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Previous: PENTEGRA DENTAL GROUP INC, 10-Q, EX-27.1, 2000-11-14 |
Next: DIVERSIFIED SENIOR SERVICES INC, 10QSB, EX-27, 2000-11-14 |
(Mark One) |
[X] |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
For the quarterly period ended September 30, 2000 |
[ ] |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
For the transition period from to
North Carolina |
56-1973923 |
Check whether the Registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No
As of October 31, 2000, the Registrant had 3,761,400 shares of Common Stock, no par value, outstanding.
Transitional Small Business Disclosure Format Yes No X
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Page |
PART I: |
FINANCIAL INFORMATION |
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Item 2. |
Management's Discussion and Analysis of |
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PART II: |
OTHER INFORMATION |
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(Unaudited) September 30, December 31, 2000 1999 --------------- ---------------- ASSETS Current assets: Cash and cash equivalents $ 95,001 $ 383,701 Development fees and costs due from affiliates -- 1,235,650 Accounts receivable - trade 115,766 86,893 Accounts receivable - properties 50,000 -- Prepaid expenses and other 147,657 120,109 Interest receivable 32,420 28,796 Notes receivable - properties 34,220 86,206 ------ ------ 475,064 1,941,355 Furniture and equipment, net 99,021 112,852 Development costs 462,095 606,911 Development fees and costs due from affiliates 4,534,138 3,917,140 Accounts receivable - affiliates 715,640 669,507 Accounts receivable - properties 1,312,823 687,159 Interest receivable 120,446 43,789 Notes receivable - properties 2,718,206 1,673,909 Investment in bonds 300,000 300,000 Other assets 286,993 250,000 ------- ------- $ 11,024,426 $ 10,202,622 ============ ============ LIABILITIES Current liabilities: Accounts payable and accrued expenses $ 452,804 $ 308,047 Commitments - affiliates with properties under construction 36,102 38,595 Preferred dividends payable 103,050 242,735 ------- ------- 591,956 589,377 Note payable 1,000,000 -- Accounts payable - affiliates 602,027 760,246 Deferred salaries and bonuses 191,823 191,823 ------- ------- 2,385,806 1,541,446 ========= ========= SHAREHOLDERS' EQUITY Preferred stock, no par, authorized 100,000,000 shares; 180,104 issued and outstanding at September 30, 2000 and 180,611 at December 31, 1999 3,998,026 4,914,068 Common stock, no par, authorized 100,000,000 shares; 3,761,400 shares issued and outstanding at September 30, 2000 and 3,301,400 at December 31, 1999 7,235,288 6,319,246 Deemed distribution (1,335,790) (1,335,790) Preferred dividends (610,291) (299,941) Accumulated deficit (648,613) (936,407) 8,638,620 8,661,176 --------- --------- $ 11,024,426 $ 10,202,622 ============ ============ See accompanying notes and independent accountants' review report.
Three Months Three Months Nine Months Nine Months Ended Ended Ended Ended September 30, September 30, September 30, September 30 2000 1999 2000 1999 ----------- ----------- ----------- ----------- Income: Management fees $ 306,731 232,448 $ 844,924 $ 652,903 Reimbursement income 1,112,668 549,455 2,786,211 1,353,456 Development fees 70,096 515,170 873,955 1,801,502 Other 27,326 23,241 89,509 269,513 ------ ------ ------ ------- 1,516,821 1,320,314 4,594,599 4,077,374 --------- --------- --------- --------- Expenses: Personnel related 1,508,014 949,967 3,973,595 2,640,648 Administrative and other 142,353 295,296 599,441 703,442 Depreciation and amortization 21,004 20,570 48,359 60,293 ------ ------ ------ ------ 1,671,371 1,265,833 4,621,395 3,404,383 --------- --------- --------- --------- Operating income (loss) (154,550) 54,481 (26,796) 672,991 Other income (expenses): Interest and other income 130,183 145,263 366,949 173,490 Interest and other expenses (28,320) (23,160) (52,359) (26,708) ------- ------- ------- ------- Net income (loss) before cumulative effect of change in accounting for development related costs (52,687) 176,584 287,794 819,773 Cumulative effect of change in accounting for development related costs -- -- -- 328,566 ------- ------- ------- ------- Net income (loss) (52,687) 176,584 287,794 491,207 Preferred stock dividends 103,050 109,533 310,350 166,738 ------- ------- ------- ------- Net income (loss) available for common shareholders $ (155,737) $ 67,051 $ (22,556) $ 324,469 =========== =========== =========== =========== Per share data: Net income (loss) available to common shareholders before cumulative effect of change in accounting for development related costs $ (0.04) $ 0.02 $ (0.01) $ 0.20 Cumulative effect of change in accounting for development related costs -- -- -- 0.10 ----------- ----------- ----------- ----------- Net income (loss) per share - basic and diluted $ (0.04) $ 0.02 $ (0.01) $ 0.10 Weighted average shares outstanding - basic 3,750,192 3,301,400 3,646,274 3,301,400 ========= ========= ========= ========= Weighted average shares outstanding - diluted 3,750,192 3,324,287 3,646,274 3,326,693 ========= ========= ========= ========= See accompanying notes and independent accountants' review report.
