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, 1999
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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.
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(Exact name of Small Business Issuer as specified in its charter)
NORTH CAROLINA 56-1973923
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
915 WEST 4TH STREET, WINSTON-SALEM, NC 27101
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (336) 724-1000
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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 25, 2000, the aggregate market value of the voting stock held by
non-affiliates of the registrant, based on the closing price, was approximately
$5,599,230.
As of February 25, 2000, the registrant had 3,321,400 shares of Common Stock
outstanding.
Registrant's revenues for the fiscal year ended December 31, 1999 were
$5,111,050.
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 the 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. [ ]
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 2000 (the "2000 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 FORWARD-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.
<PAGE>
ITEM 1. DESCRIPTION OF BUSINESS.
GENERAL
DIVERSIFIED SENIOR SERVICES, INC. ("Diversified") was founded to focus on the
development and management of low and moderate income senior housing and
assisted living facilities. We specialize in creating affordable community
living alternatives for seniors with fixed incomes. Our 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.
We believe that there is a growing demand for senior housing developed for the
low and moderate income frail elderly, specifically in our targeted areas of
smaller cities and towns throughout the Midatlantic and Southeast. Although we
have been operating for less than four years, our 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.
Diversified was formed in May 1996 as a wholly owned subsidiary of Taylor House
Enterprises, Limited and began operations in July 1996 when Taylor House
exchanged all of the stock of its wholly owned subsidiary, Residential
Properties Management, Inc., for Diversified's common stock. Taylor House is a
privately-held corporation controlled by the Diversified's senior management.
Diversified completed its initial public offering in January 1998. Our common
stock is quoted under the symbol DISS on the Nasdaq SmallCap Market.
We have focused our development efforts on two types of facilities: 60-unit
assisted living residences and 30-unit senior housing residences. We have
completed construction of 60-unit residences located in Mocksville and Hamlet,
North Carolina. By early summer of this year, we expect that 60-unit facilities
in Cherryville, Rocky Mount and Goldsboro, North Carolina will be completed. Our
first 30-door residence in Pittsboro, North Carolina is scheduled to open in
March, and our second 30-door residence in Kinston, North Carolina is scheduled
to open in the fall.
Diversified'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 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.
Our 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.
In October 1998 we began managing an assisted living property in South Boston,
Virginia for an affiliated owner. On March 1, 2000 we began managing assisted
living properties in Newport and Shelby, North Carolina for a nonprofit owner.
In addition to these properties, as of February 29, 2000, our development
pipeline includes five additional 60-unit sites and two additional 30-unit
sites, all of which are under our control and with positive feasibility studies.
We continue to identify additional markets with positive feasibility. We are
also exploring the conversion to assisted living of two residential floors in
one existing subsidized senior housing complex we manage.
In addition to the five assisted living facilities representing 288 potential
residents that we currently manage, we also manage apartment complexes. As of
February 29, 2000, we managed 52 residences, consisting of approximately 2,068
units located in four states, North Carolina, Pennsylvania and West Virginia.
Our internal growth program will focus on developing and operating 60-unit
assisted living facilities and 30-unit independent senior housing residences. In
addition to developing these new facilities, we will consider acquiring existing
assisted living and senior housing facilities.
Between May 3, 1999 and November 6, 1999, we completed a private placement,
funded over three closings, in which we issued 1,500 shares of 12% Series B
Cumulative Convertible Preferred Stock. We received net proceeds of
approximately $4,022,138 from the private placement. Subject to certain
conditions, investors participating in the private placement were entitled to
receive, as compensation, up to 362,500 shares of our common stock. Pursuant to
the terms of the private placement, on October 31, 1999 Taylor House
Enterprises, Limited returned 362,500 shares of our common stock held by Taylor
House to us. On November 11, 1999, these shares were distributed to the selling
shareholders. Because Taylor House returned the 362,500 shares of common stock,
our aggregate amount of issued and outstanding shares of common stock did not
change from this transaction.
Diversified has applied for trademark protection for both its Somerset House and
Somerset Court service marks.
