale and
delivery in accordance with the terms of the Prospectus
contained in the Registration Statement will be duly and
validly issued and nonassessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement. In giving such consent, we do not thereby admit that we
are in the category of persons whose consent is required under Section 7 of the
Act or the rules and regulations of the Securities and Exchange Commission.
HOUSE LAW FIRM
/s/ Don R. House
-----------------------
Don R. House
<PAGE>
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
To the Board of Directors and Stockholders
Diversified Senior Services, Inc.
We consent to the use in this Amendment No. 2 to the Registration Statement
relating to shares of Class A Common Diversified Senior Services, Inc. on Form
SB-2 of (i) our report dated August 6, 1997 on the consolidated financial
statements of Diversified Senior Services, Inc. as of December 31, 1996 and for
period from May 17, 1996 to December 31, 1996; (ii) our report dated August 6,
1997 on the statements of operations, changes in shareholder's equity (deficit)
and cash flows for the six months ended June 30, 1996 and year ended December
31, 1995 of Residential Properties Management, Inc. appearing in the Prospectus,
which is a part of this Amendment No. 2 to the Registration Statement, and to
the reference to us under the heading "Experts" in such Prospectus.
THE DANIEL PROFESSIONAL GROUP, INC.
Winston-Salem, North Carolina
November 13, 1997
<PAGE>