Preferred Common Preferred Common Shares Shares Stock Stock --------- ----------- ----------- ----------- Balance, January 1, 1999 178,386 3,301,400 $ 891,930 $ 6,319,246 Issuance of preferred stock 1,858 $ 3,360,832 Decrease in unrealized gain Preferred dividends -- -- -- -- Net income for the nine months ended September 30, 1999 -- -- -- -- ----------- ----------- ----------- ----------- Balance, September 30, 1999 180,244 3,301,400 $ 4,252,762 $ 6,319,246 =========== =========== =========== =========== Balance, January 1, 2000 180,611 3,301,400 $ 4,914,068 $ 6,319,246 Conversion of preferred stock (507) 460,000 (916,042) 916,042 Preferred dividends Net income for the nine months ended September 30, 2000 ----------- ----------- ----------- ----------- Balance, September 30, 2000 180,104 3,761,400 $ 3,998,026 $ 7,235,288 =========== =========== =========== =========== See accompanying notes and independent accountants' review report.
Deemed Preferred Accumulated Distribution Dividends Deficit Total ------------- ----------- ------------- ----------- Balance, January 1, 1999 $(1,335,790) $ -- $(1,293,560) $ 4,581,826 Issuance of preferred stock 3,360,832 Decrease in unrealized gain (16,061) (16,061) Preferred dividends (166,738) (166,738) Net income for the nine months ended September 30, 1999 -- -- 491,207 491,207 ----------- ----------- ----------- ----------- Balance, September 30, 1999 $(1,335,790) $ (166,738) $ (818,414) $ 8,251,066 =========== =========== =========== =========== Balance, January 1, 2000 $(1,335,790) $ (299,941) $ (936,407) $ 8,661,176 Conversion of preferred stock -- Preferred dividends (310,350) (310,350) Net income for the nine months ended September 30, 2000 287,794 287,794 ----------- ----------- ----------- ----------- Balance, September 30, 2000 $(1,335,790) $ (610,291) $ (648,613) $ 8,638,620 =========== =========== =========== =========== See accompanying notes and independent accountants' review report.
Three Months Three Months Nine Months Nine Months Ended Ended Ended Ended September 30, September 30, September 30, September 30, 2000 1999 2000 1999 ------------- -------------- -------------- ------------- Operating activities: Net income (loss) $ (52,687) $ 176,584 $ 287,794 $ 491,207 ----------- ----------- ----------- ----------- Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities: Depreciation and amortization 21,004 20,570 48,359 60,293 Cumulative effect of write off of -- -- -- 328,566 development related costs Allowance for uncollectible accounts receivable 5,000 -- 15,000 -- Changes in operating assets and liabilities: Accounts receivable - trade 22,157 (12,194) (28,873) (123,628) Prepaid expenses and other 17,554 96,308 7,562 (556) Accounts receivable - affiliates (1,838) (26,189) (1,838) (75,089) Interest receivable (25,319) (157,359) (80,281) (157,359) Development fees receivable, net of collections (71,776) (113,075) (702,744) (1,070,841) Accounts payable - trade 62,000 172,486 144,757 42,876 Accounts payable - affiliates (3,005) 1,502 -- 15,307 ------ ----- ------ ------ Total adjustments 25,777 (17,951) (598,058) (980,431) ------ ------- -------- -------- Net cash provided (used) by operating activities (26,910) 158,633 (310,264) (489,224) ------- ------- -------- -------- Investing activities: Investments -- (336,902) -- 301,659 Purchases of furniture and equipment (8,208) (24,141) (28,430) (34,572) Development costs reimbursed (paid) (12,401) (165,397) 144,816 (575,991) Advances to properties in exchange for notes receivable 5,909 -- (521,811) -- Advances to affiliate for properties in development, net of repayments (84,209) (214,836) 650,590 (2,259,975) Advances to and investment in properties (264,302) (859,280) (490,358) (859,280) Other (5,225) (300,000) (2,493) (300,000) ------ -------- ------ -------- Net cash used by investing activities (368,436) (1,900,556) (247,686) (3,728,159) -------- ---------- -------- ---------- Financing activities: Proceeds from bank borrowings -- -- 1,000,000 -- Proceeds from issuance of preferred stock, net -- 673,300 -- 3,360,832 Advances from affiliates, net of repayments 2,163 897,925 (202,514) 918,435 Preferred dividends paid (207,300) (57,205) (450,035) (57,205) Increase in prepaid expenses and other (51,627) (28,981) (78,201) (34,081) ------- ------- ------- ------- Net cash provided (used) by financing activities (256,764) 1,485,039 269,250 4,187,981 -------- --------- ------- --------- Net decrease in cash (652,110) (256,884) (288,700) (29,402) Cash and cash equivalents - beginning 747,111 259,632 383,701 32,150 ------- ------- ------- ------ Cash and cash equivalents - ending $ 95,001 $ 2,748 $ 95,001 $ 2,748 =========== =========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION 2000 1999 ---- ---- Cash payments for interest $ 43,192 $ - ========== ======== SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Preferred dividends declared and accrued $ 310,350 $ 166,738 Conversion of preferred stock to common stock: Decrease in preferred stock $ (916,042) $ - Increase in common stock 916,042 - ------- -------- $ - $ - ------- --------
NOTE 1: SELECTED DISCLOSURES
The accompanying unaudited consolidated financial statements, which are for interim periods, do not include all disclosures provided in the annual consolidated financial statements. These unaudited consolidated financial statements should be read in conjunction with Diversifieds 1999 Annual Report filed with the Securities and Exchange Commission on Form 10-KSB.
