UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934.
For the fiscal year ended DECEMBER 31, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the transition period from _____________________ to ________________________
Commission file number : 000-23321
DIVERSIFIED SENIOR SERVICES, INC.
(Exact name of Small Business Issuer as specified in its charter)
NORTH CAROLINA 56-1973923
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
915 WEST 4TH STREET, WINSTON-SALEM, NC 27101
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (336) 724-1000
--------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g)
of the Act: Common Stock, no par value
Indicate by check mark whether Registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
As of February 28, 1999, the aggregate market value of the voting stock held by
non-affiliates of the registrant, based on the closing price, was approximately
$4,593,810.
As of March 30, 1999, the registrant had 3,301,400 shares of Common Stock
outstanding.
Registrant's revenues for the fiscal year ended December 31, 1998 were
$3,644,157.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein and will not be contained, to be best
of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this form 10-KSB or any amendment to
this Form KSB. [X]
Transitional Small Business Disclosure Format Yes___ No X
DOCUMENTS INCORPORATED BY REFERENCE
The definitive Proxy Statement to be filed with the Securities and Exchange
Commission (the "Commission") with respect to the registrant's Annual Meeting of
Shareholders to be held in 1999 (the "1999 Proxy Statement") is incorporated by
reference into Part III of this Form 10-KSB.
<PAGE>
PART I
THIS ANNUAL REPORT ON FORM 10-KSB CONTAINS FORWARDING-LOOKING
STATEMENTS WITHIN THE MEANING OF THAT TERM IN THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995 (THE ACT) (SECTION 27A OF THE SECURITIES ACT OF 1933 AND
SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934). ADDITIONAL WRITTEN OR ORAL
FORWARD-LOOKING STATEMENTS MAY BE MADE BY THE COMPANY FROM TIME TO TIME, IN
FILINGS WITH THE SECURITIES EXCHANGE COMMISSION, PRESS RELEASES OR OTHERWISE.
STATEMENTS CONTAINED HEREIN THAT ARE NOT HISTORICAL FACTS ARE FORWARD-LOOKING
STATEMENTS MADE PURSUANT TO THE SAFE HARBOR PROVISIONS OF THE ACT.
FORWARD-LOOKING STATEMENTS MAY INCLUDE, BUT ARE NOT LIMITED TO, PROJECTIONS OF
REVENUE, INCOME OR LOSS AND CAPITAL EXPENDITURES, STATEMENTS REGARDING FUTURE
OPERATIONS, FINANCING NEEDS, ANTICIPATED COMPLIANCE WITH THE FINANCIAL COVENANTS
IN LOAN AGREEMENTS, PLANS FOR ACQUISITION OR SALE OF ASSETS OR BUSINESSES AND
CONSOLIDATION OF OPERATIONS OF NEWLY ACQUIRED BUSINESSES, AND PLANS RELATING TO
PRODUCTS OR SERVICES OF THE COMPANY, ASSESSMENTS OF MATERIALITY, PREDICTIONS OF
FUTURE EVENTS AND THE EFFECTS OF PENDING AND POSSIBLE LITIGATION, AS WELL AS
ASSUMPTIONS RELATING TO THE FOREGOING. IN ADDITION, WHEN USED IN THIS
DISCUSSION, THE WORDS "ANTICIPATES," "BELIEVES," "ESTIMATES," "EXPECTS,"
"INTENDS," "PLANS" AND VARIATIONS THEREOF AND SIMILAR EXPRESSIONS ARE INTENDED
TO IDENTIFY FORWARD-LOOKING STATEMENTS.
FORWARD-LOOKING STATEMENTS ARE INHERENTLY SUBJECT TO RISKS AND
UNCERTAINTIES, SOME OF WHICH CANNOT BE PREDICTED OR QUANTIFIED BASED ON CURRENT
EXPECTATIONS. CONSEQUENTLY, FUTURE EVENTS AND ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE SET FORTH IN, CONTEMPLATED BY, OR UNDERLYING THE FORWARD
LOOKING STATEMENTS CONTAINED IN THIS ANNUAL REPORT, OTHER FILINGS, PRESS
RELEASES OR OTHERWISE. STATEMENTS IN THIS ANNUAL REPORT, PARTICULARLY IN "ITEM
1. DESCRIPTION OF BUSINESS," "ITEM 3. LEGAL PROCEEDINGS", THE NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS AND "ITEM 7. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," DESCRIBE CERTAIN
FACTORS, AMONG OTHERS, THAT COULD CONTRIBUTE TO OR CAUSE SUCH DIFFERENCES. OTHER
FACTORS THAT COULD CONTRIBUTE TO OR CAUSE SUCH DIFFERENCES INCLUDE, BUT ARE NOT
LIMITED TO, UNANTICIPATED DEVELOPMENTS IN ANY ONE OR MORE OF THE FOLLOWING
AREAS: ENVIRONMENTAL ISSUES, GOVERNMENT REGULATIONS, LABOR COSTS, LIABILITY AND
INSURANCE, PENDING OR THREATENED LITIGATION AND INVESTIGATIONS, THE DEPENDENCE
ON KEY PERSONNEL, THE OPERATION OF MANAGEMENT INFORMATION AND COMPUTER SYSTEMS
AT THE COMPANY'S CUSTOMERS AND VENDORS, ESPECIALLY AS IT RELATES TO THE YEAR
2000 ISSUE, AND OTHER RISKS FACTORS WHICH MAY BE DETAILED FROM TIME TO TIME IN
THE COMPANY'S SECURITIES AND EXCHANGE COMMISSION FILINGS.
READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON ANY
FORWARD-LOOKING STATEMENTS CONTAINED HEREIN, WHICH SPEAK ONLY AS OF THE DATE
HEREOF. THE COMPANY UNDERTAKES NO OBLIGATIONS TO PUBLICLY RELEASE THE RESULT OF
ANY REVISIONS TO THESE FORWARD-LOOKING STATEMENTS THAT MAY BE MADE TO REFLECT
EVENTS OR CIRCUMSTANCES AFTER THE DATE HEREOF OR TO REFLECT THE OCCURRENCE OF
UNEXPECTED EVENTS.
ITEM 1. DESCRIPTION OF BUSINESS.
GENERAL
Diversified Senior Services, Inc. (the "Company") was founded to focus
on the development and management of low and moderate income senior housing and
assisted living facilities. Management believes that there is a growing demand
for senior housing developed for the low and moderate income frail elderly,
specifically in the Company's targeted areas of smaller cities and towns
throughout the Midatlantic and Southeast. Although the Company has been
operating for less than three 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 was formed in May 1996 as a wholly owned subsidiary of
Taylor House Enterprises, Limited ("THE") and began operations in July 1996 when
THE exchanged all of the stock of its wholly owned subsidiary Residential
Properties Management ("RPM") for Company common stock. THE is a privately-held
corporation controlled by the Company's senior management. RPM was formed in
1989 to manage low and moderate income housing developed by RPM affiliates.
Diversified completed its initial public offering in January 1998 and is quoted
under the symbol DISS on the Nasdaq Small Cap Market.
In August 1996, the Company started a licensed home care agency in
Raleigh, North Carolina providing personal care services to supplement the
services provided at its concentration of senior housing properties located
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in Eastern North Carolina. In addition, the Company began development of its
60-unit assisted living prototype, explored strategic alliances with nonprofit
organizations with interest in providing quality assisted living facilities for
the low and moderate income frail elderly and began locating sites for future
development. These activities continued during 1998 with the addition of a
30-unit independent senior housing product.
The Company began construction on five 60-unit assisted living
residences and two 30-unit senior housing residences during 1998. Construction
of 60-unit facilities located in Mocksville and Hamlet North Carolina is
expected to be completed in May 1999. Completion of 60-unit facilities in
Cherryville, Rocky Mount and Goldsboro North Carolina is expected by the end of
1999. The first 30-door residences in Pittsboro and Kinston North Carolina are
scheduled to open in the fall of 1999.
In October 1998 the Company began managing an assisted living property
in South Boston, Virginia for an affiliated owner. The property, completed in
April 1998, is licensed for up to 64 residents but is configured for 43
residents.
In addition to the properties described above, at December 31, 1998,
the Company's development pipeline included four additional 60-unit sites and
five additional 30-unit sites under Company control and with positive
feasibility studies. The Company has identified sites in nine additional markets
with positive feasibility studies completed. The Company is also exploring the
conversion to assisted living of two residential floors in one existing
subsidized senior housing complex managed by the Company.
It is anticipated that of the seven properties currently under
construction, four will be owned by a nonprofit organization which will purchase
the properties using tax-exempt bond or FHA-insured financing. Prior to the
closing of the applicable financing, the properties are owned by THE. The
remaining three properties will continue to be owned by THE and operated by the
Company until operations are stabilized. THE is providing the Company with
off-balance sheet financing for these properties, commonly referred to as "black
box" financing. However, unlike other black box arrangements, THE does not
expect to profit from the financing arrangement, except from the benefits of tax
deferral during development and fill-up. The Company has the right to purchase
the residences at THE's effective cost, which cannot exceed fair market value.
As of December 31, 1998, the Company manages 51 residences, consisting
of approximately 2,079 units located in four states, North Carolina,
Pennsylvania, Virginia and West Virginia. Management contracts covering these
units have initial terms of one to three years, with varying renewal provisions.
The Company controls 16 facilities, representing approximately 869 units,
through direct ownership of management rights and through control of management
rights by an affiliate. Currently management fees provide the majority of the
Company's revenues. The Company also provides approximately 1,300 hours of home
care services per month.
The Company intends to grow through internal development of facilities
and through acquisitions. The Company's internal growth program will be focused
on developing and operating 60-unit assisted living facilities and 30-unit
independent senior housing residences. In addition to developing these new
facilities, the Company will consider acquiring a number of facilities that it
currently operates, but does not own and acquiring existing senior housing
properties and assisted living facilities, or the lease rights to them, from
independent third parties. It is management's intention to cluster all of these
facilities in order to capture the benefits of scale. The Company expects its
future senior housing residences to serve as the foundation to provide a
continuum of care for low to moderate income senior citizens.
The Company specializes in creating affordable community living
alternatives for seniors with fixed incomes. The goal is to offer a continuum of
senior living arrangements: apartments managed specifically for the housing
needs of elderly persons; enhanced housing providing additional services for
convenient, worry free living; and, finally, assisted living residences when a
greater level of support is necessary.
The Company's 30-unit independent living residences, known as
"Somerset House," provide residents 24-hour security and emergency call system,
housekeeping, linen service, nutritious meals and activities. Each Somerset
House is designed as a large house compatible in style with, and situated in, a
small town, residential neighborhood in close proximity to community resources
such as churches and the public library. Each house is
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limited to 30 private apartments to assure a warm, home-like atmosphere. Each
apartment has a bedroom area, a living area, a Pullman style kitchen and a
private bath.
The Company's 60-unit assisted living residences, known as "Somerset
Court," supplement the services provided in an independent setting by providing
personal care services, including medication monitoring, dressing, grooming,
mobility, home management and case management. Somerset Courts provide a
comfortable home-like environment with a range of common areas to accommodate
both large gatherings and small, more intimate groups. Each resident has a
furnished, fully carpeted living area with separate entrance and temperature
control.
The Company has applied for trademark protection for both its Somerset
House and Somerset Court service marks.
ORGANIZATION
The Company is organized into two divisions: (i) developing and
acquiring assisted living facilities and senior housing residences and (ii)
managing assisted living facilities, senior housing residences and apartments,
primarily for the elderly.
DEVELOPMENT DIVISION
The Company has designed a 60-unit prototype assisted living residence
for development primarily in communities with a population under 75,000 and a
30-unit senior housing residence prototype with services for development
primarily in smaller communities with approximately 600 individuals in the
targeted population within the determined market area. The targeted resident for
the 60-unit residence 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. The target resident for the 30-unit
residence is a moderate income, elderly individual who wants the security and
convenience of non-personal care services (meals, housekeeping, linen service,
24 hour security and social interaction). 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 Midatlantic and Southeast, especially in rural areas.
Generally, 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 and senior
housing 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 (4 to 6
months); (b) construction (9 to 12 months); and (c) fill-up (3 to 9 months). The
Company intends to utilize both corporate and on-site marketing teams and
anticipates a period of 3 to 9 months to fill-up a location. With respect to the
60-unit prototype, management anticipates some private pay residents, but
intends to develop properties that can be profitable with only public pay
residents.
As of December 31, 1998, the Company has seven facilities under
construction, nine sites under development and nine sites identified in markets
with positive feasibility studies completed. These sites are located in North
Carolina, South Carolina and Virginia. The Company intends to maintain a
geographic focus in North Carolina for its 60-unit assisted living facilities,
developing approximately two to four facilities at a time. The Company will
focus on smaller communities in North Carolina, South Carolina and Virginia for
the 30-unit senior housing residence, which will not currently qualify for
public assistance. In the future, the Company plans to advance into surrounding
states, maintaining the same focus on small to mid-sized communities with a
relatively large low and moderate income elderly population. Turnkey costs,
including all development fees to the Company, for the 60-unit prototype are
estimated to average $3,123,000 for the first five projects and $2,906,000 for
the first eight 30-unit residences.
The Company has entered into two development agreements with a
non-profit housing entity that provide for the development of newly constructed
assisted living residences. One agreement relates to tax exempt bond financed
properties and the other agreement relates to FHA-insured financed properties.
Once a potential site is located, feasibility and due diligence are completed;
the prospective non-profit owner will make a final commitment to the site,
subject to financing. The Company is entitled to a base development fee equal to
10% of total
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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.
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, the Company performs 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.
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. 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 an existing
apartment complex to licensed assisted living.
MANAGEMENT DIVISION
Affiliates of the Company have been in the business of developing and
managing senior housing for more than 20 years. Of the 51 residences currently
managed by the Company, the Company controls 16, representing 869 units, either
through the direct ownership of management rights or through ownership by an
affiliated entity. The remaining 35 complexes, representing 1,210 units, are
owned by third parties. Approximately 31% of the complexes are owned by
non-profit organizations.
The Company manages housing in North Carolina, Pennsylvania, Virginia
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
("RD," formerly the Farmer's Home Administration). 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 RD
management contract has a three-year term and must be executed every three
years. The Company's conventional and assisted living management contracts have
initial terms of one to five years, with varying renewal provisions. The
Company's history of contract renewal has been excellent.
All developed assisted living and senior housing residences will be
managed either under 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,
with renewals for a minimum of three years. In addition, the Company will have a
right of first refusal to purchase any project.
Management views assisted living and senior housing 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, frail elderly market. The Company
is currently providing home care services to low and moderate income frail
elderly residents at 10 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 medication monitoring, dressing, grooming, personal hygiene,
mobility, home management, chorework and case management. It is the Company's
intention to continue to offer personal care services to its residents either
through its own staff, when economically prudent, or through quality third party
operators.
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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 will be 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 and senior housing
residences. However, perhaps most important for cross-marketing purposes,
through its apartment management division the Company has established
relationships with over a 1,000 low and moderate income elderly residents. These
relationships give the Company a unique platform from which to further its
assisted living operations.
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 viability of family care. The primary consumers of assisted living
and senior housing 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 which have greater financial resources than the Company.
There is increasing demand for such facilities due to the increasing population
of elderly in the United States. Growth in this industry is dependent upon the
availability of government financing and subsidies which are currently being
restricted and undergoing reassessment and change. The Company does not
anticipate substantial near-term growth in this part 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.
Assisted living facilities are generally subject to less regulation than other
licensed health care providers are, but more regulation than standard congregate
care or independent living facilities. However, the Company anticipates that the
states and the federal government will impose additional regulations and
licensing requirements. Currently, North Carolina requires licenses to provide
the assisted living services provided by the Company but not a certificate of
need. In August 1997, the North Carolina General Assembly enacted a twelve-month
moratorium on newly licensed beds while licensure procedures are studied to
determine whether the existing licensure procedures need to be modified. In 1998
the moratorium was extended for another twelve months. It is anticipated that
the moratorium will result in stricter licensure procedures in North Carolina.
The Company has received confirmation from the Division of Facilities Services
that its nine feasible sites are exempt from the moratorium.
North Carolina also has regulations applicable to facilities that are
not technically assisted living providers but still offer substantially similar
services. The regulations primarily require a notice filing with the state and
are intended to assure that residents are given sufficient information to choose
providers of personal care services that the facility is not licensed to
provide. Although the Company does not believe its 30-unit senior housing
residence is subject to this regulation, the Company may elect to register its
30-unit facilities until the applicability of the regulation is clarified.
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
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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 North Carolina assisted living facilities are anticipated to
derive a substantial portion of their revenues from the Division of Social
Services ("DSS") and the Division of Medical Assistance ("DMA"), both under the
North Carolina Department of Health and Human Services. DSS administers the
state program for Special Assistance for Adults ("SA"), and DMA administers the
Medicaid program including the reimbursement to assisted living facilities for
personal care assistance ("ACH/PC"). In general, persons with incomes under
$12,058 per year are eligible to receive payments under SA and ACH/PC. DSS
applies a sliding scale to determine the percentage of SA it will pay, with the
resident being responsible for any remaining portion.