In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (which are of a normal recurring nature) necessary for a fair presentation of the financial statements. The results of operations for the nine months ended September 30, 2000 are not necessarily indicative of the results to be expected for the year.
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reporting amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates.
NOTE 2: ACCOUNTING POLICIES
Reclassification
Certain items in the financial statements for 1999 have been reclassified to conform to the format presented in these financial statements.
NOTE 3: RELATED PARTY TRANSACTIONS
Diversified is developing properties for 60-unit assisted living facilities and 30-unit independent senior housing residences with services. The owner of certain of the properties during development is Taylor House Enterprises, Limited (Taylor House), Diversifieds majority stockholder. Taylor House intends to sell the properties to third party owners after permanent financing is arranged. At September 30, 2000 development fees of $1,886,722 and reimbursable development costs of $2,229,292 are due to Diversified from Taylor House. At September 30, 2000, Diversified is the guarantor for $3,373,896 outstanding Taylor House construction loans for two 30-unit properties currently under construction. The total commitment for the properties currently under construction is $3,900,000.
From time to time, Diversified advances to or borrows funds from Taylor House or other related entities. The following schedule summarizes the related party activities for the nine months ended September 30, 2000 and 1999.
Due from Due (to) from Affiliated Taylor House & Partnerships Subsidiaries Total --------------- --------------- ------------ Amounts due (to) from affiliates at January 1, 1999: $ 233,616 $ 2,859,709 $ 3,093,325 Computer equipment lease payment due to Taylor House - (4,508) (4,508) Rent due to Taylor House (10,800) (10,800) Management fees due from affiliates 26,000 26,000 Development fees and costs due from properties currently held by Taylor House 2,367,240 2,367,240 Interest receivable from affiliated properties 123,834 123,834 Advances from Taylor House (1,172,940) (1,172,940) Repayments to Taylor House 120,000 120,000 Advances due from affiliate 191,594 191,594 ------- ------- Balance, September 30, 1999 $ 233,616 $ 4,500,129 $ 4,733,745 =========== =========== ===========
NOTE 3: RELATED PARTY TRANSACTIONS (continued) Due from Due (to) from Affiliated Taylor House & Partnerships Subsidiaries Total --------------- --------------------- -------- Amounts due from affiliates at January 1, 2000: $ 233,616 $ 4,828,435 $ 5,062,051 Management fees due from affiliates 10,837 10,837 Development fees and costs due from properties currently held by Taylor House - (799,325) (799,325) Interest receivable from affiliated properties - 171,674 171,674 Advances due from affiliate 44,295 44,295 Repayments to Taylor House - 172,294 172,294 Advances from Taylor House - (14,075) (14,075) ------------- ------------- -------------- Balance, September 30, 2000 $ 233,616 $ 4,414,135 $ 4,647,751 ============= ============= ==============
Included in the accompanying balance sheets under the following captions: September 30, December 31, 2000 1999 --------------- -------------- Development fees and costs due from affiliates (current asset) $ - $ 1,235,650 Development fees and costs due from affiliates (long-term asset) 4,534,138 3,917,140 Accounts receivable-affiliates (long-term asset) 715,640 669,507 Accounts payable-affiliates (long-term liability) (602,027) (760,246) -------------- -------------- $ 4,647,751 $ 5,062,051 ============== ==============
Diversified earned interest of $197,295 for the nine months ended September 30, 2000 on development fees and costs due from affiliates. Interest receivable of $383,503, net of a $23,950 allowance, is included in development fees and costs due from affiliates at September 30, 2000. There was no interest income earned from affiliates for the nine months ended September 30, 1999.
Diversified earned income from a wholly owned subsidiary of Taylor House. Diversified managed partnerships, whose general partner is Diversifieds chief executive officer and a beneficial shareholder of Taylor House. Revenues from these affiliates for the nine months ended September 30, 2000 and 1999 are as follows:
2000 1999 ------------ ------------ Management fees $ 268,193 $ 255,609 Reimbursement fees 810,966 659,978 Development fees 186,946 1,465,152 ----------- ------------ $ 1,266,105 $ 2,380,739 =========== ============
At September 30, 2000 and 1999, uncollected management fees and reimbursement fees are included in accounts receivable-trade and accounts receivable-affiliates.
NOTE 4: FURNITURE AND EQUIPMENT
The Company has furniture and equipment as follows:
September 30, December 31, 2000 1999 -------------- -------------- Computer equipment $ 259,267 $ 230,836 Office furniture 50,766 52,005 ----------- ------------ 310,033 282,841 Less accumulated depreciation (211,012) (169,989) ----------- ------------ $ 99,021 $ 112,852 =========== ============
Depreciation expense for the nine months ended September 30, 2000 and 1999 was $42,261 and $27,866.
NOTE 5: NOTES RECEIVABLE
Notes receivable consisted of the following: September 30, December 31, 2000 1999 -------------- ------------- 9% note receivable with interest payable semi-annually, due 2009 $ 515,921 $ 515,921 7% note receivable, principal and interest due 2040 574,133 574,133 7% note receivable, principal and interest due 2040 670,061 670,061 10% note receivable with interest payable monthly, due 2010 453,499 - 6.6% acquisition fee receivable, principal and interest due monthly, due 2007 470,500 - Prime based working capital line of credit, due 2001 68,312 - ------------ ------------ 2,752,426 1,760,115 Less current portion (34,220) (86,206) ------------- ------------ Notes receivable-properties $ 2,718,206 $ 1,673,909 ============= ============
Interest receivable, related to the above notes receivable was $149,241 at September 30, 2000. Interest receivable of $28,795 is included in interest receivable as a current asset, while $120,446 interest receivable is included as a long-term asset.
Maturities of the notes receivable for future years ending December 31 are as follows:
Current year $ 74,220 2001 61,256 2002 93,540 2003 148,434 2004 148,434 2005 234,641 later years 1,991,901 ------------- $ 2,752,426 =============
NOTE 6: NOTE PAYABLE
Diversified obtained a bank loan totaling $1,000,000 in April of 2000. The loan bears interest, payable monthly, at prime plus one and one-half percent (1.5%); eleven percent (11%) at September 30,2000. Quarterly principal payments of $125,000 begin on July 15, 2001. All unpaid principal and interest is due on April 15, 2003. Certain accounts and notes receivable due from unrelated third parties totaling approximately $3,700,000 at September 30, 2000 have been pledged as collateral securing this loan.
NOTE 7: INVESTMENTS
For the nine months ended September 30, 1999, proceeds from sales of Diversifieds investments were $2,883,359, resulting in gains of $34,279 and realized losses of $85,987. These gains and losses are reflected in other income in the financial statements. There were no proceeds from sales of investments in 2000.
NOTE 8: CONVERSION OF PREFERRED STOCK
On February 25, March 4, and August 28, 2000, preferred shareholders converted 22, 475 and 10 shares, respectively, of 12% Series B Cumulative Convertible Preferred Stock with no par value per share and a stated value of $2,000 per share. The preferred shares were converted to 20,000, 422,222 and 17,778 common shares, respectively.
The Company had preferred stock as follows:
September 30, 2000 December 31, 1999 -------------------------- --------------------------- Shares Amount Shares Amount --------- ---------- ------------ ---------- Series A 178,386 $ 891,930 178,386 $ 891,930 Series B 1,718 3,106,096 2,225 4,022,138 ------- ------------- ------- ------------- 180,104 $ 3,998,026 180,611 $ 4,914,068 ======= ============= ======= =============
NOTE 9: PROVISION FOR INCOME TAXES
The components of income tax benefit are as follows for the nine months ended September 30, 2000 and 1999:
9/30/00 9/30/99 Current taxes payable (refundable): ------- -------- Federal $ 44,200 $ 110,300 State 20,000 26,599 Utilization of operating loss carryforwards (64,200) (136,899) --------------- -------------- - - --------------- -------------- Deferred tax expense (benefit): Deferred compensation (53,000) 13,000 Start up costs 9,300 15,200 Development costs 69,600 - Generation of state loss carryforwards (19,200) - Utilization of loss carryforwards 64,200 154,200 All other changes 7,300 (15,000) Increase (decrease) in valuation allowance (78,200) (167,400) --------------- ------------- - - --------------- ------------- Income tax benefit $ - $ - =============== ==============
NOTE 9: PROVISION FOR INCOME TAXES - continued
The actual income tax expense attributable to income from continuing operations for the nine months ended September 30, 2000 and 1999 differed from the amounts computed by applying the U.S. federal tax rate of 34 percent to loss before income tax benefit as a result of the following:
9/30/00 9/30/99 ------- ------- Computed "expected" tax expense $ 97,800 $ 110,300 Timing differences related to deferred compensation 53,000 (4,800) Timing differences related to depreciation and amortization (12,700) (4,200) Timing differences related to development costs (69,600) - Utilization of net operating loss carryforward (44,200) (110,300) All other changes (24,300) 9,000 --------------- -------------- Income tax expense $ - $ - =============== ==============
Deferred taxes based upon differences between the financial statement and tax bases of assets and liabilities and available tax carryforwards consists of:
9/30/00 9/30/99 ------- -------- Non-current deferred tax asset: Deferred compensation $ 135,900 $ 65,200 Start-up costs 5,500 17,900 Development costs 21,900 - State operating loss carryforwards 143,800 193,400 Federal operating loss carryforward 15,100 184,700 All others 34,200 21,500 -------------- ------------- Gross deferred tax assets 356,400 482,700 Valuation allowance (237,400) (482,700) -------------- ------------- Non-current deferred tax liability: 119,000 - Deferred revenues (119,000) - -------------- ------------- Net deferred taxes $ - $ - ============== =============
At September 30, 2000 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 ------- ------ 2006 $ - $ 59,000 2007 - 116,000 2008 - 2,000 2009 - 66,000 2011 - 202,000 2012 - 601,000 2013 - 487,000 2014 - 63,000 2015 - 155,000 2018 44,000 -
NOTE 10: EARNINGS PER SHARE
The following is a reconciliation of net income per share basic and diluted for the nine months ended September 30, 2000 and 1999:
9/30/00 9/30/99 ------- -------- Net income (loss) - basic and diluted $ (22,556) $ 324,469 =============== ============= Weighted average shares outstanding - basic 3,646,274 3,301,400 Additional shares issued assuming exercise of options - 76,729 Shares assumed repurchased - (51,436) --------------- ------------- Weighted average shares outstanding - diluted 3,646,274 3,326,693 =============== =============
For the nine months ended September 30, 2000 and 1999, 218,729 and 142,000 options and warrants, respectively, were not included since conversion would be anti-dilutive. Conversion of the remaining Series B Cumulative Convertible Preferred Stock in 2000 also were not included.
NOTE 11: COMMITMENTS AND CONTINGENCIES
In 1999, Diversified entered into a loan agreement with the owner of the Goldsboro and Mocksville assisted living facilities to provide up to $500,000 in working capital as needed. Borrowings under this agreement bear interest at prime plus one percent (1%). At September 30, 2000, $68,312 was borrowed under this agreement. (Also see Note 5).
In connection with the above-described loan agreement, Diversified obtained from a bank a $500,000 irrevocable letter of credit that expired July 27, 2000. The bank has renewed the letter of credit extending the expiration date to July 27, 2001. Diversified purchased a $500,000 certificate of deposit as collateral for the letter of credit initially, and in March 2000, the bank released $250,000 to Diversified. At September 30, 2000, $250,000 is included in Other Assets.
ITEM 2. |
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. |
The discussion and analysis below should be read in conjunction with the Interim Financial Statements of Diversified and Notes appearing elsewhere in this report and the Form 10-KSB for the year ended December 31, 1999 as filed with the Securities and Exchange Commission.
Overview
Diversified Senior Services, Inc. (Diversified) was formed in May 1996 as a wholly owned subsidiary of Taylor House Enterprises, Limited (Taylor House) and began operations in July 1996. We manage apartments, primarily for seniors, and develop and manage assisted living properties and independent living properties for seniors. All properties target low and moderate income residents.
In July 1996 we acquired Residential Properties Management, Inc. (RPM), a wholly owned subsidiary of Taylor House. RPM was formed in March 1989 to manage government subsidized multi-family and elderly residential rental apartments. On January 14, 1998, we completed our initial public offering. On February 16, 1998, we formed a wholly-owned subsidiary, DSS Funding, Inc. (DSSF), a North Carolina corporation, for the purpose of securing permanent financing for the properties which we develop or acquire for third party owners. On July 22, 1998, we formed a wholly owned subsidiary, Diversified Senior Services of Virginia, Inc. (DSSVA), a Virginia corporation, for the purpose of developing and managing properties in Virginia.
Diversified, RPM and DSSF are incorporated in North Carolina, and DSSVA is incorporated in Virginia and, as C corporations, file federal income tax returns as part of a consolidated group. Diversified, RPM, DSSF and DSSVA file separate state returns since state income tax regulations do not permit filing consolidated returns.
We began offering home care services in August 1996 at selected apartment locations. We sold the home care business effective June 1, 1999 to an independent home care provider to execute a strategy to expand the availability of services to our managed properties.
We anticipate growth in income from a moderate increase in the number of residential units managed and from inflationary effects on rent and service fees. All personnel located at the residences are our employees. However, we are reimbursed for the services of site personnel. We anticipate moderate growth in reimbursement income because of increases in salaries of site personnel and an increase in the number of complexes under management.
Our first two 60-unit assisted living facilities commenced operations in June and July, 1999. We also began managing an assisted living property for an affiliated owner in October 1998. The property, located in South Boston, Virginia, is licensed for up to 64 residents but currently is configured for 50 residents. It was completed in April 1998. On March 1, 2000 we began managing two 64 resident assisted living facilities located in Newport and Shelby, North Carolina.