The North Carolina General Assembly sets the SA and ACH/PC rates.
Effective October 1, 1998, the basic SA rate was set at $956 per month and the
basic ACH/PC rate was set at $9.15 per day. For residents that require a higher
level of care and are deemed to be "enhanced care" residents the ACH/PC rate
paid in addition to basic SA is as follows:
Extra assistance with eating $18.12 per day
Extra assistance with toileting $12.35 per day
Extra assistance with eating and toileting $21.35 per day
"Enhanced care" residents are those who need extensive assistance or are totally
dependent on other persons for eating, toileting or both.
Finally, an allowance of $ .50 per day is paid by Medicaid to fund
medically related resident transportation.
Subsidized apartments are also subject to substantial regulations
primarily from HUD/FHA and the Rural Development Agency, as applicable. In most
states, subsidized apartments are also subject to state and local building and
fire codes. Approximately 56% 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 contract affecting the Company's managed properties is up for
renewal until 1999. The effect of the expiration of an individual property's HAP
contract without renewal varies and depends on the HUD determined fair market
rent for the specific market area.
Providers of personal care services in North Carolina must obtain a
license from the Division of Facility Services of the North Carolina Department
of Health and Human 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
("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 $12.13 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 activities of daily living, 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 1997 and 1998
were funded 90% and 48%, respectively by the Medicaid PCS program.
ENVIRONMENTAL MATTERS
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
Company's activities are not anticipated
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to generate any environmentally controlled substance. With respect to the
Company's development activities, a Phase I environmental report is obtained on
all potential sites before acquisition. Although the Company is not aware of any
material environmental issues affecting any property it operates, as a
developer, owner and/or manager of real property environmental concerns could
impact the Company's operations.
EMPLOYEES
As of December 31, 1998, the Company had 145 employees, 54 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.
ITEM 2. DESCRIPTION OF PROPERTIES.
CORPORATE OFFICES
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 one and one-half
years.
The Company leases office space in Raleigh, North Carolina for both a
regional property team and the home care agency. The leased premises are
controlled by an affiliate and there is no written lease. The current monthly
rent equals the cost of the utilities used by the Company. The Company leases
office space in Port Royal, Pennsylvania from an unrelated third party for a
regional property team. The lease is for a term of one year.
The Company leases office space in New York, New York from an
unrelated third party for a its subsidiary, DSS Funding, Inc. Rent payments are
approximately $2,200 per month, on a month-to-month basis. There is no written
lease.
PROPERTIES MANAGED
<TABLE>
<CAPTION>
Property Name City State #Units
Properties Currently Under Management
<S> <C> <C> <C> <C>
(1) Adelaide Walters Chapel Hill NC 24
(1) Agape Homes Valdese NC 30
(1) (2) Balsam Grove Brevard NC 40
(1) (2) Cape Fear Wilmington NC 89
(1) Dogwoods Farmville NC 24
(1) (2) Duplin County Housing for the Elderly Rose Hill NC 85
Fiesta Drive Properties Greensboro NC 8
(1) Hampton Woods I Jackson NC 15
(1) Hampton Woods II Jackson NC 10
(1) Heritage Homes Henderson NC 50
(1) Hobart Jackson Estates Reidsville NC 36
(2) Hoffman Homes Gastonia NC 81
In-Chu-Co Chapel Hill NC 79
(1) Jackson Village Sylva NC 24
(1) Kirkwood I Goldsboro NC 100
(1) Kirkwood II Goldsboro NC 40
(1) Lion's Senior Village Shelby NC 40
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Morehead Glen Durham NC 20
Oaks at Spring Garden Greensboro NC 192
Point South Greensboro NC 23
(1) Prince Court Rocky Mount NC 30
(1) (2) RM Wilson Rocky Mount NC 50
Rolling Hills Townhomes Salisbury NC 61
(1) Scott Mitchell I Norlina NC 14
(1) Scott Mitchell II Norlina NC 16
(1) (2) Sir Walter Raleigh NC 140
The Summit at Cullowhee Cullowhee NC 48
The Summit at Cullowhee Cullowhee NC 48
(2) University Apartments Durham NC 114
(1) Wesbury Concord NC 50
(1) Wesbury Plaza Concord NC 40
West Park Durham NC 10
(2) Yadkin Trail Homes Raeford NC 48
Big Valley Apartments Reedsville PA 12
Brown Apartments Reedsville PA 20
Cedar Acres I & II Mifflintown PA 32
(2) Centre Estates I Boalsburg PA 40
(2) Centre Estates II Boalsburg PA 40
East Berlin Manor Apartments East Berlin PA 19
Evergreen Pointe Danville PA 48
(2) Fayette Acres McAllisterville PA 10
Findlay Park Mercersburg PA 15
Middlecreek Village Kreamer PA 12
(1) (2) North Street Manor Mifflintown PA 30
Randall Brake Apartments Mercersburg PA 4
(2) Rockwood Gardens II Rockwood PA 10
(1) (2) Southview Apartments McAllisterville PA 32
(1) Susquehanna Apartments Duncannon PA 28
(1) (2) Tuscarora Acres I Port Royal PA 17
(1) Tuscarora Acres II Port Royal PA 12
(2) (3) Somerset Court of South Boston South Boston VA 43
(1) Senior Square Elizabeth WV 24
(3) 60 Unit Properties Under Construction
(2) Somerset Court of Mocksville Mocksville NC 60
(2) Somerset Court of Hamlet Hamlet NC 60
(2) Somerset Court of Rocky Mount Rocky Mount NC 60
(2) Somerset Court of Goldsboro Goldsboro NC 60
(2) Somerset Court of Cherryville Rocky Mount NC 60
8
<PAGE>
(130 Units Under Construction
(2) Somerset House of Pittsboro Pittsboro NC 30
(2) Somerset House of Kinston Kinston NC 30
NOTES
(1) Senior housing
(2) Controlled by an affiliate
(3) Assisted living properties
</TABLE>
INVESTMENT POLICIES
The Company's developed properties are generally owned by affiliates
or by third party nonprofit entities. The Company has the right to buy each
developed properties owned by an affiliate at the affiliate's cost, but not more
than fair market value, at any time after the Company determines that the
property has achieved stabilized operations. The definition of "stabilized
operations" is determined by the Company from time to time in its sole
discretion.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKET INFORMATION
Effective January 10, 1998, the Common Stock of the Company was
approved for quotation on the Nasdaq Small Cap market under the symbol "DISS."
Accordingly, the Company's Common Stock did not trade during the year ended
December 31, 1997. The following table summarizes the high and low sales price
for the year ended December 31, 1998.
QUARTER HIGH LOW
First $6.125 $3.875
Second $5.375 $3.500
Third $5.938 $3.688
Fourth $5.063 $3.000
9
<PAGE>
HOLDERS OF RECORD
There were approximately 14 shareholders of record of Common Stock as
of March 3, 1999. This number does not include beneficial owners holding shares
through nominees or "street" names. The Company believes that it has
approximately 500 beneficial holders of Common Stock.
DIVIDEND POLICY
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. 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.
ITEM 6. 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.
OVERVIEW
Diversified Senior Services, Inc. (the "Company") was formed in May
1996 as a wholly owned subsidiary of Taylor House Enterprises, Limited ("THE")
and began operations in July 1996. The Company was capitalized with $100 and its
parent, THE, received 100 shares of common stock. THE provided working capital
to the Company during its start-up phase. Upon formation, the Company agreed to
take responsibility for deferred salaries and bonuses for certain executives of
THE for the period January 1, 1996 through June 30, 1996.
In July 1996, THE exchanged all of the stock of its wholly owned
subsidiary Residential Properties Management, Inc. ("RPM") for 2,277,678 shares
of the Company. RPM was formed in March 1989 to manage government subsidized
multi-family and elderly residential rental apartments. Effective June 30, 1997,
THE returned 477,778 shares of common stock to the Company which it retired
leaving 1,800,000 shares of common stock issued and outstanding. On January 14,
1998, the Company completed its initial public offering of 1,500,000 shares of
common stock On February 16, 1998, the Company formed a wholly-owned subsidiary,
DSS Funding, Inc. ("DSSF"), a North Carolina corporation, for the purpose of
securing permanent financing for the properties which the Company develops or
acquires for third party owners. On July 22, 1998, the Company formed a wholly
owned subsidiary, Diversified Senior Services of Virginia, Inc. ("DSSVA"), a
Virginia corporation, for the purpose of conducting development and management
of properties in Virginia.
The Company anticipates a moderate growth in the number of apartment
units managed and also expects that income will increase due to inflationary
effects on rents. All personnel located at the apartments who manage the
apartments and perform maintenance are employees of the Company. However, the
apartments reimburse the Company for the services of the on site personnel. The
Company anticipates a moderate growth in reimbursement income as a result of
increases in salaries of on site personnel and an increase in the number of
apartment complexes under management.
The Company began offering home care services in August 1996 at
selected apartment locations. Management anticipates that growth in home care
service income will continue at a moderate, controlled pace as it begins to
offer these services to elderly residents in other apartments that it manages.
However, management does not expect the income from these services to be
material with respect to the total income of the Company over the next several
years.
The Company is in the process of developing 60-unit assisted living
residences in North Carolina and 30-unit independent senior housing residences
with services throughout the Southeast. As of February 28, 1999, the Company has
five 60-unit properties in the construction process, and an additional four
sites approved under the state's moratorium on new assisted living facilities.
The construction process is estimated to be nine to twelve months for each
60-unit assisted living residence. The Company began managing an assisted living
property for an affiliated owner
10
<PAGE>
in October 1998. The property, located in South Boston, Virginia, is licensed
for up to 64 residents but currently configured for 43 residents. It was
completed in April 1998. The Company will provide working capital to this
facility to cover operating deficits while the Company is pursuing permanent
financing. The permanent financing involves a transfer of ownership to a not for
profit and provides for repayment of the working capital advances made by the
Company. With respect to the 30-unit residences, the Company has two sites under
construction and an additional five sites under control, all of which have
positive feasibility. The sites are in Virginia, South Carolina and North
Carolina. Once construction of these 60-unit and 30-unit residences is
completed, the Company will begin to recognize management fee income for those
properties. The Company is currently negotiating the private placement of
convertible preferred stock which will serve as the equity component for its
development plan. However, there can be no assurance that the Company will
consummate such financing, and if alternative financing cannot be arranged on
terms acceptable to the Company, the Company may not be able to complete its
current development plan on schedule. Management believes that in the future the
development and management of assisted living facilities and residences for the
elderly will provide the vast majority of the Company's revenues and profits.
The Company is developing 30-unit and 60-unit properties for third
party owners. The Company recognizes development fee income on the percentage of
completion basis. Development costs are paid by the Company as incurred. Other
development costs are reimbursed by the purchaser when the property is sold. If
a site is abandoned, all development costs associated with that property are
written off.
Most of the operating expenses of the Company are related to the
personnel directly performing the management services and the corporate
management staff. Between 70% and 90% of the expenses are for salaries, benefits
and payroll taxes. The remaining expenses are primarily administrative expenses
that support the activities of the personnel such as travel, rent, telephone and
office expenses. Since the Company's inception, the operating staff increases
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, RPM and DSSF are incorporated in North Carolina, and DSSVA is
incorporated in Virginia and, as C corporations, file their federal income tax
returns as part of a consolidated group. Prior to the initial public offering,
DSS and RPM filed their federal income tax returns as part of THE's consolidated
group. An income tax benefit has been recorded in 1996 and 1997 since the losses
of DSS and RPM were applied to income in THE's consolidated group. DSS, RPM and
DSSF file separate state returns since state income tax regulations do not
permit filing consolidated returns.
RESULTS OF OPERATIONS
The Year Ended December 31, 1998 Compared to the Year Ended December
31, 1997
INCOME
Total income increased $1,125,105, to $3,644,157 for the year ended
December 31, 1997 from $2,519,052 for year ended December 31, 1997. The
increases were primarily due to development fees recognized in 1998 and an
increase in home care income, while management fees and reimbursement income
decreased.
MANAGEMENT FEES. Management fees decreased $87,600 to $770,999 for
1998 from $858,599 for the year ended December 31, 1997. The Company stopped
managing two large non-elderly apartment properties that did not fit into the
long term goals of the Company. Management fees from these properties were
included in 1997 fees, but not in 1998 fees. On July 31, 1998 the Company sold
the management rights for 361 units, primarily multi-family, which generated
management fees of approximately $10,500 per month. The Company expects growth
in fee income as it begins to manage properties currently in development.
REIMBURSEMENT INCOME. Reimbursement income decreased $75,371 to
$1,379,598 for 1998 from $1,454,969 for the year ended December 31, 1997. The
decrease was primarily the result of having fewer employees and fewer sites. The
Company no longer managed the two large, non-elderly sites in 1998 and,
beginning July 31, 1998, the 361 units whose management rights were sold.
Offsetting the effect of the decrease was reimbursement
11
<PAGE>
income received from the management of the assisted living facility in Virginia
during the fourth quarter. The Company expects increases in reimbursement income
as the number of properties under management increases.
DEVELOPMENT FEES. Development fees of $1,135,779 were recognized for
the year ended December 31, 1998. The income represents 60% of the total
estimated development fees of five 60-unit facilities and two 30-unit residences
with construction starts during the second, third and fourth quarters.
Development fees also include 20% of the total estimated development fee of one
60-unit facility for which the land has been acquired. The Company expects
development fee income to increase as the 60-unit and 30-unit properties begin
to roll out.
HOME CARE FEES. Home care fees increased $142,587 to $328,469 for 1998
from $185,882 for 1997. The Company increased the hours charged by increasing
the number of individuals served. The Company provides care for residents of the
apartments for the elderly managed by the Company and for others. The Company
expects moderate growth over time in home care fees.
OPERATING EXPENSES
Operating expenses increased $399,437 to $3,822,542 for the year ended
December 31, 1998 from $3,423,105 for the year ended December 31, 1997.
Personnel related expenses decreased, while administrative expenses increased;
the net change was an increase.
PERSONNEL EXPENSE. Personnel expense decreased $22,269 to $2,880,996
for 1998 from $2,903,265 for 1997. Site related personnel expense decreased
$75,371 for the year due to having fewer employees on site and no longer
managing the two non-elderly apartment sites and the 361 units whose management
rights were sold July 31, 1998, offset by the increase in personnel expense at
the Virginia facility, mentioned above. There were increases in both the number
of corporate personnel and their rate of pay in 1998 compared to 1997. The
Company expects increases in personnel expense in future periods due to
increased management activity.
ADMINISTRATION AND OTHER EXPENSES. Administration and other expenses
increased $414,519 to $871,253 in 1998 from $456,734 in 1997. The increases
reflect increased activity in home care, the assisted living development
activity, and expenses related to operating the public company. The Company
expects further increases in administrative expenses as the number of assisted
living properties managed increases.
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization
expense increased $7,187 to $70,293 in 1998 from $63,106 in 1997. The Company
expects modest increases in depreciation expense due to the purchase of office
furniture and equipment used by management personnel.
OTHER INCOME AND EXPENSES. Interest expense of $5,678 and $134,536 was
incurred for the years ended December 31, 1998 and 1997, respectively. The
interest expense was incurred on a bank loan, which was paid off with proceeds
from the equity offering completed in January 1998. The Company earned $166,268
in interest income from cash and cash equivalents during the year ended December
31, 1998, and had an unrealized gain of $16,061 on funds held for development.
INCOME TAX BENEFIT. The Company did not record an income tax benefit
for the year ended December 31, 1998 since the losses of the Company can only be
carried forward and applied to future income of the Company. For the year ended
December 31, 1997, the Company recorded a tax benefit of $269,900 since the
losses of the Company and its subsidiary were used to reduce prior period income
of THE and its consolidated group. Due to the public company status of the
Company, the Company and its subsidiaries were no longer consolidated with THE
for federal income tax purposes effective January 14, 1998.
NET LOSS. The net loss decreased $750,894 to $17,795 ($.01 per share)
for the year ended December 31, 1998 from $768,689 ($.38 per share) for the year
ended December 31, 1997. The decrease was due to the net effect of a decrease in
operating loss of $725,668, an increase in interest income of $166,268, a
decrease in interest expense of $128,858 and a decrease in the income tax
benefit of $269,900 as described above.
12
<PAGE>
FINANCIAL CONDITION
DECEMBER 31, 1998 COMPARED TO DECEMBER 31, 1997
The Company had current assets of $1,056,003 on December 31, 1998 and
$643,311 on December 31, 1997. The primary current asset on December 31, 1997
was offering expenses of $425,821, which were incurred to prepare for the
offering of 1,500,000 shares of common stock completed during the quarter ended
March 31, 1998. After the completion of the offering, these expenses were
charged to equity. Also following the completion of the offering, the Company
had approximately $3.5 million to use in the development activity. On December
31, 1998 the balance was reduced to $819,074 due to the Company's increased
development activity. Accounts receivable increased from $92,878 to $113,921 due
to increased activity in home care and prepaid expenses increased from $12,280
to $90,858 due primarily to the payment of directors and officers insurance
premiums. The Company expects receivables to increase as the Company increases
management of apartment units and assisted living residences.