We continue to develop and manage 60-unit assisted living residences and 30-unit independent senior housing residences with services. As of October 15, 2000, we manage five assisted living properties stabilized at greater than 90% occupancy, and three developed facilities in initial rent-up. Additionally, we control six sites approved under North Carolinas moratorium on new assisted living facilities.
We completed construction of our first 30-unit residence in March 2000, and we have another site scheduled for completion during the fall of 2000. There are two sites ready to begin construction and an additional site we control, all of which have positive feasibility. All sites are in North Carolina.
Upon completion of these 60-unit and 30-unit residences, we will begin to recognize management fee income from the properties. Our development and construction pace depends upon our success in obtaining construction and permanent financing. There can be no assurance that we will obtain financing on a regular or timely schedule. If alternative financing cannot be arranged on acceptable terms, we may not be able to produce a pipeline of developed properties on a regular basis. We believe that in the future the development and management of assisted living facilities and residences for the elderly will provide the majority of our revenues and profits.
We develop properties for third party owners. We recognize development fee income on the percentage of completion basis. Development costs are paid by us as incurred and 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 our operating expenses are related to the personnel directly performing the management services and the corporate management staff. Between 75% and 90% of the expenses are for salaries, benefits and payroll taxes. The remaining expenses are primarily administrative expenses such as travel, rent, telephone and office expenses that support the activities of the personnel. Since our inception, the operating staff increases have been due to the addition of properties under management. However, the corporate staff has grown over that same period of time because of the need to have adequate personnel in place to support the development effort. We expect that expenses associated with operating personnel will continue to increase significantly as we expand, but we do not expect to increase the corporate staff significantly during the next several years.
Results of Operations
Three and Nine Months Ended September 30, 2000 As Compared to the Three and Nine Months Ended September 30, 1999
Income
Total income increased $517,225 to $4,594,599 for the
nine months ended September 30, 2000 from $4,077,374 for the nine months ended
September 30, 1999. Total income increased $196,507 to $1,516,821 for the three
months ended September 30, 2000 from $1,320,314 for the three months ended
September 30, 1999. The increase was the net effect of increases in management
fees and reimbursement income and a decrease in development fees and other
income.
Management Fees. Management fees increased $192,021 to $844,924 for the nine months ended September 30, 2000 from $652,903 for the nine months ended September 30, 1999. For the three months ended September 30, 2000, management fees increased $74,283 to $306,731 compared to $232,448 for the three months ended September 30, 1999. The increase was due primarily to the recognition of management fees on the two 60-unit assisted living facilities we developed, which commenced operations during the third quarter of 1999 and the management, which began in March 1, 2000, of two 64 resident assisted living facilities located in Newport and Shelby, North Carolina. We expect growth in fee income as the developed assisted living and independent living properties are completed and rented.
Reimbursement Income. Reimbursement income increased $1,432,755, to $2,786,211 for the nine months ended September 30, 2000 from $1,353,456 for the nine months ended September 30, 1999. Reimbursement income was $1,112,668 and $549,455 for the three months ended September 30, 2000 and 1999, respectively. The increase was the result of income received from the properties for personnel hired to manage the two 60-unit assisted living facilities developed by us that began accepting residents in June and July of 1999 and the two new 64 resident assisted living facilities mentioned above. We expect continued increases in reimbursement income as the number of properties under management increases.
Development Fees. Development fees decreased $927,547 to $873,955 for the nine months ended September 30, 2000 from $1,801,502 for the nine months ended September 30, 1999. Development fees were $70,096 for the three months ended September 30, 2000 compared to $515,170 for the three months ended September 30, 1999. The change is due to decreased development activities during the first nine months of 2000. Development fee income is recognized on a percentage of completion basis on the 60-unit assisted living facilities and the 30-unit independent senior housing residences we are currently developing. We expect development fee income to be cyclical, depending on the availability of both construction and permanent financing at reasonable rates.
Other Income. Other income decreased $180,004 to $89,509 for the nine months ended September 30, 2000 from $269,513 for the nine months ended September 30, 1999. Other income was $27,326 and $23,241 for the three months ended September 30, 2000 and 1999, respectively. Other income includes DSSF consulting fees and, for the nine months ended September 30, 1999, home care fees. The decrease is due to a decrease in home care fees. On June 1, 1999, we sold the home care business to an independent home care provider. We expect consulting fees earned by DSSF to be cyclical, depending on the availability of permanent financing at reasonable rates.
Operating Expenses
Operating expenses increased $1,217,012 to $4,621,395 for the nine months ended
September 30, 2000 from $3,404,383 for the nine months ended September 30, 1999.
For the three months ended September 30, 2000 and 1999, operating expenses were
$1,671,371 and $1,265,833, respectively. The increase is due to personnel
related expenses and administrative expenses.