Furniture and equipment net of depreciation increased to $90,201 from
$56,487 due to purchases of computer equipment for corporate personnel of
$86,095. Depreciation expense for the year ended December 31, 1998 was $52,381.
Intangible assets net of amortization decreased from $114,779 to $43,235 due to
the July 31, 1998 sale of management rights and amortization expense. Other
assets decreased from $114,779 to $43,235 due to the July 31, 1998 sale of
management rights.
Development costs increased to $730,604 at December 31, 1998 from
$241,433 at December 31, 1997 due to continuing development activities with
respect to assisted living residences and residences with services. Development
costs will either be recouped with the successful completion of a property or
written off if a site is abandoned.
Development fees and costs due from properties currently held by THE
was $2,603,656 at December 31, 1998. The increase is due to development fees and
reimbursable costs on properties currently being developed owed to the Company.
Accounts receivable-affiliates increased to $489,669 at December 31,
1998 from $310,407 at December 31, 1997. The increase is the net effect of
transactions between DSS and the majority stockholder, including the tax benefit
to THE's operating losses in 1997.
Total liabilities decreased $2,670,461 to $431,542 at December 31,
1998 from $3,102,003 at December 31, 1997. Accounts payable and accrued expenses
decreased to $239,719 from $652,445 primarily due to the payment of offering
expenses that were accrued at December 31, 1997. The bank loan and accrued
interest were paid off during the quarter ended March 31, 1998 and the deferred
salaries of $577,508 and deferred bonuses of $42,582 were also paid off during
the first six months. Proceeds from the equity offering provided the funds to
pay the liabilities referred to above.
Shareholder's equity increased to $4,581,826 at December 31, 1998 from
a deficit of $1,735,586 at December 31, 1997. The increase was the net effect of
the increase in common stock net of issue costs of $6,319,146, an unrealized
gain on investment securities of $16,061 and a $17,795 increase in accumulated
deficit.
LIQUIDITY AND CAPITAL RESOURCES
The Company has operated, and expects to continue to operate, on a
negative cash flow basis due to start-up expenses and length of the development
cycle. Currently, the Company's primary cash requirements include covering
operating deficits and development expenses related to the development,
construction and fill-up of 60-unit assisted living residences and 30-unit
independent senior housing residences with services. The Company had relied upon
its parent, THE, and its bank to provide it with operating cash until the
initial public offering was completed January 14, 1998. After January 14, 1998,
the Company has not relied upon, nor does it expect to rely upon, THE for
assistance in bank financings.
The net proceeds of the public offering were used to pay off the
outstanding balance under the bank line of credit, to provide $3.5 million in
development working capital for the assisted living projects and for general
13
<PAGE>
corporate purposes. The Company anticipates that the net proceeds from the
public offering, together with construction funds available for each facility
will be insufficient to fund its operations for the next twelve months, and that
the Company's current development plans will require additional debt or equity
financing during the second quarter of 1999. The Company currently has several
sources of potential funding and does not anticipate that liquidity demands will
not be met. There can be no assurance that the Company will be able to obtain
financing on a favorable or timely basis. The type, timing and terms of
financing selected by the Company will depend on its cash needs, the
availability of other financing sources and the prevailing conditions in the
financial markets.
The Company is the guarantor on the construction loans for the
properties currently under construction owned by THE.
INFLATION AND INTEREST RATES
Inflation has minimal impact on the daily operations of the Company.
Increases in salaries and administrative expenses are offset by increases in
management fees that are computed as a percentage of rent and resident service
fees. Increases in resident service fees may lag behind inflation since the
amount of the fee is based on a cost reimbursement by public sources. Except for
the lag time, however, the Company expects the reimbursement to keep pace with
inflation.
The primary concern regarding inflation is 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.
YEAR 2000
Many currently installed computer systems and software are coded to
accept only two digit entries in the date code filed. Beginning the year 2000,
these date code fields will need to accept four digit entries to distinguish
twenty-first century dates from twentieth century dates. As a result, within the
next eighteen months, computer systems and/or software used by many companies
may need to be upgraded to comply with such "Year 2000" requirements.
The Company has developed plans to modify its computer information
systems enabling proper processing of data relating to the year 2000 and beyond.
The Company has been informed by Electronic Data System ("EDS"), the paying
agent for the North Carolina Medicaid program, that the National Electronic
Claims Submission ("NECS") software developed by EDS for electronic claims
submission by North Carolina Medicaid providers, is not currently Year 2000
compliant. Compliance is anticipated by September 1999. Medicaid revenues do not
currently constitute a material portion of the Company's revenues; but as
additional assisted living residences are added to the Company's management
portfolio, the Medicaid revenues will increase. All other computer programs
currently in use by the Company have been upgraded to be Year 2000 compliant.
While there can be no assurance that Year 2000 matters will be
satisfactorily identified and resolved, the Company currently believes that Year
2000 issues will not have a material adverse effect on the Company. The
possibility exists that isolated incidents of a Year 2000 nature could affect
individual properties managed by the Company, but the Company does not
anticipate that such incident(s) would have a material impact on the Company's
business or operations. The Company is in the process of contacting customers,
vendors and service providers to determine which of them is affected by the year
2000 problem, and to what extent, in order to assess the potential impact on the
Company.
CERTAIN ACCOUNTING CONSIDERATIONS
SFAS NO. 123
In October 1995, FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"). SFAS No. 123 establishes financial accounting
and reporting standards for stock-based employee compensation plans. Those plans
include all arrangements by which employees receive shares of stock or other
equity instruments of the employer or the employer incurs liabilities to
employees in amounts based on the price of
14
<PAGE>
the employer's stock. Examples are stock purchase plans, stock options,
restricted stock awards, and stock appreciation rights. This statement also
applies to transactions in which an entity issues its equity instruments to
acquire goods or services from non-employees. Those transactions must be
accounted for, or at least disclosed in the case of stock options, based on the
fair value of the consideration received or the fair value of the equity
instruments issued, whichever is more reliably measurable. The accounting
requirements of SFAS No. 123 are effective for financial statements for fiscal
years beginning after December 15, 1995, or for an earlier fiscal year for which
SFAS No. 123 is initially adopted for recognizing compensation cost. The
statement permits a company to choose either a new fair value-based method or
the current APB Opinion No. 25 intrinsic value-based method of accounting for
its stock-based compensation arrangements. The Company adopted its Stock
Incentive Plan effective January 1, 1997. During 1998, the Company granted
47,000 stock options at an exercise price ranging from $4.75 to $5.225, the
market value of the shares at the date of grant. The stock options are 100%
vested and have a five-year term. Warrants for 45,000 shares were issued with a
four-year term, a one-year vesting schedule and exercise prices ranging from
$6.00 to $9.00 per share. Warrants for 50,000 shares have a four-year term, one
year vesting schedule and an exercise price of $6.75 per share. At December 31,
1998, a total of 142,000 stock options and warrants are outstanding, 1,400
common shares have been issued and 356,600 shares are available for granting. At
December 31, 1997, no grants had been made.
ITEM 7. FINANCIAL STATEMENTS.
Reference is made to the Financial Statements, the reports thereon and
the notes thereto, commencing on page F-1 of this report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT.
ITEM 10. EXECUTIVE COMPENSATION.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Part III information will be set forth in the Company's definitive
proxy statement for the Company's 1999 Annual Meeting of Stockholders.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
EXHIBIT NO. DESCRIPTION
3.1 Articles of Incorporation of the Company (as amended).
Incorporated by reference to Exhibit 3.1 to Registration
Statement on Form SB-2 (File No. 333-34367).
3.1(a) Articles of Amendment filed October 6, 1997. Incorporated by
reference to Exhibit 3.1(a) to Registration Statement on Form
SB-2 (File No. 333-34367).
15
<PAGE>
3.1(b) Articles of Amendment filed March 19, 1999 incorporating
Certificate of Designation, Powers, Preferences and Rights of the
Series of Preferred Stock of Diversified Senior Services, Inc. to
be designated 12% Series B Cumulative Convertible Preferred
Stock.
3.2 Bylaws of the Company, as amended. Incorporated by reference to
Exhibit 3.2 to Registration Statement on Form SB-2 (File No.
333-34367).
10.1 Employment Agreement dated as of January 1, 1997 between the
Company and William G. Benton, as amended. Incorporated by
reference to Exhibit 10.1 to Registration Statement on Form SB-2
(File No. 333-34367).
10.2 Employment Agreement dated as of January 1, 1997 between the
Company and Susan L. Christiansen, as amended. Incorporated by
reference to Exhibit 10.2 to Registration Statement on Form SB-2
(File No. 333-34367).
10.3 Employment Agreement dated as of January 1, 1997 between the
Company and G. L. Clark, Jr., as amended. Incorporated by
reference to Exhibit 10.3 to Registration Statement on Form SB-2
(File No. 333-34367).
10.4 Lock-up agreements. Incorporated by reference to Exhibit 10.4 to
Registration Statement on Form SB-2 (File No. 333-34367).
10.5 The Company's 1997 Stock Incentive Plan. Incorporated by
reference to Exhibit 10.5 to Registration Statement on Form SB-2
(File No. 333-34367).
10.6 Employment Agreement dated as of February 1, 1998 between the
Company and Bernard Gawley.
20 Independent Auditors' Report.
21 Subsidiaries of the Company
23 Consent of The Daniel Professional Group, Inc.
24 Powers of Attorney
27 Financial Data Schedule.
(b) Reports on Form 8-K.
None:
16
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
DIVERSIFIED SENIOR SERVICES, INC.
By: /S/ WILLIAM G. BENTON
William G. Benton, Chairman of the Board
and Chief Executive Officer
Date: MARCH 30, 1999
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
SIGNATURE TITLE DATE
/s/ WILLIAM G. BENSON Chairman of the Board and March 30, 1999
- --------------------------- Chief Executive Officer
William G. Benson
/s/ SUSAN L. CHRISTIANSEN Chief Operating Officer March 30, 1999
- --------------------------- and Director
Susan L. Christiansen
/s/ G.L. CLARK, JR. Chief Financial Officer, March 30, 1999
- --------------------------- Treasurer and Director
G.L. Clark, Jr.
/S/ SUSAN L. CHRISTIANSEN Director March 30, 1999
- ---------------------------
Susan L. Christiansen
Attorney in Fact for
Perry C. Craven
/S/ SUSAN L. CHRISTIANSEN Director March 30, 1999
- ---------------------------
Attorney in Fact for
Walter H. Ettinger, Jr.
17
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Diversified Senior Services, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Diversified
Senior Services, Inc. and Subsidiaries as of December 31, 1998 and 1997 and the
related consolidated statements of operations, changes in shareholder's deficit,
and of cash flows for the years ended. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform our audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
As described in Note 5, the Company completed its initial public offering
on January 14, 1998.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Diversified Senior Services, Inc. and Subsidiaries as of December 31, 1998 and
1997 and the consolidated results of its operations and cash flows for the years
then ended in conformity with generally accepted accounting principles.
February 19, 1999
Winston-Salem, North Carolina
F-1
<PAGE>
DIVERSIFIED SENIOR SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $32,150 $78,156
Investments held for development (Note 7) 819,074 -
Accounts receivable--trade 113,921 92,878
Offering expenses - 425,821
Prepaid expenses and other 90,858 46,456
1,056,003 643,311
Furniture and equipment, net (Note 3) 90,201 56,487
Development costs 730,604 241,433
Development fees and costs due from affiliates (Note 2) 2,603,656 -
Accounts receivable--affiliates (Note 2) 489,669 310,407
Other assets 43,235 114,779
------ -------
$5,013,368 $1,366,417
========== ==========
LIABILITIES
Current liabilities:
Accounts payable and accrued expenses $239,719 $652,445
Note payable--bank (Note 4) - 1,637,645
Deferred salaries and bonuses 191,823 811,913
------- -------
431,542 3,102,003
------- ---------
SHAREHOLDERS' EQUITY (DEFICIT)
Preferred stock, no par, authorized 100,000,000 shares;
178,386 issued and outstanding at December 31,
1998 and 1997 891,930 891,930
Common stock, no par, authorized 100,000,000 shares;
3,301,400 shares issued and outstanding at
December 31, 1998 and 1,800,000 at December 31, 1997 6,319,246 100
Unrealized gains on investments (Note 7) 16,061 -
Deemed distribution (1,335,790) (1,335,790)
Accumulated deficit (1,309,621) (1,291,826)
---------- ----------
4,581,826 (1,735,586)
--------- ----------
$5,013,368 $1,366,417
========== ==========
The accompanying notes are an integral part of the financial statements.
</TABLE>
F-2
<PAGE>
DIVERSIFIED SENIOR SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
Income:
<S> <C> <C>
Management fees (Note 2) $770,999 $858,599
Reimbursement income (Note 2) 1,379,598 1,454,969
Development fees (Note 2) 1,135,779 -
Home care fees 328,469 185,882
Other 29,312 19,602
--------- ---------
3,644,157 2,519,052
--------- ---------
Expenses:
Personnel related 2,880,996 2,903,265
Administrative and other 871,253 456,734
Depreciation and amortization 70,293 63,106
--------- ---------
3,822,542 3,423,105
Operating loss 178,385 904,053
Other (income) expenses:
Interest and other income (166,268) -
Interest expense and other 5,678 134,536
--------- ---------
Loss before income tax benefit 17,795 1,038,589
Income tax benefit (Note 10) - (269,900)
--------- ---------
Net loss $17,795 $768,689
========= =========
Net loss per common share $0.01 $0.38
========= =========
Weighted average shares outstanding 3,246,940 2,036,926
========= =========
The accompanying notes are an integral part of the financial statements.
</TABLE>
F-3
<PAGE>
DIVERSIFIED SENIOR SERVICES, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
Unrealized
Preferred Common Preferred Common Gain on Deemed Accumulated
Shares Shares Stock Stock Investments Distribution Deficit Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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 year ended
December 31, 1997 - - - - - - (768,689) (768,689)
-------- --------- -------- --------- ------- ------------ ------------ -----------
Balance, December 31, 1997 178,386 1,800,000 $891,930 $100 $ - $(1,335,790) $(1,291,826) $(1,735,586)
-------- --------- -------- --------- ------- ------------ ------------ -----------
Issuance of common stock - 1,501,400 - 6,319,146 - - - 6,319,146
Unrealized gains on investments - - - - 16,061 - - 16,061
Net loss for the year ended
December 31, 1998 - - - - - - (17,795) (17,795)
-------- --------- -------- --------- ------- ------------ ------------ -----------
Balance, December 31, 1998 178,386 3,301,400 $891,930 $6,319,246 $16,061 $(1,335,790) $(1,309,621) $4,581,826
======= ========= ======== ========== ======= =========== =========== ==========
The accompanying notes are an integral part of the financial statements.
</TABLE>
F-4
<PAGE>
DIVERSIFIED SENIOR SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years ended December 31, 1998 and 1997
Increase (Decrease) in Cash and Cash Equivalents
<TABLE>
<CAPTION>
1998 1997
Operating activities:
<S> <C> <C>
Net loss $(17,795) $(768,689)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 70,293 63,106
Gain on sale of management contracts (7,700) -
Changes in operating assets and liabilities:
Accounts receivable (21,043) 5,521
Accounts receivable, affiliates (25,525) -
Development fees receivable (1,135,779) -
Prepaid expenses (17,870) 6,588
Accounts payable, trade 25,066 52,452
Accounts payable, affiliates 38,411 (215,776)
Interest payable (33,070) 26,483
Deferred salaries and bonuses (620,090) 383,625
---------- --------
Total adjustments (1,727,307) 321,999
---------- --------
Net cash used by operating activities (1,745,102) (446,690)
---------- --------
Investing activities:
Increase in investments held for development (803,013) -
Purchase of furniture and equipment (84,848) (4,994)
Development costs paid (456,584) (104,256)
Advances to affiliate for properties in development (1,467,877) -
Sale of management contracts 61,851 -
Other (50,520) 35,250
---------- --------
Net cash used by investing activities (2,800,991) (74,000)
---------- --------
Financing activities:
(Repayment of) proceeds from borrowings (1,729,575) 797,953
Proceeds from issuance of common stock, net 6,446,810 -
Offering expenses prepaid - (127,664)
Advances (to) and repayments from affiliates (192,148) (101,575)
Other (25,000) (1,000)
---------- --------
Net cash provided by financing activities 4,500,087 567,714
---------- --------
Net increase (decrease) in cash (46,006) 47,024
Cash and cash equivalents - beginning 78,156 31,132
---------- --------
Cash and cash equivalents - ending $32,150 $78,156
========== =========
Cash payments for interest $38,748 $80,861
========== =========
For supplemental schedule of non-cash investing and financing activities, see Note 2.
The accompanying notes are an integral part of the financial statements.
</TABLE>
F-5
<PAGE>
Diversified Senior Services, Inc.
Notes to Consolidated Financial Statements
December 31, 1998
NOTE 1: ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Diversified Senior Services, Inc. (the "Company"), a North Carolina corporation
is a public company listed on Nasdaq Small Cap market. It is a growth company
focused on the development, acquisition and management of apartments,
independent living apartments with services and assisted living residences for
low and moderate-income seniors. The development, acquisition and management
services are performed for both related and unrelated third party property
owners. The Company currently operates in the Midatlantic and Southeast sections
of the country. It was founded as a wholly-owned subsidiary of Taylor House
Enterprises ("THE") on May 17, 1996. On January 14, 1998, the Company completed
its initial public offering when it issued 1,500,000 shares of common stock,
which is described in Note 6.
The Company formed a wholly-owned subsidiary, DSS Funding, Inc. ("DSSF"), a
North Carolina corporation, on February 16, 1998, for the purpose of securing
permanent financing for the assisted living facilities and senior residences
which the Company develops or acquires for third party owners. On July 22, 1998,
the Company formed a wholly-owned subsidiary; Diversified Senior Services of
Virginia, Inc. ("DSSVA"), a Virginia corporation, for the purpose of conducting
development and management of properties in Virginia.
The following significant accounting policies have been followed in the
preparation of the Company's financial statements.
CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries, Residential Properties Management, Inc.
("RPM"), DSSF and DSSVA. All significant intercompany 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.
INVESTMENTS HELD FOR DEVELOPMENT
The Company's investments held for development are classified as
available-for-sale securities and are reported at fair value, with
unrealized gains and losses excluded from earnings and reported in a
separate component of shareholders' equity.
ACCOUNTS RECEIVABLE - TRADE
Accounts receivable - trade consists of management fees and reimbursements
for administrative services due from partnerships and other entities whose
properties are managed by RPM, and home care revenues which are due
primarily from Medicaid. The Company and its subsidiaries 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 to five 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.
DEVELOPMENT COSTS
Development costs are expenses, including certain salaries, which are
capitalized during the development of new facilities. The properties are
developed for third party owners and the costs are reimbursed based upon
the terms of the financing arrangements. Costs for abandoned sites are
written off when the sites are considered not feasible.
F-6
<PAGE>
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 period.
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 prior to the initial public offering,
filed its federal income tax return as a part of a consolidated group with
THE. Tax expense or benefit is allocated based on net income or loss for
each entity in the consolidated group. As a result of the initial public
offering, the Company no longer is included in the consolidated group with
THE for federal income tax purposes effective January 14, 1998. The Company
and its subsidiaries will file a separate consolidated federal income tax
return from THE.
State income tax regulations generally do not permit filing of consolidated
income tax returns. Accordingly, the Company and its subsidiary file
separate state corporate income tax returns as described further in Note
10.
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
properties. Income is recognized monthly as rent is collected.
Reimbursement income consists of amounts charged to the properties managed
for the services of management and maintenance personnel employed by the
Company.
Development fee income is recognized on the percentage of completion basis.
Home care revenues are recognized at the time the service is provided. A
significant portion of the Company's home care revenues are reimbursed by
the Medicaid PCS program.
PREFERRED STOCK
The Company's Articles of Incorporation provide authority for the issuance
of 100,000,000 shares of preferred stock, no par value. On September 24,
1997, the Board of Directors classified a series of 200,000 shares of
convertible, preferred stock as Series A preferred stock. 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.
Attributes or preferences have not been established for the remaining
unissued stock.
STOCK OPTIONS
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 price of the stock at the date of the
grant is recorded as compensation expense.
RECLASSIFICATION
Certain items in the financial statements for 1997 have been reclassified
to conform to the format presented in these financial statements.
F-7
<PAGE>
NOTE 2: RELATED PARTY TRANSACTIONS
The Company is developing six properties for 60-unit assisted living facilities
and two 30-unit independent senior housing residences with services. Five of the
60-unit and the two 30-unit projects are currently under construction. The owner
of the properties is THE, the majority stockholder of the Company. THE intends
to sell the 60-unit properties to a not for profit owner after permanent
financing is completed. At December 31, 1998 development fees of $1,135,779 and
reimbursable costs of $1,467,877 are due to the Company from THE. The Company is
the guarantor on the construction loans for the properties currently under
construction. The amount of the loans outstanding at December 31, 1998 was
$890,598. The total commitment for the properties currently under construction
is $7,150,000.
RPM leases certain computer equipment from THE under operating lease agreements
expiring in 2003. These lease agreements are included in the lease information
disclosed in Note 11.
From time to time, the Company advances or borrows funds from THE or other
related entities.
On September 30, 1997, the Company, in a non-cash transaction, issued 178,386
shares of preferred stock to THE in exchange for a note payable to THE 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.
The following schedule summarizes the related party activities for the years
ended December 31, 1998 and December 31, 1997.
<TABLE>
<CAPTION>
Due from Due (to) from Note
Affiliated THE and Payable
PARTNERSHIPS SUBSIDIARIES THE TOTAL
<S> <C> <C> <C> <C>
Amounts due (to) from affiliates at January 1, 1997: $ 233,616 $ (36,170) $ (1,096,320) $ (898,874)
Repayment to affiliate - 33,415 - 33,415
Computer equipment lease
payment due to THE - (5,333) - (5,333)
Rent due to THE (21,600) (21,600)
Accrued interest to THE (27,191) (27,191)
Repayments to THE - 90,771 127,836 218,607
Advances from THE - (150,447) - (150,447)
Exchange note for preferred stock - - 891,930 891,930
Reclassify remaining note to
account payable - (76,554) 76,554 -
Tax benefit of operating losses
due from THE - 269,900 - 269,900
----------- ----------- ----------- -----------
Balance, December 31, 1997 233,616 76,791 - 310,407
Computer equipment lease
payment due to THE - (6,011) - (6,011)
Rent due to THE - (32,400) - (32,400)
Development fees and costs due
from properties currently held by THE - 2,603,656 - 2,603,656
Advances due from affiliate 142,705 142,705
Repayments to THE - 277,242 277,242
Advances from THE - (202,274) - (202,274)
----------- ------------ ---------- ------------
Balance, December 31, 1998 $ 233,616 $ 2,859,709 $ - $ 3,093,325
=========== =========== =========== ===========
</TABLE>
F-8
<PAGE>
Diversified Senior Services, Inc.
Notes to Consolidated Financial Statements - Continued
NOTE 2: RELATED PARTY TRANSACTIONS - CONTINUED
There was no interest income received from related parties during the years
ended December 31, 1998 and 1997. The amounts due from affiliated partnerships
are collectible, but will not be realized until such time as certain
partnerships terminate. The Company earned income from a subsidiary of THE and
partnerships, a general partner of which is a beneficial shareholder of THE, for
the years ended December 31, 1998 and 1997 as follows:
1998 1997
Management fees $ 293,753 $ 288,385
Reimbursement fees 591,450 550,946
Home care fees 12,480 9,360
-------------- -------------
$ 897,683 $ 848,691
============== =============
At December 31, 1998 and 1997, $26,431and $26,237, respectively, of such fees
are included in trade accounts receivable and $25,525 is included in accounts
receivable-affiliates at December 31, 1998.
NOTE 3: FURNITURE AND EQUIPMENT
The Company has furniture and equipment as follows:
1998 1997
---- ----
Computer equipment $ 163,557 $ 86,355
Office furniture 52,005 43,112
-------------- -------------
215,562 129,467
- -----
Less accumulated depreciation 125,361 72,980
-------------- -------------
$ 90,201 $ 56,487
============== =============
Depreciation expense for the years ended December 31, 1998 and 1997 was $52,381
and $36,958, respectively.
NOTE 4:
NOTES PAYABLE
On December 31, 1997 the Company had a bank line of credit bearing interest at
prime (8.50% at December 31, 1997), with a balance of $1,604,575 and accrued
interest of $33,070. The note and accrued interest were paid on January 14,
1998.
<PAGE>
Diversified Senior Services, Inc.
Notes to Consolidated Financial Statements - Continued
NOTE 5: INITIAL PUBLIC OFFERING
On January 14, 1998 the Company completed its public offering of 1,500,000
shares of common stock at $5.00 per share. The following gives the effect of the
offering and subsequent use of the proceeds.
Gross proceeds (1,500,000 shares at $5.00 per share) $ 7,500,000
Offering expenses paid during 1998 (1,057,350)
------------------
6,442,650
Offering expenses paid prior to December 31, 1997 (127,664)
-----------------
Net proceeds from offering 6,314,986
-----------------
Use of proceeds:
Repayment of bank loan and accrued interest (1,637,645)
Payment of deferred salaries and bonuses (620,090)
Investments held for development (3,500,000)
(5,757,735)
Remainder to be used for general corporate purposes $ 557,251
===============
F-9
<PAGE>
NOTE 6: FINANCIAL INSTRUMENTS
The Company's financial instruments include cash, investments, note payable to a
bank and amounts due to and from affiliates. At December 31, 1998 and 1997, the
carrying values of cash, investments and the note payable approximated their
fair values based on current market prices and rates. It was not practicable to
estimate the fair value of the amounts due to and from affiliates as the
repayment terms have not been established and they are non-interest bearing.
NOTE 7: INVESTMENTS HELD FOR DEVELOPMENT
The Company's investments held for development are invested in government and
corporate bond mutual funds and are held for development and construction of
assisted living facilities. These investments are classified as available for
sale and accordingly, unrealized gains of $16,061 at December 31, 1998 have been
recorded in equity. The carrying value of the funds were based on current market
prices at the statement date. Proceeds from sales of the company's investments
for the year ended December 31, 1998 were $2,990,065 resulting in realized gains
of $52,328 and realized losses of $51,797. These gains and losses are reflected
under other income in the financial statements.
NOTE 8: SAVINGS INCENTIVE PLAN
The Company participates in a defined contribution savings incentive plan
covering substantially all of its full time employees. The Company provided 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 contribution for the years ended December 31, 1998 and 1997 was
$33,595 and $21,465, respectively.
NOTE 9: STOCK INCENTIVE PLAN
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. The Company granted 47,000 stock options to certain
employees at an exercise price ranging from $4.75 to $5.225, the market value of
the shares at the date of grant. The stock options are 100% vested and have a
five-year term. Warrants for 45,000 shares were issued with a four-year term, a
one-year vesting schedule and exercise prices ranging from $6.00 to $9.00 per
share. Warrants for 50,000 shares have a four-year term, one year vesting
schedule and an exercise price of $6.75 per share. All the warrants were issued
to third parties for services rendered. At December 31, 1998, a total of 142,000
stock options and warrants are outstanding, 1,400 common shares have been issued
and 356,600 shares are available for granting. At December 31, 1997, no grants
had been made. Options and warrants granted during 1998 are as follows:
Range of Share Weighted Average Remaining Life
EXERCISE PRICE OUTSTANDING EXERCISE PRICE (MONTHS)
Options:
$4.75 - $5.225 47,000 $4.91 50
Warrants:
$6.00 - $9.00 45,000 5.93 55
$6.75 50,000 6.75 56
------ ---- --
142,000 $5.88 54
Separately from the Stock Incentive Plan, a maximum of 76,729 options at an
exercise price of $2.50 per share have been granted to certain officers of the
Company in consideration for their deferral of certain cash compensation. In
addition, the Company granted the underwriter of its initial public offering
warrants to purchase 150,000 shares of common stock at an exercise price of
$6.75 per share exercisable for four years, commencing January 14, 1999.
F-10
<PAGE>
NOTE 9: STOCK INCENTIVE PLAN - CONTINUED
The Company applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations in accounting for its
options. Accordingly, no compensation expense has been recognized for its
stock-based compensation plan. Had compensation cost for the Company's stock
options been determined based upon the fair value at the grant date consistent
with the methodology prescribed under FAS 123, the company's net loss in 1998
would have been increased by $94,000, or $.03 per share on a diluted basis. The
fair value of the options granted during 1998 is estimated on the date of grant
using the Black-Scholes valuation model with the following assumptions:
volatility of 38%, risk-free interest rate of 5.5% and a weighted average
expected life of 5.0 years.
NOTE 10: PROVISION FOR INCOME TAXES
The components of income tax benefit are as follows for the years ended December
31, 1998 and 1997:
<TABLE>
<CAPTION>
12/31/98 12/31/97
Current taxes refundable:
<S> <C> <C>
Federal $ - $ (269,900)
State - -
-------------- -------------
- (269,000)
- ----- -------------- --------------
Deferred tax expense (benefit):
Deferred compensation 126,500 (199,400)
Start up costs 13,700 (46,800)
Generation of state loss carryforwards (144,500) (92,800)
Generation of federal loss carryforward (295,000) -
All other changes (5,200) (6,600)
Increase in valuation allowance 304,500 345,600
-------------- ------------
- -
-------------- -------------
Income tax benefit $ - $ (269,900)
============== ==============
</TABLE>
As further described at Note 2, the income tax benefit is included in the
amounts due (to) from THE.
The actual income tax benefit attributable to loss from continuing operations
for the years ended December 31, 1998 and 1997 differed from the amounts
computed by applying the U.S. federal tax rate of 34 percent to loss before
income tax benefit as a result of the following:
<TABLE>
<CAPTION>
12/31/98 12/31/97
<S> <C> <C>
Computed "expected" tax benefit $ (6,100) $ (353,100)
Timing differences related to deferred compensation (111,300) 92,600
Timing differences related to depreciation and amortization (149,300) (11,300)
All other changes (28,300) 1,900
Increase in net operating loss carryforward 295,000 -
------------- -------------
Income tax benefit $ - $ (269,900)
============== ==============
</TABLE>
F-11
<PAGE>
Diversified Senior Services, Inc.
Notes to Consolidated Financial Statements - Continued
NOTE 10: PROVISION FOR INCOME TAXES - CONTINUED
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying value of assets and liabilities for financial reporting
purposes and the amounts reported for income tax purposes. Significant
components of the Company's deferred income tax assets are as follows. There are
no significant deferred income tax liabilities.
12/31/98 12/31/97
Non-current deferred tax asset:
Deferred compensation $ 72,900 $ 199,400
Start-up costs 33,100 46,800
State operating loss carryforwards 237,300 92,800
Federal operating loss carryforward 295,000 -
All others 11,800 6,600
650,100 345,600
Valuation allowance (650,100) (345,600)
-------------- --------------
Net deferred tax asset $ - $ -
============== =============
From May 17, 1996 (Date of Inception) through January 13, 1998, the Company was
included in the consolidated federal return of THE; therefore, loss
carryforwards for federal purposes have been utilized. Effective January 14,
1998, DSS and its subsidiaries will file a consolidated federal return separate
from THE.
At December 31, 1998 the Company and its subsidiaries had operating loss
carryforwards available to reduce future state and federal taxable income. These
carryforwards are subject to examination by taxing authorities and if not
previously utilized, expire as follows:
FEDERAL STATE
2001 $ - $ (1,228,600)
2002 - (495,000)
2003 - (732,300)
2018 (867,500) (135,200)
NOTE 11: COMMITMENTS AND CONTINGENCIES
The Company has various operating leases for office space and equipment. Future
minimum lease payments of $133,277 are as follows for the years ending December
31:
1999 $ 44,488
2000 $ 45,362
2001 $ 27,404
2002 $ 15,345
2003 $ 678
Rent expense for the years ended December 31, 1998 and 1997 was $103,228 and
$74,217, respectively. Beginning in May 1997, the Company entered into a
month-to-month sublease with THE for office space for its corporate headquarters
with required monthly rent payments of $2,700. During 1999, the monthly rent
will increase to $3,800. Beginning in April, 1998, the Company entered into a
month-to-month lease with a non-related third party for office space in New
York, New York, occupied by its subsidiary, DSS Funding, Inc. Rent payments for
the New York office are approximately $2,200 per month. In addition, RPM leases
computer equipment from THE, with monthly payments of $501.
The Company is obligated to pay $40,000 in 1999 to a non-related third party for
consulting services and $3,500 per month to a public relations firm through
January 31, 2000.
F-12
<PAGE>
Diversified Senior Services, Inc.
Notes to Consolidated Financial Statements - Continued
NOTE 12: SUBSEQUENT EVENTS
During the third quarter of 1998, the Company entered into a letter of intent to
purchase lease rights for five assisted living facilities from a third party.
During the fourth quarter of 1998, the parties mutually agreed not to proceed
with the arrangement as structured. While the Company and the owner continue to
explore alternative structures, the owner is also in discussion with other
potential buyers. No new arrangement has been agreed upon.