Personnel Related Expense. Personnel expense increased $1,332,947 to $3,973,595 for the nine months ended September 30, 2000 from $2,640,648 for the nine months ended September 30, 1999. Personnel expense was $1,508,014 for the three months ended September 30, 2000 compared to $949,967 for the three months ended September 30, 1999. The increase was the net effect of an increase in site related personnel expense of $1,432,755, as mentioned above in reimbursement income, offset by a decrease in personnel expense related to the home care business which was sold on June 1, 1999. We expect increases in personnel expense in future periods depending upon increases in management and development activity.
Administrative and Other Expenses. Administrative and other expenses decreased $104,001 to $599,441 for the nine months ended September 30, 2000 from $703,442 for the nine months ended September 30, 1999. For the three months ended September 30, 2000 and 1999, administrative and other expenses were $142,353 and $295,296, respectively. The decrease was due to additional fees paid to professionals for corporate business during 1999. We expect increases in administrative expenses as the number of assisted living and independent senior housing properties managed increases for support of direct management of the properties, but only minor increases attributable to corporate management.
Other Income and Expenses. We earned $366,949 and $173,490 in interest income during the nine months ended September 30, 2000 and 1999, respectively and $130,183 compared to $145,263 for the quarters ended September 30, 2000 and 1999. The increase is the net effect of an increase in interest on funds loaned to properties and a decrease in interest earned on the funds held for development. We expect interest income in future periods from funds loaned to the owners of properties currently being developed to increase. Interest and other expenses was $52,359 for the nine months ended September 30, 2000 compared to $26,708 for the same period of 1999. Interest expense will increase since we obtained a three year loan from a bank in April of 2000.
Net Income (Loss) before cumulative effect of change in accounting for development related costs. The net income (loss) before the cumulative effect decreased $531,979 to $287,794 for the nine months ended September 30, 2000 from $819,773 for the nine months ended September 30, 1999. For the three months ended September 30, 2000 and 1999, net income (loss) before cumulative effect of change in accounting for development related costs was a loss of $52,687 and income of $176,584, respectively. The decrease was the net effect of a decrease in operating income and an increase in interest income.
Cumulative effect of change in accounting for development related costs. The change in accounting policy resulted in the write off of salaries and administrative and other expenses in the amount of $328,566 capitalized in development costs at January 1, 1999.
Net Income (Loss). The net income decreased $203,413 to $287,794 for the nine months ended September 30, 2000 from $491,207 for the nine months ended September 30, 1999. The increase was due to the net effect of a decrease in operating income, an increase in interest income and the cumulative effect of change in accounting for development related costs at January 1, 1999. For the three months ended September 30, 2000 and 1999, the net loss was $52,687 and net income was $176,584, respectively.
Preferred Stock Dividends. During 1999, we issued 2,225 shares of 12% Series B Cumulative Convertible Preferred Stock with no par value per share and a stated value of $2,000 per share. The Stock pays a 12% dividend semiannually and has a liquidation preference superior to all stock, common or preferred, currently issued and outstanding. During the first quarter of 2000, 497 shares were converted to 442,222 shares of common stock and during the third quarter 10 shares were converted to 17,778 shares of common stock. Preferred stock dividends were $310,350 for the nine months ended September 30, 2000 compared to $166,738 for the nine months ended September 30, 1999.
Net Income (Loss) Available to Common Shareholders. The net income available to common shareholders decreased $347,025 or $.11 per share to a net loss of $22,556 or ($.01) for the nine months ended September 30, 2000 from $324,469 or $.10 per share for the nine months ended September 30, 1999. The decrease was due to the net effect of a decrease in operating income and an increase in interest income, offset by the cumulative effect of the change in accounting policy and the preferred stock dividends. For the three months ended September 30, 2000, the net loss available to common shareholders was $155,737 or ($.04) per share compared to net income of $67,051 or $.02 per share for the three months ended September 30, 1999. We expect to operate near break even until properties currently being developed are completed and reach stabilized occupancy.
Financial Condition
September 30, 2000 As Compared to December 31, 1999
We had current assets of $475,064 on September 30, 2000 and $1,941,355 on December 31, 1999. The primary current asset on December 31, 1999 was development fees and costs due from affiliates of $1,235,650. This amount was collected during the first quarter of 2000. Accounts receivabletrade increased to $115,766 at September 30, 2000 compared to $86,893 at December 31, 1999. We expect receivables to increase as we increase management of apartment units and assisted living residences. Prepaid expenses and other increased from $120,109 at December 31, 1999 to $147,657 at September 30, 2000 due primarily to the payment of certain operating expenses during the nine months ended September 30, 2000 that will be charged to expense as the related services are performed.
Development costs decreased to $462,095 at September 30, 2000 from $606,911 at December 31, 1999. The decrease is due to reimbursements of development costs previously advanced by us. During the initial stages of development, we advance funds for, and capitalize certain development costs. When development fee income is recognized on a certain property, that propertys associated development costs become receivable from either Taylor House, on a temporary basis, or from the permanent owner. Development costs are either 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 Taylor House increased to $4,534,138 at September 30, 2000 from $3,917,140 at December 31, 1999. The increase reflects the ongoing development of properties and the related recognition of development fees by us as the properties near completion. Development fees and costs are collected at permanent financing or from operations of the property after stabilized occupancy depending upon the type and amount of permanent financing.