F-13
STATE OF NORTH CAROLINA
DEPARTMENT OF THE SECRETARY OF STATE
ARTICLES OF AMENDMENT
BUSINESS CORPORATION
Pursuant to ss.55-10-06 of the General Statutes of North Carolina, the
undersigned corporation hereby submits thE following Articles of Amendment for
the purposes of amending its Articles of Incorporation.
1. The name of the corporation is: DIVERSIFIED SENIOR SERVICES, INC.
2. The text of each amendment adopted is as follows (STATE BELOW OR ATTACH):
SEE EXHIBIT "A" ATTACHED HERETO AND MADE A PART HEREOF
3. If an amendment provides for an exchange, reclassification, or cancellation
of issued shares, provisions for implementing the amendment, if not
contained in the amendment itself, are as follows:
N/A
4. The date of adoption of each amendment was as follows: March 15, 1999
5. (Check either a, b, c, or d, whichever is applicable)
a._________ The amendment(s) was (were) duly adopted by the incorporators
prior to the issuance of shares.
b._________ The amendment(s) was (were) duly adopted by the board or
directors prior to the issuance of shares.
c. X The amendment(s) was (were) duly adopted by the board or directors
without shareholder action as shareholder action was not required because
(SET FORTH A BRIEF EXPLANATION OF WHY SHAREHOLDER ACTION WAS NOT REQUIRED)
THE ARTICLES OF INCORPORATION OF THE COMPANY AUTHORIZE THE DIRECTORS SO TO
ACT.
d._________ The amendment(s) was (were) approved by shareholder action, and
such shareholder approval was obtained as required by Chapter 55 of the
North Carolina General Statutes.
6. These articles will be effective upon filing, unless a delayed time and
date is specified:
---------------------------------------------------------------------------
This the 19th day of March, 1999.
DIVERSIFIED SENIOR SERVICES, INC.
------------------------------------
Name Of Corporation
/S/ SUSAN L. CHRISTIANSEN
------------------------------------
Signature
SUSAN L. CHRISTIANSEN, PRESIDENT
------------------------------------
Type or Print name and Title
Notes:
1. Filing fee is $50. This document and one exact or conformed copy of these
articles must be filed with the Secretary of State.
(REVISED MAY 1998)
<PAGE>
Exhibit A
CERTIFICATE OF DESIGNATION, POWERS,
PREFERENCES AND RIGHTS OF THE SERIES
OF
PREFERRED STOCK
OF
DIVERSIFIED SENIOR SERVICES, INC.
TO BE DESIGNATED
12% SERIES B CUMULATIVE CONVERTIBLE PREFERRED STOCK
Pursuant to Section 55-6-02 of the North Carolina Business Corporation
Act, we, the undersigned, Susan L. Christiansen and Joanne Ragan, being
respectively the President and the Secretary of Diversified Senior Services,
Inc. (the "COMPANY"), a Company organized and existing under the North Carolina
Business Corporation Act, DO HEREBY CERTIFY that the following resolution was
duly adopted by the Board of Directors of the Company by unanimous written
consent, and that said resolution has not been rescinded or amended and is in
full force and effect at the date hereof:
RESOLVED, that, pursuant to authority expressly granted to and vested
in the Board of Directors by the provisions of the Articles of Incorporation, as
amended to date, the Board of Directors hereby creates a series of a series of
Preferred Stock of the Company, no par value per share and a stated value of
$2,000 per share, to be designated "12% Series B Cumulative Convertible
Preferred Stock" and to consist of Three Thousand (3,000) shares, and hereby
fixes the powers, designations, preferences and relative, participating,
optional and other rights of the shares of such series, and the qualifications,
limitations, or restrictions thereof (in addition to those provisions set forth
in the Articles of Incorporation, as amended, which are applicable to the 12%
Series B Cumulative Convertible Preferred Stock), as follows:
Section 1. DESIGNATION, AMOUNT, PAR VALUE, STATED VALUE AND RANK. The
series of Preferred stock shall be designated as 12% Series B Cumulative
Convertible Preferred Stock (the "SERIES B PREFERRED STOCK"), and the number of
shares so designated shall be 3,000 (which shall not be subject to increase
without the consent of the holders of the Series B Preferred Stock ("HOLDERS")).
Each share of Series B Preferred Stock shall have a no par value per share and a
stated value of $2000 per share (the "STATED VALUE").
The Series B Preferred Stock shall rank senior to the Junior
Securities (as defined below) and all other series of preferred stock of the
Company issued and outstanding on the Original Issue Date as to distributions
and upon liquidation, dissolution or winding up.
Section 2. DIVIDENDS.
(a) AMOUNT OF DIVIDENDS. The holders of Series B Preferred Stock shall
be entitled to receive, in preference to the holders of Common Stock or any
other Junior Securities, cumulative annual dividends at the annual rate of 12%
of the Stated Value in cash for each share of Series B Preferred Stock held.
Such dividends shall be payable as and when declared by the Board of Directors
out of the assets of the Company legally available for payment thereof.
Dividends shall be paid in cash. Dividends payable to holders of Series B
Preferred Stock, as aforesaid, whether or not declared by the Board of
Directors, shall accrue from and after the date of original issuance of the
Series B Preferred Stock and shall be paid semi-annually in arrears on the first
business day of January and July in each year (each, a "Dividend Date"),
commencing on July 1, 1999. Dividends will be payable to holders of record as
they appear on the stock books of the Company on the record date, which will be
the December 15 or June 15, as the case may be, before the related Dividend
Date.
(b) PAYMENT OF DIVIDENDS ON COMMON STOCK AND JUNIOR SECURITIES. No
cash dividends may be paid, or funds set apart for payment, on shares of any
class of Junior Securities until all accrued dividends on the Series B Preferred
Stock have been paid in full or declared and funds set apart for payment thereof
in full. Additionally, the Company shall not declare or make any dividend or
distribution with respect to Common Stock, other than regular cash dividends or
dividends payable solely in shares of Common Stock, unless each holder of Series
B Preferred Stock concurrently receives dividends or distributions equal in
amount and in the same kind of property (whether cash, securities or other
property) as such holder would be entitled to receive if all of the outstanding
Series B Preferred Stock were converted into Common Stock as of the record date
of such dividend or distribution with respect to Common Stock. As used herein,
the term "regular cash dividends" shall mean any cash dividend publicly
characterized by the Board of Directors at the time of its declaration as a
regular dividend, whether payable on a quarterly, semi-annual or annual basis.
Section 3. JUNIOR SECURITIES. So long as any Series B Preferred Stock
shall remain outstanding, neither the Company nor any subsidiary thereof shall
redeem, purchase or otherwise acquire otherwise than upon conversion or exchange
directly or indirectly any Junior Securities, nor shall the Company directly or
indirectly pay or declare any dividend or make any distribution (other than a
dividend or distribution described in Section 6) upon, nor shall any
distribution be made in respect of, any Junior Securities, nor shall any monies
be set aside for or applied to the purchase or redemption (through a sinking
fund or otherwise) of any Junior Securities.
Section 4. VOTING RIGHTS. The holders of Series B Preferred Stock
shall have no right to vote, except as otherwise required by North Carolina law.
However, so long as any shares of Series B Preferred Stock are outstanding, the
Company shall not and shall cause its subsidiaries not to, without the written
consent of the holders of 66 2/3% of the shares of the Series B Preferred Stock
then outstanding, (a) amend, alter or change the preferences or rights of any
series or class of capital stock of the Company (including the Series B
Preferred Stock) or the qualifications, limitations or restrictions thereof if
such amendment, alteration or change adversely affects the powers, preferences
or rights given to the Series B Preferred Stock, (b) alter or amend this
Certificate of Designation, (c) authorize or create any class or series of any
class of capital stock ranking as to distribution of assets upon a Liquidation
(as defined in Section 5) or otherwise senior to the Series B Preferred Stock,
(d) amend its Articles of Incorporation, bylaws or other charter documents so as
to affect adversely any rights of any Holders, (e) increase the authorized
number of shares of Series B Preferred Stock, and (f) enter into any agreement
with respect to the foregoing.
Section 5. LIQUIDATION. Upon any liquidation, dissolution or
winding-up of the Company, whether voluntary or involuntary (a "LIQUIDATION"),
the Holders shall be entitled to receive out of the assets of the Company,
whether such assets are capital or surplus, for each share of Series B Preferred
Stock an amount equal to the Stated Value before any distribution or payment
shall be made to the holders of any Junior Securities, and if the assets of the
Company shall be insufficient to pay in full such amounts, then the entire
assets to be distributed to the holders of Series B Preferred Stock shall be
distributed among the holders of Series B Preferred Stock and the holders of all
securities ranking PARI PASSU to the Series B Preferred Stock ratably in
accordance with the respective amounts that would be payable on such shares if
all amounts payable thereon were paid in full. A sale, conveyance or disposition
of all or substantially all of the assets of the Company or the effectuation by
the Company of a transaction or series of related transactions in which more
than 50% of the voting power of the Company is disposed of, or a consolidation
or merger of the Company with or into any other company or companies shall not
be treated as a Liquidation, but instead shall be subject to the provisions of
Section 6(c)(ii). The Company shall mail written notice of any such Liquidation,
not less than 45 days prior to the payment date stated therein, to each record
holder of Series B Preferred Stock.
Section 6. CONVERSION.
(a) (i) Each share of Series B Preferred Stock shall be convertible
into shares of Common Stock (subject to Section 6(a)(ii) and Section 6(a)(iii))
at the Conversion Ratio (as defined in Section 9) at the option of the Holder in
whole or in part at any time after the Original Issue Date. The Holders shall
effect conversions by surrendering the certificate or certificates representing
the shares of Series B Preferred Stock to be converted to the Company, together
with the form of conversion notice attached hereto as EXHIBIT A (the "CONVERSION
NOTICE"). Each Conversion Notice shall specify the number of shares of Series B
Preferred Stock to be converted. The date on which such conversion is to be
effected shall be the date the Holder delivers such Conversion Notice by
facsimile (the "CONVERSION DATE"). Subject to Sections 6(a)(ii) and 6(b) hereof,
each Conversion Notice, once given, shall be irrevocable. If the Holder is
converting less than all shares of Series B Preferred Stock represented by the
certificate or certificates tendered by the Holder with the Conversion Notice,
or if a conversion hereunder cannot be effected in full for any reason, the
Company shall promptly deliver to such Holder (in the manner and within the time
set forth in Section 6(b)) a certificate for such number of shares as have not
been converted.
(ii) If on the Conversion Date applicable to any conversion, (A) the
Common Stock is then listed for trading on the Nasdaq National Market, the
New York Stock Exchange, the American Stock Exchange or The Nasdaq Small
Cap Market, (B) the Conversion Price then in effect is such that the
aggregate number of shares of Common Stock that would then be issuable upon
conversion of all outstanding shares of Series B Preferred Stock, together
with any shares of Common Stock previously issued upon conversion of Series
B Preferred Stock, would equal or exceed 20% of the number of shares of
Common Stock outstanding on the Original Issue Date (the "ISSUABLE
MAXIMUM"), and (C) the Company has not previously obtained (or attempted
pursuant to clause (1) of this subsection to obtain) Shareholder Approval
(as defined below), then the Company shall issue to any Holder so
requesting conversion of Series B Preferred Stock its pro rata portion of
the Issuable Maximum in the same ratio that the number of shares of Series
B Preferred Stock held by any such Holder bears to all shares of Series B
Preferred Stock then outstanding and, with respect to any shares of Common
Stock that otherwise would have been issuable to such Holder in respect of
the Conversion Notice at issue in excess of the Issuable Maximum, the
Company shall at the Holder's request, (1) as promptly as possible but in
no event later than 45 days after such Conversion Date, convene a meeting
of the holders of the Common Stock and use its best efforts to obtain the
Shareholder Approval or a waiver of such approval from The Nasdaq Stock
Market or the appropriate exchange, and (2) as promptly as possible from
time to time, after a written request by the Holder, issue shares of Common
Stock at a Conversion Price equal to the Per Share Market Value on the
Trading Day immediately preceding the date of such request for all or a
portion of the shares of Series B Preferred Stock held by such Holder as
would cause the number of shares of Common Stock issuable upon such
conversion to exceed the Issuable Maximum. "SHAREHOLDER APPROVAL" means the
approval by a majority of the total votes cast on the proposal, in person
or by proxy, at a meeting of the shareholders of the Company held in
accordance with the Company's Articles of Incorporation and bylaws, of the
issuance by the Company of shares of Common Stock exceeding the Issuable
Maximum as a consequence of the conversion of Series B Preferred Stock into
Common Stock at a price less than the greater of the book or market value
on the Original Issue Date as and to the extent required pursuant to Rule
4460(i) or Rule 4310(c)(25) of The Nasdaq Stock Market, Inc.'s Marketplace
Rules (or any successor or replacement provision thereof).
(iii) In no event shall a Holder be permitted to convert any shares of
Series B Preferred Stock in excess of the number of such shares upon the
conversion of which, (x) the number of shares of Common Stock owned by such
Holder (other than shares of Common Stock issuable upon conversion of
shares of Series B Preferred Stock) plus (y) the number of shares of Common
Stock issuable upon such conversion of such shares of Series B Preferred
Stock, would be equal to or exceed (z) 9.999% of the number of shares of
Common Stock then issued and outstanding, including shares issuable on
conversion of the Series B Preferred Stock held by such Holder after
application of this Section 6(a)(iii). As used herein, beneficial ownership
shall be determined in accordance with Section 13(d) of the Exchange Act
and the rules and regulations thereunder. To the extent that the limitation
contained in this Section 6(a)(iii) applies, the determination of whether
shares of Series B Preferred Stock are convertible (in relation to other
securities owned by a Holder) and of which shares of Series B Preferred
Stock are convertible shall be in the sole discretion of such Holder, and
the submission of shares of Series B Preferred Stock for conversion shall
be deemed to be such Holder's determination of whether such shares of
Series B Preferred Stock are convertible (in relation to other securities
owned by a Holder) and of which shares of Series B Preferred Stock are
convertible, in each case subject to such aggregate percentage limitation,
and the Company shall have no obligation to verify or confirm the accuracy
of such determination. Nothing contained herein shall be deemed to restrict
the right of a Holder to convert such shares of Series B Preferred Stock at
such time as such conversion will not violate the provisions of this
paragraph. The provisions of this Section 6(a)(iii) may be waived by a
Holder of Series B Preferred Stock as to itself (and solely as to itself)
upon not less than 75 days prior notice to the Company, and the provisions
of this Section 6(a)(iii) shall continue to apply until such 75th day (or
later, if stated in the notice of waiver). No conversion in violation of
this paragraph but otherwise in accordance with this Certificate of
Designation shall affect the status of the securities issued upon such
conversion as validly issued, fully-paid and nonassessable.
(b) (i) Not later than seven (7) Trading Days after any Conversion
Date, the Company will deliver to the applicable Holder by express courier (A) a
certificate or certificates which shall be free of restrictive legends and
trading restrictions (other than those required by SECTION 3.1(B) of the
Purchase Agreement) representing the number of shares of Common Stock being
acquired upon the conversion of shares of Series B Preferred Stock (subject to
reduction pursuant to Section 6(a)(ii) and Section 6(a)(iii)), and (B) one or
more certificates representing the number of shares of Series B Preferred Stock
not converted. If in the case of any Conversion Notice such certificate or
certificates are not delivered to or as directed by the applicable Holder by the
seventh Trading Day after the Conversion Date (the "DELIVERY DATE"), the holder
shall be entitled by written notice to the Company at any time on or before its
receipt of such certificate or certificates thereafter, to rescind such
conversion, in which event the Company shall immediately return the certificates
representing the shares of Series B Preferred Stock tendered for conversion,
whereupon the Company and the Holder shall each be restored to their respective
positions immediately prior to the delivery of such notice of revocation, except
that any amounts described in Sections 6(b)(ii) and (iii) shall be payable
through the date notice of rescission is given to the Company.
(ii) The Company understands that a delay in the delivery of the
shares of Common Stock upon conversion of shares of Series B Preferred
Stock and failure to deliver certificates representing the unconverted
shares of Series B Preferred Stock beyond the Delivery Date could result in
economic loss to the Holder. If the Company fails to deliver to the Holder
such certificate or certificates pursuant to this Section hereunder by the
Delivery Date, the Company shall pay to such Holder, in cash, an amount per
Trading Day for each Trading Day until the earlier of the date such
certificates are delivered or the date the conversion is rescinded pursuant
to Section 6(b)(i) above, together with interest on such amount at a rate
of 15% per annum, accruing until such amount and any accrued interest
thereon is paid in full, equal to (i) 1% of the Stated Value of the shares
of Series B Preferred Stock requested to be converted for the first five
Trading Days after the Delivery Date and (ii) 2% of the Stated Value of the
shares of Series B Preferred Stock requested to be converted for each
Trading Day thereafter (which amounts shall be paid as liquidated damages
and not as a penalty). Nothing herein shall limit a Holder's right to
pursue actual damages for the Company's failure to deliver certificates
representing shares of Common Stock upon conversion within the period
specified herein (including, without limitation, damages relating to any
purchase of shares of Common Stock by such Holder to make delivery on a
sale effected in anticipation of receiving certificates representing shares
of Common Stock upon conversion, as provided in Section 6(b)(iii) below),
and such Holder shall have the right to pursue all remedies available to it
at law or in equity (including, without limitation, a decree of specific
performance and/or injunctive relief).
(iii) In addition to any other rights available to the Holder, if the
Company fails to deliver to the Holder such certificate or certificates
pursuant to Section 6(b)(i) by the Delivery Date and if after the Delivery
Date the Holder purchases (in an open market transaction or otherwise)
shares of Common Stock to deliver in satisfaction of a sale by such Holder
of the Underlying Shares which the Holder anticipated receiving upon such
conversion (a "BUY-IN"), then the Company shall pay in cash to the Holder
(in addition to any remedies available to or elected by the Holder) the
amount by which (A) the Holder's total purchase price (including brokerage
commissions, if any) for the shares of Common Stock so purchased exceeds
(B) the aggregate Stated Value of the shares of Series B Preferred Stock
for which such conversion was not timely honored, together with interest
thereon at a rate of 15% per annum, accruing until such amount and any
accrued interest thereon is paid in full (which amount shall be paid as
liquidated damages and not as a penalty). For example, if the Holder
purchases shares of Common Stock having a total purchase price of $11,000
to cover a Buy-In with respect to an attempted conversion of $10,000
aggregate Stated Value of the shares of Series B Preferred Stock, the
Company shall be required to pay the Holder $1,000, plus interest. The
Holder shall provide the Company written notice indicating the amounts
payable to the Holder in respect of the Buy-In.
(c) (i) Prior to December 14, 1999, the conversion price for each
share of Series B Preferred Stock (the "CONVERSION PRICE") in effect on any
Conversion Date shall be $4.00. On and after December 14, 1999, the Conversion
Price for each share of Series B Preferred Stock in effect on any Conversion
Date shall be the lesser of (A) $4.00 and (B) an the Per Share Market Value for
the Trading Day having the lowest Per Share Market Value during the thirty
Trading Days prior to the Conversion Date, except that if during any period (a
"BLACK-OUT PERIOD"), a Holder is unable to trade any Common Stock issued or
issuable upon conversion of Series B Preferred Stock immediately due to the
postponement of filing or delay or suspension of effectiveness of a registration
statement or because the Company has otherwise informed such Holder that an
existing prospectus cannot be used at that time in the sale or transfer of such
Common Stock, such Holder shall have the option but not the obligation on any
Conversion Date within ten Trading Days following the expiration of the
Black-out Period of using the Conversion Price applicable on such Conversion
Date or any Conversion Price selected by such Holder that would have been
applicable had such Conversion Date been at any earlier time during the
Black-out Period or within the ten Trading Days thereafter.
(ii) In case the Company after the Original Issue Date shall do any of
the following (each, a "TRIGGERING EVENT") (a) consolidate with or merge
into any other person and the Company shall not be the continuing or
surviving Company of such consolidation or merger, or (b) permit any other
person to consolidate with or merge into the Company and the Company shall
be the continuing or surviving person but, in connection with such
consolidation or merger, any capital stock of the Company shall be changed
into or exchanged for securities of any other person or cash or any other
property, or (c) transfer all or substantially all of its properties or
assets to any other person, or (d) effect a capital reorganization or
reclassification of its capital stock, the holders of the Series B
Preferred Stock then outstanding shall have the right thereafter to convert
such shares only into the shares of stock and other securities, cash and
property receivable upon or deemed to be held by holders of Common Stock
following such Triggering Event, and the holders of the Series B Preferred
Stock shall be entitled upon such event to receive such amount of
securities, cash or property as the shares of the Common Stock of the
Company into which such shares of Series B Preferred Stock could have been
converted immediately prior to such Triggering Event would have been
entitled. The terms of any such Triggering Event shall include such terms
so as to continue to give to the holder of Series B Preferred Stock the
right to receive the securities, cash or property set forth in this Section
6(c)(ii) upon any conversion following such Triggering Event. This
provision shall similarly apply to successive Triggering Events.
(iii) If:
A. the Company shall declare a dividend (or any other
distribution) on its Common Stock; or
B. the Company shall declare a special nonrecurring cash
dividend on or a redemption of its Common Stock; or
C. the Company shall authorize the granting to all holders of
the Common Stock rights or warrants to subscribe for or
purchase any shares of capital stock of any class or of any
rights; or
D. the approval of any shareholders of the Company shall be
required in connection with any Triggering Event; or
E. the Company shall authorize the voluntary or involuntary
dissolution, liquidation or winding up of the affairs of the
Company;
then the Company shall cause to be filed at each office or agency maintained for
the purpose of conversion of Series B Preferred Stock, and shall cause to be
mailed to the Holders of Series B Preferred Stock at their last addresses as
they shall appear upon the stock books of the Company, at least 30 calendar days
prior to the applicable record or effective date hereinafter specified, a notice
stating (x) the date on which a record is to be taken for the purpose of such
dividend, distribution, redemption, rights or warrants, or if a record is not to
be taken, the date as of which the holders of Common Stock of record to be
entitled to such dividend, distributions, redemption, rights or warrants are to
be determined or (y) the date on which such reclassification, consolidation,
merger, sale, transfer or share exchange is expected to become effective or
close, and the date as of which it is expected that holders of Common Stock of
record shall be entitled to exchange their shares of Common Stock for
securities, cash or other property deliverable upon such reclassification,
consolidation, merger, sale, transfer or share exchange; PROVIDED, HOWEVER, that
the failure to mail such notice or any defect therein or in the mailing thereof
shall not affect the validity of the corporate action required to be specified
in such notice. Holders are entitled to convert shares of Series B Preferred
Stock during the 30-day period commencing the date of such notice to the
effective date of the event triggering such notice.
(d) The Company covenants that it will at all times reserve and keep
available out of its authorized and unissued Common Stock solely for the purpose
of issuance upon conversion of Series B Preferred Stock free from preemptive
rights or any other actual contingent purchase rights of persons other than the
holders of Series B Preferred Stock, not less than such number of shares of
Common Stock as shall (subject to any additional requirements of the Company as
to reservation of such shares set forth in the Purchase Agreement) be issuable
(taking into account the adjustments and restrictions of Section 6(c)) upon the
conversion of all outstanding shares of Series B Preferred Stock. The Company
covenants that all shares of Common Stock that shall be so issuable shall, upon
issue, be duly and validly authorized, issued and fully paid, nonassessable and
freely tradable.
(e) Upon a conversion hereunder the Company shall not be required to
issue stock certificates representing fractions of shares of Common Stock, but
may if otherwise permitted, make a cash payment in respect of any final fraction
of a share based on the Per Share Market Value at such time. If the Company
elects not, or is unable, to make such a cash payment, the holder of a share of
Series B Preferred Stock shall be entitled to receive, in lieu of the final
fraction of a share, one whole share of Common Stock.
(f) The issuance of certificates for shares of Common Stock on
conversion of Series B Preferred Stock shall be made without charge to the
holders thereof for any documentary stamp or similar taxes that may be payable
in respect of the issue or delivery of such certificate.
(g) Shares of Series B Preferred Stock converted into Common Stock
shall be canceled and shall have the status of authorized but unissued shares of
undesignated preferred stock.
(h) Any and all notices or other communications or deliveries to be
provided by the holders of the Series B Preferred Stock hereunder, including,
without limitation, any Conversion Notice, shall be in writing and delivered
personally, by facsimile or sent by a nationally recognized overnight courier
service, addressed to the attention of the President and to the Secretary of the
Company at the facsimile telephone number or address of the principal place of
business of the Company as set forth in the Purchase Agreement. Any and all
notices or other communications or deliveries to be provided by the Company
hereunder shall be in writing and delivered personally, by facsimile or sent by
a nationally recognized overnight courier service, addressed to each Holder of
Series B Preferred Stock at the facsimile telephone number or address of such
holder appearing on the books of the Company, or if no such facsimile telephone
number or address appears, at the principal place of business of the Holder. Any
notice or other communication or deliveries hereunder shall be deemed given and
effective on the earlier of (i) the date of transmission, if such notice or
communication is delivered via facsimile at the facsimile telephone number
specified in this Section prior to 5:00 p.m., New York City time, (ii) the date
after the date of transmission, if such notice or communication is delivered via
facsimile at the facsimile telephone number specified in this Section later than
5:00 p.m., New York City time, on any date and earlier than 11:59 p.m., New York
City time, on such date, (iii) receipt, if sent by a nationally recognized
overnight courier service, or (iv) actual receipt by the party to whom such
notice is required to be given.
(i) In the event a Holder shall elect to convert any shares of Series
B Preferred Stock as provided herein, the Company cannot refuse conversion based
on any claim that such Holder or any one associated or affiliated with such
Holder has been engaged in any violation of law, unless, an injunction from a
court or regulatory body, on notice, restraining and or adjoining conversion of
all or of said shares of Series B Preferred Stock shall have issued and the
Company posts a surety bond for the benefit of such Holder in the amount of the
difference between the Conversion Price and the Per Share Market Value on the
Trading Day preceding the date of the attempted conversion multiplied by the
number of shares of Series B Preferred Stock sought to be converted, which bond
shall remain in effect until the completion of arbitration/litigation of the
dispute and the proceeds of which shall be payable to such Holder in the event
it obtains judgment. Any Holder which becomes subject to an injunction of the
type described in the preceding sentence shall notify the Company of such within
one day of becoming aware of such injunction.
Section 7. OPTIONAL REDEMPTION.
(a) REDEMPTION RIGHT. The Company shall have the right to redeem the
outstanding Series B Preferred Stock, in whole or in part, at any time and from
time to time, from and after the first day on which Per Share Market Value
exceeds $8.00 by paying to the holders thereof in cash 100% of the Stated Value,
together with all accrued and unpaid dividends thereon through the Redemption
Date (as defined in below).
(b) NOTICE OF REDEMPTION. If any shares of Series B Preferred Stock
are to be redeemed pursuant to Section 7(a) hereof, notice thereof (the
"Redemption Notice") shall be sent at least 30 and not more than 60 days prior
to the date fixed for redemption (the "Redemption Date") to each holder of
record whose Series B Preferred Stock is to be redeemed, by first class mail,
postage pre-paid, to such holder at such holder's address as the same shall
appear on the books of the Company. The Redemption Notice shall state (a) the
Redemption Date, (b) the redemption price, (c) the then current Conversion Rate,
(d) that the shares called for redemption may be converted at any time before
the close of business on the business day preceding the Redemption Date, (e)
that holders who want to convert shares of Series B Preferred Stock must satisfy
the requirements of Section 6(a) hereof, (f) the place at which certificates for
shares of Series B Preferred Stock called for redemption must be surrendered to
collect the redemption price, (g) that dividends on shares of Series B Preferred
Stock called for redemption cease to accrue at the close of the last day of
business prior to the Redemption Date and (h) the Section of this Certificate of
Designation, Powers, Preferences and Rights pursuant to which they are to be
redeemed.
(c) PARTIAL REDEMPTION. If less than all of the outstanding shares of
Series B Preferred Stock are to be redeemed, the shares to be redeemed shall be
determined PRO RATA or by lot in a manner fixed by the Board of Directors. On or
after the Redemption Date, each holder of shares of Series B Preferred Stock
that were called for redemption shall present and surrender the certificate or
certificates for such shares to the Company at the place designated in the
Redemption Notice and thereupon the redemption price of such shares shall be
paid to, or to the order of, the person whose name appears on such certificate
or certificates as the owner thereof. From and after the Redemption Date, unless
the Company shall default in the payment of redemption price pursuant to the
Redemption Notice, all dividends on the Series B Preferred Stock shall cease to
accrue and all rights of the holders thereof as stockholders of the Company,
except the right to receive the redemption price (but without interest thereon),
shall cease and terminate. Any and all shares of Series B Preferred Stock
redeemed, purchased or otherwise acquired by the Company thereafter shall be
cancelled and returned to the status of authorized and unissued Preferred Stock.
(d) TRANSFER BOOKS. To facilitate the redemption of any shares of
Series B Preferred Stock, the Board of Directors is authorized to cause the
transfer books for such Series B Preferred Stock to be closed as to the shares
to be redeemed, unless the rules of any national securities exchange or
automated quotation system on which the Series B Preferred Stock may be listed
or quoted prohibit the closing of such transfer books.
Section 8. NO PREEMPTIVE RIGHTS. No holder of Series B Preferred Stock
shall have any preemptive or preferential right of subscription to any shares of
stock of the Company, or to options, warrants or other interests therein or
therefor, or to any obligations convertible into stock of the Company, issued or
sold, or any right of subscription to any thereof other than such, if any, as
the Board of Directors, in its discretion, from time to time may determine and
at such price or prices as the Board of Directors from time to time may fix
pursuant to the authority conferred by the Company's Articles of Incorporation.
Section 9. DEFINITIONS. For the purposes hereof, the following terms
shall have the following meanings:
"COMMON STOCK" means the common stock, no par value, of the Company
and stock of any other class into which such shares may hereafter have been
reclassified or changed.
"CONVERSION RATIO" means, at any time, a fraction, of which the
numerator is Stated Value and of which the denominator is the Conversion Price
at such time.
"INDEPENDENT APPRAISER" means a nationally recognized or major
regional investment banking firm or firm of independent certified public
accountants of recognized standing (which may be the firm that regularly
examines the financial statements of the Company) that is regularly engaged in
the business of appraising the capital stock or assets of corporations or other
entities as going concerns, and which is not affiliated with either the Company
or any Holder.
"JUNIOR SECURITIES" means the Common Stock and all other equity
securities of the Company which are junior in rights and liquidation preference
to the Series B Preferred Stock.
"NASDAQ" means the National Association of Securities Dealers
Automated Quotation System.
"ORIGINAL ISSUE DATE" shall mean the date of the first issuance of any
shares of the Series B Preferred Stock regardless of the number of transfers of
any particular shares of Series B Preferred Stock and regardless of the number
of certificates which may be issued to evidence such Series B Preferred Stock.
"PER SHARE MARKET VALUE" means on any particular date (a) the closing
bid price per share of the Common Stock on such date on The Nasdaq Small-Cap
Market, the Nasdaq National Market or other registered national stock exchange
on which the Common Stock is then listed or if there is no such price on such
date, then the closing bid price on such exchange or quotation system on the
date nearest preceding such date, or (b) if the Common Stock is not listed then
on The Nasdaq Small-Cap Market, the Nasdaq National Market or any registered
national stock exchange, the closing bid price for a share of Common Stock in
the over-the-counter market, as reported by NASDAQ or in the National Quotation
Bureau Incorporated or similar organization or agency succeeding to its
functions of reporting prices) at the close of business on such date, or (c) if
the Common Stock is not then reported by the National Quotation Bureau
Incorporated (or similar organization or agency succeeding to its functions of
reporting prices), then the average of the "Pink Sheet" quotes for the relevant
conversion period, as determined in good faith by the holder, or (d) if the
Common Stock is not then publicly traded the fair market value of a share of
Common Stock as determined by an Independent Appraiser selected in good faith by
the holders of a majority in interest of the shares of the Series B Preferred
Stock; PROVIDED, HOWEVER, that the Company, after receipt of the determination
by such Independent Appraiser, shall have the right to select an additional
Independent Appraiser, in which case, the fair market value shall be equal to
the average of the determinations by each such Independent Appraiser; and
PROVIDED, FURTHER that all determinations of the Per Share Market Value shall be
appropriately adjusted for any stock dividends, stock splits or other similar
transactions during such period. The determination of fair market value by an
Independent Appraiser shall be based upon the fair market value of the Issuer
determined on a going concern basis as between a willing buyer and a willing
seller and taking into account all relevant factors determinative of value, and
shall be final and binding on all parties. In determining the fair market value
of any shares of Common Stock, no consideration shall be given to any
restrictions on transfer of the Common Stock imposed by agreement or by federal
or state securities laws, or to the existence or absence of, or any limitations
on, voting rights.
"PERSON" means an individual or Company, partnership, trust,
incorporated or unincorporated association, joint venture, limited liability
company, joint stock company, government (or an agency or subdivision thereof)
or other entity of any kind.
"PURCHASE AGREEMENT" means the Securities Purchase Agreement, dated as
of the Original Issue Date, among the Company and the original holders of the
Series B Preferred Stock.
"REGISTRATION RIGHTS AGREEMENT" means the Registration Rights
Agreement, dated as of the Original Issue Date, by and among the Company and the
original Holders.