We completed the permanent financing on four 60-unit facilities in June and July of 1999 and one 60-unit facility in February of 2000. As part of the transactions, the ownership of those facilities transferred from Taylor House to a third party, not-for-profit organization. As a result of the transfers of properties from Taylor House to third parties, receivables previously recorded in development fees and costs due from properties are reclassified to accounts receivable-properties and/or notes receivable-properties, as appropriate. At September 30, 2000, accounts receivables from properties were $1,362,823 is included in current assets) as compared to $687,159 at December 31, 1999 and notes receivable-properties increased to $2,752,426 at September 30, 2000 from $1,760,115 at December 31, 1999.
Accounts receivable-affiliates increased to $715,640 at September 30, 2000 from $669,507 at December 31, 1999. The increase is due primarily to our advances made to an affiliate for operations at the Virginia facility.
Accounts payable-affiliates decreased to $602,027 at September 30, 2000 from $760,246 at December 31, 1999 due to our repayments to Taylor House for advances associated with properties currently being developed.
Total liabilities increased $844,360 to $2,385,806 at September 30, 2000 from $1,541,446 at December 31, 1999 due primarily to the bank loan we obtained in May, 2000 offset by the decrease in accounts payable-affiliates, as mentioned above. The deferred salaries of $191,823 are payable at the discretion of the employees and more than likely will not be paid from cash.
Shareholders equity decreased to $8,638,620 at September 30, 2000 from $8,661,176 at December 31, 1999. The decrease was the net effect of the declaration of preferred dividends of $310,350 and the decrease in accumulated deficit due to the net income of $287,794. As discussed previously, during the first nine months of 2000, 507 shares of Series B Cumulative Convertible Preferred Stock were converted to 460,000 shares of common stock. The conversion resulted in a decrease of $916,042 in preferred stock and an increase of $916,042 in common stock.
Liquidity and Capital Resources
Generally, we operate, and expect to continue to operate, on a negative cash flow from operations due to start-up expenses and lengths of the development cycles. Currently, our primary cash requirements include funding 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.
During the second quarter of 2000, we obtained a $1 million, three year term loan from a bank that will be repaid primarily from the collection of notes receivable-properties over the life of the loan. We anticipate that the proceeds from the term loan, the collection of development fees and costs receivable, together with construction funds available for each facility, will be sufficient to complete the current development pipeline. Future development will require additional debt or equity financing. We currently have several sources of potential funding and anticipate that liquidity demands will be met. However, there can be no assurance that we will be able to obtain financing on a favorable or timely basis. The type, timing and terms of financing selected by us will depend on its cash needs, the availability of other financing sources and the prevailing conditions in the financial markets.
We are the guarantor on the construction loans for two 30-unit properties, one under construction and one in rent-up. Both are owned by Taylor House.
Inflation and Interest Rates
Inflation has had minimal impact on our daily operations. Increases in salaries and administrative expenses have been 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, we expect the reimbursement to keep pace with inflation.
Our primary concern regarding inflation is interest rate fluctuations. High interest rates would increase the cost of building new facilities and could slow down our development plans.
Year 2000
All computer programs currently in use by us have been upgraded to be Year 2000 compliant as part of normal updating expense. We have experienced minor problems with the software for filing Medicaid claims but the dollar amounts involved have not been material.
Certain Accounting Considerations
SFAS No. 123
In October 1995, FASB issued SFAS No. 123, Accounting for Stock-Based Compensation (SFAS No. 123). SFAS No. 123 establishes financial accounting and reporting standards for stock-based employee compensation plans. Those plans include all arrangements by which employees receive shares of stock or other equity instruments of the employer or the employer incurs liabilities to employees in amounts based on the price of the employers 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. We adopted our Stock Incentive Plan effective January 1, 1997. During 1998, we 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 September 30, 2000, a total of 142,000 stock options and warrants are outstanding, 1,400 common shares have been issued and 356,600 shares are available for granting.
Information Concerning Forward Looking Statements
With the exception of historical information (information relating to our financial condition and results of operations at historical dates or for historical periods), the matters discussed herein contain forward-looking statements within the meaning of the Private Securities Litigation Act of 1995. Forward-looking statements include, without limitation, any statement that may predict, forecast, indicate or imply future results, performance or achievements, and may contain the words believe, anticipate, expect, estimate, intend, project, will be, will likely continue, will result, or words or phrases of similar meaning. Forward-looking statements involve risks and uncertainties, which may cause actual results to differ materially from the forward-looking statements. These forward-looking statements are based on managements expectations as of the date hereof, and we do not undertake any responsibility to update any of these statements in the future.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) |
Exhibits: |
(b) |
Reports on Form 8-K |
______________________
* Filed herewith
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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DIVERSIFIED SENIOR SERVICES, INC. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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DIVERSIFIED SENIOR SERVICES, INC. |
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