"TRADING DAY" means (a) a day on which the Common Stock is traded on
The Nasdaq Small-Cap Market, the Nasdaq National Market or other registered
national stock exchange on which the Common Stock has been listed, or (b) if the
Common Stock is not listed on The Nasdaq Small-Cap Market, the Nasdaq National
Market or any registered national stock exchange, a day or which the Common
Stock is traded in the over-the-counter market, as reported by the OTC Bulletin
Board, or (c) if the Common Stock is not quoted on the OTC Bulletin Board, a day
on which the Common Stock is quoted in the over-the-counter market as reported
by the National Quotation Bureau Incorporated (or any similar organization or
agency succeeding its functions of reporting prices); PROVIDED, HOWEVER, that in
the event that the Common Stock is not listed or quoted as set forth in (a), (b)
and (c) hereof, then Trading Day shall mean any day except Saturday, Sunday and
any day which shall be a legal holiday or a day on which banking institutions in
the State of New York are authorized or required by law or other government
action to close.
"UNDERLYING SHARES" means the number of shares of Common Stock into
which the Shares are convertible in accordance with the terms hereof and the
Purchase Agreement.
IN WITNESS WHEREOF, we have subscribed this document on the date
indicated below and do hereby affirm, under the penalties of perjury, that the
statements contained therein have been examined by us and are true and correct.
Date: March 19, 1999
/s/ SUSAN L. CHRISTIANSEN
------------------------------------
Name: Susan L. Christiansen
Title: President
/s/ JOANNE RAGAN
------------------------------------
Name: Joanne Ragan
Title: Secretary
<PAGE>
EXHIBIT A
DIVERSIFIED SENIOR SERVICES, INC.
CONVERSION NOTICE
Reference is made to the Certificate of Designation, Powers, Preferences and
Rights of the Series of Preferred Stock of Diversified Senior Services, Inc. to
be Designated 12% Series B Cumulative Convertible Preferred Stock (the
"CERTIFICATE OF DESIGNATION"). In accordance with and pursuant to the
Certificate of Designation, the undersigned hereby elects to convert the number
of shares of 12% Series B Cumulative Convertible Preferred Stock, no par value
per share and stated value $2,000 per share (the "PREFERRED SHARES"), of
Diversified Senior Services, Inc., a North Carolina Company (the "COMPANY"),
indicated below into shares of Common Stock, no par value (the "COMMON STOCK"),
of the Company, by tendering the stock certificates(s) representing the share(s)
of Preferred Shares specified below as of the date specified below.
Date of Conversion:
Number of Preferred Shares to be converted:
Stock certificate no(s). of Preferred Shares to be converted:
The Common Stock have been sold pursuant to the Registration Statement (as
defined in the Registration Rights Agreement): YES_____ NO_____
Please confirm the following information:
Conversion Price: $______________
Number of shares of Common Stock to be issued:
------------------------
Please issue the Common Stock into which the Preferred Shares are being
converted and, if applicable, any check drawn on an account of the Company in
the following name and to the following address:
Issued to: ___________________________________________
Facsimile Number: ___________________________________
Authorization: _______________________________________
<PAGE>
By:________________________________________
Title: ________________________________________
Dated: _____________________________________________
Account Number: ____________________________________
(if electronic book entry transfer)
Transaction Code Number: _____________________________
(if electronic book entry transfer)
PRICES ATTACHED
EXHIBIT 10.6
EXECUTIVE EMPLOYMENT AGREEMENT
BETWEEN
DIVERSIFIED SENIOR SERVICES, INC.
AND
BERNARD P. GAWLEY
EFFECTIVE AS OF FEBRUARY 16, 1998
THIS AGREEMENT, made and entered into as of the 16th day of February, 1998, by
and between DIVERSIFIED SENIOR SERVICES, INC., a North Carolina corporation
("Company") and BERNARD P. GAWLEY, a resident of the State of New York
("Executive").
W I T N E S S E T H:
The parties, for and in consideration of the mutual and reciprocal covenants and
agreements contained in this Agreement, do contract and agree as follows:
ARTICLE I
PURPOSE AND EMPLOYMENT
The purpose of this Agreement is to define the relationship between the Company,
as an employer, and Executive, as an employee. By the execution of this
Agreement, the Company employs Executive and Executive accepts employment by the
Company.
ARTICLE II
DEFINITIONS
The following terms (in alphabetical order) shall have the meanings set forth
opposite such terms for purposes of this Agreement:
2.01 AGREEMENT: means this Executive Employment Agreement between
Diversified Senior Services, Inc. and Bernard P. Gawley, effective as
of February 16, 1998, and as may be amended from time to time.
2.02 BASE COMPENSATION: means the annual salary amount payable to Executive
by the Company pursuant to Section 4.01, as such amount may be
adjusted from time to time.
2.03 BOARD: means the Board of Directors of the Company.
2.04 CEO: means the Chief Executive Officer of the Company.
2.05 CODE: means the Internal Revenue Code of 1986, as amended from time to
time.
2.06 COMMITTEE: means the Compensation Committee of the Board of Directors
of Diversified Senior Services, Inc. or any successor committee of the
Board which deals with compensation.
2.07 COMPANY: means Diversified Senior Services, Inc., a North Carolina
corporation.
2.08 EFFECTIVE DATE: means February 16, 1998.
2.09 EXCESS PARACHUTE PAYMENTS: means "excess parachute payments" as that
term is defined under Code Section 280G(b).
2.10 EXECUTIVE: means Bernard P. Gawley, a New York resident, Social
Security number ###-##-####.
2.11 FUNDAMENTAL CHANGE: means any of the following events:
(a) the sale by the Company of substantially all of its assets to a
single purchaser or a group of associated or affiliated
purchasers who are not affiliated with the Company;
(b) the sale, exchange or other disposition, in one transaction to an
entity or entities not affiliated with the Company, of more than
fifty percent (50%) of the outstanding capital stock of the
Company other than a sale, exchange or disposition of the capital
stock of the Company resulting from a public or private offering
of capital stock or other security convertible into capital stock
of the Company which offering is sponsored or initiated by the
Company and approved by the Board;
(c) the merger or consolidation of the Company in a transaction in
which the stockholders of the Company receive less than fifty
percent (50%) of the outstanding voting stock of the new or
continuing entity;
(d) a change in control of the Board as constituted as of the
Effective Date.
2.12 NORMAL RETIREMENT: means retirement by Executive from employment with
the Company after the date he attains age seventy-five (75) or such
earlier age as requested by Executive and approved by the Committee.
2.13 SEVERANCE EVENTS: means a termination without cause by the Company at
any time in accordance with Section 3.04(a) of the Executive's
employment with the Company or, upon the occurrence of a Fundamental
Change and within three (3) months before or eighteen (18) months
after such Fundamental Change:
(a) a meaningful reduction in Executive's title, duties or
responsibilities by the Company;
(b) a greater than ten percent (10%) reduction of Executive's Base
Compensation by the Company; or
(c) a Company-required relocation of Executive's workplace beyond a
30-mile radius from either the Company's principal office in
Winston-Salem, North Carolina or Executive's then current
principal residence.
2.14 TOTAL DISABILITY: means a physical or mental condition arising after
Executive commences employment with the Company which totally and
permanently prevents him from performing his usual and customary
duties as an employee of the Company. Executive will be deemed to have
suffered a Total Disability when he:
(a) has been declared legally incompetent by a final decree of a
court of competent jurisdiction (the date of such decree being
deemed to be the date on which the disability occurred);
(b) receives disability insurance benefits for a period of six (6)
consecutive months from any disability income insurance policy
maintained by the Company; or
(c) has become permanently disabled, which shall be deemed to exist
upon a determination by the Board:
(1) that Executive has become physically or mentally
incapacitated or disabled; and
(2) that such incapacity or disability has continued for a
period of six (6) consecutive months or for shorter periods
aggregating nine (9) months during any consecutive fifteen
(15) month period.
ARTICLE III
TERMS AND DUTIES
3.01 TERM. The term of this Agreement shall be for two (2) years from the
Effective Date and shall be extended a day for each day Executive is
employed by the Company on or before his seventy-third (73rd)
birthday, so that the Agreement shall always be effective for a term
ending with the date of the earlier of Executive's seventy-fifth
(75th) birthday or two (2) years from his most recent date of
employment with the Company.
3.02 DUTIES. Executive shall serve as the President and Chief Operating
Officer of DSS Funding, Inc., a wholly owned subsidiary of the
Company, or in such other position of the same or greater stature as
the Company may direct or desire, subject at all times to the control
of the CEO. Executive shall perform such other or additional duties as
shall reasonably be assigned to him from time to time by the CEO,
which duties shall be those customarily performed by a corporate
officer having executive responsibilities of the position in which he
is employed under this Agreement and in a business similar to the
Company. During the term of this Agreement, Executive also agrees to
serve, if elected, as an officer and director of any subsidiary or
affiliate of the Company and to provide services to other entities as
directed by the CEO.
3.03 EXTENT OF SERVICES. Executive shall use his best efforts to devote his
entire business time, attention, skills, abilities and energies to
promote the business and best interest of this Company, and will
perform such duties as are assigned to him by the CEO, in accordance
with and pursuant to all of the terms and conditions contained in this
Agreement, and shall, during the term of this Agreement, be engaged in
any other business activity only if reasonably approved by the CEO,
regardless of whether such activity is pursued for gain, profit, or
other pecuniary advantage; provided, however, this Section 3.03 shall
not prevent Executive from investing his assets in such form or manner
as will not require any services by Executive in the operation of the
affairs of the companies in which such investments are made. Executive
shall serve in such other executive capacity or capacities as may be
specified from time to time by the CEO.
Anything contained in this paragraph 3.03 notwithstanding, Executive
shall be allowed to provide consulting services to PW Funding located
in Mineola, NY, through approximately the end of February 1998 in
return for the provision by PW Funding of office and secretarial
support during the month of February. During this period, the
Executive shall nevertheless allocate the majority of his time to
activities pertaining to the Company's business. Thereafter, Executive
may work or provide services and receive compensation on his own time
without being considered in violation of the provisions of this
Article III for the provision of services on project loans associates
with Woodview Associates located in East Haven, Connecticut; The
Gateway Apartments located in Council Bluffs, Iowa and the Northern
Manhattan Nursing Home located in New York City, New York.
3.04 TERMINATION OF EMPLOYMENT.
(A) WITHOUT CAUSE. Either party may terminate this Agreement without
cause at any time, including the occurrence of a Fundamental
Change, upon thirty (30) days written notice to the other party.
Upon such termination by the Company, the Company shall be
obligated to continue to pay Executive the Base Compensation
amount due Executive under Section 4.01 and all accrued incentive
compensation through the date of termination, plus any other
compensation due him under Article V. Upon such termination by
Executive for any reason other than Normal Retirement, the
Company shall be obligated to pay Executive only the Base
Compensation amount due Executive under Section 4.01 plus all
accrued incentive compensation through the date of termination.
Upon such termination by Executive upon his Normal Retirement,
the Company shall be obligated to pay Executive only the Base
Compensation amount due Executive under Section 4.01 for the
three (3) months following the date of termination.
(B) WITH CAUSE. The Company may terminate this Agreement with cause
at any time immediately upon delivery of written notice to
Executive. Upon such termination, the Company shall be obligated
to continue to pay Executive only the Base Compensation amount
due Executive under Section 4.01 for thirty (30) days following
the date of the delivery of the notice of termination, which date
shall be for all purposes of this Agreement, the date of
termination of his employment.
Executive's employment shall be considered terminated with cause
if terminated for (1) any act of fraud, misappropriation,
embezzlement or similar act involving malfeasance or moral
turpitude; (2) conviction of a felony of a heinous nature; (3)
material failure to perform the services and duties described
herein (except in the case of death or disability), material
violation of any Agreement provisions, or material breach of any
fiduciary duty to the Company, if the material failure, violation
or breach unreasonably continues after written notice of the
breach or violation is given to the Executive by the Company; (4)
gross misconduct, misfeasance or malfeasance in connection with
his employment under this Agreement, which shall include, but not
be limited to, excessive absences from work, failure to follow
reasonable directives from the CEO, neglect of duty, negligence,
disloyalty, directly or indirectly accepting or soliciting any
business of the type conducted by the Company during the term of
this Agreement in direct competition with the Company, without
prior authorization of the Board, dishonesty, intemperance,
immorality, disobedience of the Company's rules, disrespect,
unnecessarily endangering, damaging or destroying life or
property, or similar conduct injurious to the Company; (5)
failure of DSS Funding to achieve break even operations by the
end of its twelfth full month of operations; or (6) other
behavior which adversely reflects on the reputation of the
Company such as substance abuse, public intoxication, etc.
Whether cause for such termination exists shall be determined by
the CEO. If on or before the date of such determination by the
CEO, the individual who, as of the Effective Date, is CEO has
retired, become disabled or died, the Committee shall make such
determination and the Committee's determination of cause shall be
subject to arbitration as described in Article VII.
(C) TOTAL DISABILITY. Upon the Total Disability of Executive during
the term of this Agreement, this Agreement shall terminate
immediately and the Company shall be obligated to continue to pay
Executive only the Base Compensation amount due Executive under
Section 4.01 for the three (3) months following the date of
termination.
In determining Total Disability under Section 2.14 for purposes
of this Section 3.04(c), the Board shall rely upon the written
opinion of the physician regularly attending Executive in
determining whether a disability is deemed to exist. If the Board
disagrees with the opinion of such physician, the Board may
choose a second physician, and the two (2) physicians shall
choose a third physician, and the written opinion of a majority
of the three (3) physicians shall be conclusive as to Executive's
disability. The date of any written opinion conclusively finding
Executive to be disabled is the date on which the disability will
be deemed to have occurred. The expenses associated with the
utilization of any physician other than the physician regularly
attending Executive shall be borne by the Company. Executive
hereby consents to any required medical examination and agrees to
furnish any medical examination and agrees to furnish any medical
information requested by the Company and to waive any applicable
physician/patient privilege that may arise because of such
determination.
(D) DEATH. Upon the death of Executive during the term of this
Agreement, this Agreement shall terminate immediately and
Executive's estate shall be entitled to receive the Base
Compensation amount due Executive under Section 4.01 for the
three (3) months following the Executive's date of death.
(E) EARLY RETIREMENT. The Company currently does not have an early
retirement policy and, therefore, the Executive shall not obtain
any rights to early retirement under this Agreement.
ARTICLE IV
BASE COMPENSATION, BONUSES, BENEFITS AND PERQUISITES
4.01 BASE COMPENSATION AND BONUSES. For all the services to be rendered by
Executive pursuant to his Agreement, the Company shall pay Executive a
Base Compensation as set forth on the "Schedule of Compensation"
attached to this Agreement as Exhibit A and made a part hereof by this
reference. Said Compensation shall be payable in accordance with the
Company's regular payroll procedures. In the event Executive receives
any periodic payments representing lost compensation under any health,
disability, accident and/or salary continuation insurance policy, the
premiums for which have been paid by the Company, the amount of salary
that Executive would be entitled to receive from the Company shall not
be decreased by the amount of such payments. Executive shall also be
entitled to any cash bonuses as may be granted by the Company from
time to time with regard to his services as an employee of the
Company. The Company and Executive from time to time by mutual
agreement may reflect increases in Executive's Base Compensation by
entering any such increase upon Exhibit A. If an increase is entered
on Exhibit A and duly signed by the Company and Executive, such entry
shall constitute an amendment to this Agreement as of the effective
date of such entry designated in such Exhibit A and shall supersede
the Base Compensation provided for in this Section 4.01 or any other
increase or increases previously made in Exhibit A. In the event that
the Company requests and Executive agrees to the deferral of part or
all of Executive's Base Compensation, Executive shall be entitled to
repayment of such base amount, plus an additional amount as shall be
provided in detail on the "Schedule for Repayment and Computation of
Deferred Compensation" attached to this Agreement as Exhibit B and
made a part of this Agreement by this reference. At the time of any
entry on Exhibit B, such entry shall be duly signed by the Company and
Executive and such entry shall constitute an amendment to this
Agreement as of the effective date of such entry designed in such
Exhibit B.
4.02 EXPENSE REIMBURSEMENT. Executive shall be entitled to reimbursement
for all reasonable travel and other business expenses incurred by him
in the performance of services under this Agreement. All expenses
described under this Section 4.02 shall be reimbursed by the Company
upon presentation of expense statements or vouchers and such other
supporting information as the Company may reasonably request.
4.03 EMPLOYEE BENEFITS AND PERQUISITES. Based on his years of service, his
compensation (but only to the extent provided under Section 4.01 and
as permitted to be taken into account under the Code) and his position
with the Company, Executive shall be entitled to participate in the
major medical, hospitalization, life insurance, vacation, sick leave
or disability, pension or retirement, profit-sharing, stock-based
incentive and other fringe benefit plans which are generally provided
by the Company to its similarly situated employees and the Company
agrees to provide such basic benefits. Further, for each Year of the
term of this Agreement, in the discretion of the Board, the Company
shall provide and Executive receive any and all working facilities,
perquisites and incentives, and such other benefits to the extent they
are generally provided and continue to be provided by the Company to
its other similarly situated executives during the Year. For purposes
of identifying the benefits and perquisites contemplated by this
Section 4.03, except as prohibited or found to be discriminatory under
current provisions of the Employee Retirement Income Security Act of
1974 or applicable North Carolina law,
ARTICLE V
SEVERANCE PAY
5.01 ELIGIBILITY.
(a) In addition to any amounts due under Section 3.04 of this
Agreement or any other benefit or incentive plan of the Company,
executive shall receive a lump sum compensatory payment from the
Company as determined in Section 5.02, if during the term of this
Agreement a Severance Event occurs. In no event shall the
Severance Pay amount determined under Section 5.02 be reduced by
the amount of any payments or benefits due under any other plan
or program outside of this Article V, unless specifically taken
into account in Section 5.02(a).
(b) Executive shall not be entitled to any Severance Pay amount under
this Article V, if Executive's employment with the Company is
terminated with cause under Section 3.04(b) or as a result of his
Normal Retirement, death, Total Disability, or voluntary
termination by him of this Agreement under Section 3.04(a).
5.02 PAYMENT AMOUNT AND TIMING.
(A) AMOUNT. The Company shall pay to Executive an amount referred to
in this Article V as "Severance Pay." Subject to adjustment as
provided in Section 5.03(b), the Severance Pay to be received by
the Executive shall be an amount equal to the following, less one
dollar ($1.00): (a) three (3) times the Executive's average Base
Compensation received for the immediately preceding five (5)
fiscal years; or, (b) if Executive has been employed by the
Company for less than five (5) years, then the annualized average
of any Base Compensation received during such period. This
provision is intended to comply with the definitions set forth in
Code Sections 280G(b)(3) and (d)(1) and (2). For purposes of this
Agreement, the term "Severance Pay Cap" shall mean the maximum
amount which may be paid to Executive without constituting an
Excess Parachute Payment. The value of any non-cash benefit of
any deferred cash payments shall be determined by the Company in
accordance with the principles of Code Section 280G(d)(3) and
(4). The Company reserves the right, after consultation with its
chosen tax counsel, to make a reasonable determination of the
Severance Pay Cap under Code Section 280G. It is the intention of
the parties to this Agreement that Executive's Severance Pay
shall not exceed an amount which is deductible in full by the
Company when paid, except as permitted under Section 5.02(c).
(B) TIMING. The Company shall pay the Severance Pay amount determined
under this Section 5.02 in a single lump sum to Executive not
later than thirty (30) days after the Severance Event occurs.
5.03 REIMBURSEMENT FOR EXCISE TAX AND ADDED INCOME TAX.
(a) The Severance Pay provided under Section 5.02 is not intended to
be treated as an Excess Parachute Payment. The Company shall take
such actions as may be available and practical, and Executive
shall cooperate with any such actions, to provide clear and
convincing evidence to the Internal Revenue Service and/or the
State of North Carolina that any such payments were not
contingent upon a change in Company ownership and otherwise were
not Excess Parachute Payments.
(b) If, despite the efforts of the Company and Executive, the
Internal Revenue Service successfully treats all or any portion
of those payments as Excess Parachute Payments, the Company shall
protect Executive from depletion of the amount of such payments
by reimbursing him for the effects of any additional federal or
State of New York income or excise taxes payable as a result of
such payments, including any reimbursement under this Section
5.03. Such reimbursement shall be made to Executive by the
Company as an annual payment for each affected taxable year of
Executive, in addition to any payments due under Section 5.01, in
an amount equal to the amount of any Section 5.01 payments
treated by the Internal Revenue Service as Excess Parachute
Payments for such taxable year multiplied by a fraction with (1)
as the numerator and (2) as the denominator, where
(1) is the combined excise tax rate applicable to such Excess
Parachute Payments under Code Section 4999 and any similar
State of New York excise tax rate, and
(2) is the difference of 1.0 minus both (A) the combined federal
excise tax rate applicable to such Excess Parachute Payments
under Code Section 4999 and any similar State of New York
excise tax rate, and (B) the combined marginal federal and
State of New York income tax rate applicable to the
additional payment provided under this Section 5.03(b) for
the taxable year of Executive for which such payment is
considered to be taxable income.
ARTICLE VI
INFORMATION, DOCUMENT AND EMPLOYEE SOLICITATION
6.01 CONFIDENTIAL INFORMATION AND DISCOVERIES. Executive agrees that all
information of a technical or business nature such as know-how, trade
secrets, secret business information, plans, data processes,
techniques, etc., except such information and skills generally known
in the Company's trade and business, information made public by the
Company or generally of a public nature, and knowledge of Executive
not constituting a trade secret ("Confidential Information"), acquired
by Executive in the course of his employment by the Company, is a
valuable business property right of the Company. Executive agrees,
that such Confidential Information, whether in written, verbal or
model form, shall not be disclosed to anyone outside the employment of
the Company without the express written authorization of the Company.
Confidential Information shall include, without limitation, vendor
lists and records, customer lists, business policies, business
methods, financial information and any other similar material of any
kind relating to the business of the Company. In the event of an
actual or threatened breach of this provision, the Company shall be
entitled to an injunction restraining Executive from such action, and
the Company shall not be prohibited in obtaining such equitable relief
or from pursuing any other available remedies for such breach or
threatened breach, including recovery of damages from Executive.
6.02 RETURN OF DOCUMENTS. Upon the termination of this Agreement, Executive
shall forthwith return and deliver to the Company and shall not retain
any original or copies of any books, papers, price lists or vendor
contracts, bids or customer lists, files, books of account, notebooks
and other documents and data relating to the performance of services
rendered by Executive hereunder, all of which materials are hereby
agreed to be the property of the Company.
6.03 SOLICITATION OF EMPLOYEES. Executive agrees that for a period of
eighteen (18) months following the termination of Executive's
employment with the Company, Executive shall not directly or
indirectly, personally or with any other employees, agents or
otherwise, on behalf of himself or any other person, firm or
corporation, solicit or cause any person under his control to solicit
any employee of the Company, or any employee of any Company subsidiary
to affiliate to terminate his or her employment with the Company or
such subsidiary or affiliate. In the event of an actual or threatened
breach of this provision, the Company shall be entitled to an
injunction restraining Executive from such action, and the Company
shall not be prohibited in obtaining such equitable relief or from
pursing any other available remedies for such breach of threatened
breach including recovery of damages from Executive.
6.04 PROJECT FINANCINGS. Anything contained in this Article VI
notwithstanding, Executive shall be allowed to continue to provide
financing related services to proposed project loans originated by him
where such project loans do not involve the company as project sponsor
or developer or where the Company gives express permission for the
Executive to continue to provide such financing services as were
contemplated to be provided by the Executive while employed by the
Company; provided, however, that 50% of the origination fees
associated with any proposed project commenced prior to the
termination of Executive employment will be paid to the Company at
closing of the proposed financing.
ARTICLE VII
ARBITRATION
Any claim, dispute or controversy arising out of or relating to this Agreement,
the parties relationship under this Agreement or the breach of this Agreement
shall be determined by a single arbitrator pursuant to the applicable rules of
practice and procedures of either the Private Adjudication Center, Inc., an
affiliate of the Duke University School of Law, or of the American Arbitration
Association, as such rules shall be in effect at the time the demand for
arbitration is filed, at the Company's sole election. The parties hereby agree
that the arbitration proceeding shall be private and confidential and shall not
be published in any form or manner. The location of the arbitration shall be at
the Private Adjudication Center's facilities at the Duke Law School, Durham,
North Carolina in the event that the Company elects to apply the rules of
practice and procedure of the Center or shall be in Winston-Salem, North
Carolina in the event the Company elects to apply the rules of the American
Arbitration Association. The decision of the arbitrator shall be final and
binding Judgment to enforce the decision or award of the arbitrator may be
entered in any court having jurisdiction and the parties hereby agree not to
object to the jurisdiction of the North Carolina General Court of Justice for
such purpose. Nothing contained herein shall in any way deprive the Company of
its claim to obtain an injunction or other equitable relief arising out of
Executive's breach of the provisions of Articles IV and VII. In the event of the
termination of Executive's employment, Executive's sole remedy shall be
arbitration as herein provide. The parties agree that no punitive damages shall
be awarded pursuant to any claim brought hereunder.
The parties agree that service of process relating to any arbitration proceeding
shall be made by certified mail. In any judicial proceeding to enforce this
agreement to arbitrate, the only issues to be determined shall be the existence
of the agreement to arbitrate and the failure of one party to comply with that
agreement, and those issues shall be determined summarily by the court without a
jury. All other issues shall be decided by the arbitrator, whose decision
therein shall be final and binding. There may be no appeal of an order
compelling arbitration except as part of an appeal concerning confirmation of
the decision of the arbitrator.
ARTICLE VIII
MISCELLANEOUS
8.01 PLACE OF EXECUTIVE'S RESIDENCE. The Company shall not require
Executive to relocate his place of residence, principal or otherwise,
except upon Executive's consent. If Executive consents to any change
of residence, the Company shall pay all reasonable relocation
expenses.
8.02 RESIGNATION UPON TERMINATION. In the event of termination of this
Agreement other than by death, Executive shall, and shall be deemed to
have, resigned from all positions held with the Company, including
without limitation, any position as a director, officer, agent,
trustee or consultant of the Company or any affiliate of the Company
effective the date of termination of employment.
8.03 ENFORCEMENT. Both parties recognize that the services to be rendered
under this Agreement by Executive are special, unique and of
extraordinary character and that in the event of the breach by
Executive of any of the terms and conditions of this Agreement to be
performed by him, then the Company shall be entitled, if it so elects,
to institute and prosecute proceedings in any court of competent
jurisdiction, either at law or in equity, to obtain damages for any
breach hereof, or to enjoin Executive from performing acts prohibited
hereby, but nothing herein contained shall be construed to prevent
such other remedy in the courts as the Company may elect to invoke.
8.04 WAIVER OF BREACH. The waiver by a party hereto of a breach of any
provision of this Agreement by the other party hereto shall not
operate or be construed as a waiver of any subsequent breach by such
party.
8.05 SELF-INTEREST. Executive shall not vote or decide upon any matter
related directly or indirectly to him or any right of his to claim any
benefit under the Agreement.
8.06 NOTICES. Any notice required or permitted to be given under this
Agreement shall be sufficient if in writing and if sent by registered
or certified mail to executive or the Company at the address set forth
below their signatures at the end of this Agreement or to such other
address as they shall notify each other in writing.
8.07 WITHHOLDING OF TAXES. The Company may withhold from any benefits
payable under this Agreements all federal, state and other taxes as
shall be required pursuant to any law or governmental regulation or
ruling.
8.08 TAX EFFECTS. The Company makes no warranties or representations with
regard to the tax effects or results of this Agreement. Executive
shall be deemed to have relied upon his own tax advisors with regard
to such effects.
8.09 ADMINISTRATION. This Agreement shall be administered, with the advice
and consent of the Committee, by the CEO. All reasonable
determinations and interpretations of the Code and this Agreement made
by the Company or its chosen tax counsel, shall be binding and
conclusive on all parties to this Agreement.
8.10 BURDEN AND BENEFIT. This Agreement shall be binding upon and inure to
the benefit of the Company and its successors and assigns and
Executive and his personal representatives, heirs, legatees and
beneficiaries, but shall not be assignable by Executive.
8.11 CONSTRUCTION. This Agreement shall be construed in accordance with the
laws of the State of North Carolina in every respect, including
without limitation, validity. interpretation and performance. Words
used in this Agreement, other than as specifically defined in Article
II, have the meaning their context dictates. If, however, a situation
arises in which an undefined word in this Agreement has a different
meaning in legal usage than that in common use, and its is unclear to
the parties which usage is proper under the circumstances, the
ambiguity shall be resolved by the Committee in favor of the meaning
in common usage. Headings and sub-headings have been added only for
convenience of reference and shall have no substantive effect.
References to the masculine gender shall include the feminine and the
singular the plural whenever appropriate.
8.12 ENTIRE AGREEMENT. This Agreement supersedes all prior discussions and
agreements by and between the Company, or any of its officers,
directors employees, or agents, and Executive with respect to all
matters relating to the employment by Company of Executive and all
other matters contained in this Agreement constitute the sole and
entire Agreement with respect to such employment. Any representation,
inducement, promise or agreement, whether oral or written, between the
Company, or any of its officers, directors employees, or agents, an
Executive which is not embodied in this Agreement shall be of no force
and effect and Executive represents and warrants that he has not
executed this Agreement in reliance upon any such representation or
promise.
8.13 IMPLIED TERMS. The terms, conditions, obligations and duties expressed
in this Agreement are in addition to any duties and obligations
implied in law to an employment relationship except where any
expressed condition is contrary to the implied condition and in which
case, the express condition will apply and control.
8.14 AUTHORITY. All of the provisions of this Agreement required to be
approved by the Committee have been so approved and authorized. Any
other action to be taken by the Company under the terms of this
Agreement shall be by the affirmative vote of a majority of those
members of the Committee.
8.15 AMENDMENT. This Agreement may be amended as provided in Section 4.01
or at any other time by the written mutual agreement of Executive and
the Company executed in a form similar to that of this original
Agreement.
8.16 SEVERABILITY. If any term, covenant or condition of this Agreement or
its application to any person or circumstance shall to any extent be
found to be invalid or unenforceable by a court of competent
jurisdiction, the remainder of this Agreement or the application of
such term, covenant or condition to persons or under conditions other
than those for which it is held invalid or unenforceable, shall not be
affected by such holding and each such remaining portion of this
Agreement shall be valid and be enforced to the fullest extent
permitted by law.
8.17 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original, but all
of which together shall constitute one agreement.
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its
duly authorized officer and Executive has signed this Agreement as of the day
and year first above written.
COMPANY:
DIVERSIFIED SENIOR SERVICES, INC.
By: /s/ SUSAN L. CHRISTIANSEN
-----------------------------------
Susan L. Christiansen
EXECUTIVE:
/s/ BERNARD P. GAWLEY (SEAL)
----------------------------------
Bernard P. Gawley
<PAGE>
EXHIBIT A
SCHEDULE OF COMPENSATION
The undersigned hereby agree that the Base Compensation due Executive under
Section 4.01 of the attached Agreement shall be $100,000 payable in accordance
with the Company's regular payroll procedures beginning with the effective date
of this Agreement, and for each successive year thereafter during the remaining
term of the Agreement, unless and until further changed by mutual agreement as
provided in Section 4.01.
This the 16th day of February, 1998.
COMPANY:
DIVERSIFIED SENIOR SERVICES, INC.
By: /s/ SUSAN L. CHRISTIANSEN
---------------------------------
Susan L. Christiansen
EXECUTIVE:
/s/ BERNARD P. GAWLEY (SEAL)
----------------------------------
Bernard P. Gawley
<PAGE>
EXHIBIT B
SCHEDULE FOR REPAYMENT
AND COMPUTATION OF DEFERRED COMPENSATION
NONE
EXHIBIT 21
SUBSIDIARIES
All subsidiaries are 100% owned by Diversified Senior Services, Inc., and
do business under their corporate names.
Residential Properties Management, Inc., a North Carolina corporation
DSS Funding, Inc., a North Carolina corporation
Diversified Senior Services of Virginia, Inc., a Virginia corporation
EXHIBIT 23
CONSENT OF THE DANIEL PROFESSIONAL GROUP, INC.
INDEPENDENT AUDITORS' CONSENT
To the Board of Directors and Shareholders of
Diversified Senior Services, Inc. and Subsidiaries
We consent to the use in this Annual Report on Form 10-KSB our report dated
February 19, 1999 on the consolidated financial statements of Diversified Senior
Services, Inc. and subsidiary as of December 31, 1998 and for the year then
ended.
THE DANIEL PROFESSIONAL GROUP, INC.
Winston-Salem NC
March 30, 1999
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the person whose signature
appears below constitutes and appoints William G. Benton, G. L. Clark, Jr. and
Susan L. Christiansen his true and lawful attorneys-in-fact and agents, each
acting alone, with full powers of substitution and resubstitution, for him and
his name, place and stead, in any and all capacities, to sign the Annual Report
on Form 10-KSB for the period ended December 31, 1998, any or all amendments to
such Annual Report, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange commission,
granting unto said attorneys-in-fact and agents, each acting alone, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, each acting alone, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Dated: March 29, 1999
/S/ PERRY C. CRAVEN
----------------------------------
Perry C. Craven
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the person whose signature
appears below constitutes and appoints William G. Benton, G. L. Clark, Jr. and
Susan L. Christiansen his true and lawful attorneys-in-fact and agents, each
acting alone, with full powers of substitution and resubstitution, for him and
his name, place and stead, in any and all capacities, to sign the Annual Report
on Form 10-KSB for the period ended December 31, 1998, any or all amendments to
such Annual Report, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange commission,
granting unto said attorneys-in-fact and agents, each acting alone, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, each acting alone, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Dated: March 28, 1999
/S/ WALTER H. ETTINGER, JR.
----------------------------------
Walter H. Ettinger, Jr.
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