Diversified's executive offices are located at 915 West Fourth Street,
Winston-Salem, North Carolina 27101. Our telephone number is (336) 724-1000.
COMPETITION
The assisted living industry is highly competitive and fragmented. There
are numerous small operators but also 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. We believe that
residential style assisted living offers an attractive approach to providing
residential and personal care services for the elderly. We believe that (i) the
increased emphasis by both federal and state governments on containing costs;
(ii) the limitations imposed in many states on the construction of additional
skilled nursing facilities; and (iii) the decreasing viability of family care
create a positive competitive environment for our residences. 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 Diversified.
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
continued availability of government financing and subsidies. We do not
anticipate substantial near-term growth in this part of our business nor are we
dependent on such growth for future profitability. Our senior management has
over twenty years experience in subsidized housing, so we should be positioned
to take advantage of this business if and when conditions change.
REGULATORY MATTERS
Diversified's assisted living operations are subject to substantial
regulation by governmental agencies. Assisted living facilities are generally
subject to less regulation than other licensed health care providers, but more
regulation than standard congregate care or independent living facilities. In
North Carolina, Diversified's assisted living facilities are licensed as Adult
Care Homes with capacities of 21 or more. Adult Care Homes are regulated by the
North Carolina Department of Health and Human Services. In August 1997, the
North Carolina General Assembly enacted a twelve-month moratorium on newly
licensed beds while licensing procedures are studied to determine whether the
existing licensing procedures need to be modified. In 1998 and 1999 the
moratorium was extended for another twelve months, respectively. It is
anticipated that the moratorium will result in stricter licensing procedures in
North Carolina.
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 we do not believe that our 30-unit senior housing residences
are subject to this regulation, we may elect to register our 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,
and emergency service procedures. Diversified'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.
Diversified is a provider of services under Medicaid programs and is subject to
Medicaid regulations designed to limit fraud and abuse, violations of which
could result in civil and criminal penalties and exclusion from participation in
Medicaid programs. Diversified believes it is in substantial compliance with all
applicable regulatory requirements. No actions are pending against Diversified
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, 1999, the basic SA rate was set at $982 per month and the basic
ACH/PC rate was set at $9.39 per day. Effective January 1, 2000, the ACH/PC rate
was increased to $12.95 per day, which includes financial assistance for
medication monitoring. In addition, Medicaid transportation increased to $.55
per day beginning January 1, 2000. 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 $22.16 per day
Extra assistance with toileting $16.23 per day
Extra assistance with eating and toileting $25.44 per day
Extra assistance with locomotion $2.35 per day
"Enhanced care" residents are those who need extensive assistance or are totally
dependent on other persons for eating, toileting or both.
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 54% of the units under management are eligible for rent
subsidies under Housing Assistance Payment ("HAP") contracts. The treatment of
HAP contracts upon expiration is administered by the United States Department of
Housing and Urban Development. No current HAP contract affecting the Company's
managed properties is up for renewal in 2000. The effect of the expiration of an
individual property's HAP contract without renewal varies and depends on the
market rent for the specific market area.
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. Our
activities are not anticipated to generate any environmentally controlled
substance other than a limited amount of medical waste. We contract with a third
party to properly dispose of waste products. We obtain a Phase I environmental
report on all potential development sites before acquisition., The State of
North Carolina issued an environmental no-action letter at the request of the
owner of our Shelby facility. The no-action letter was requested because of the
presence of pollutants upstream and provides that the State of North Carolina
does not presently intend to institute environmental proceedings. The no-action
letter does not preclude the federal government from instituting its own
environmental proceedings against the owner of the property. Although we are not
aware of any other material environmental issues affecting any property we
operate, as a developer, owner and/or manager of real property environmental
concerns could impact the our operations.
EMPLOYEES
As of December 31, 1999, we had 180 employees, 83 of whom are full-time.
None of our employees are subject to collective bargaining agreements and none
of our employees have been on strike in the past three years.
ITEM 2. DESCRIPTION OF PROPERTIES.
CORPORATE OFFICES
We sublease 90% of the office and administrative building located at 915
West Fourth Street, Winston-Salem, North Carolina from Taylor House at a monthly
rent of $2,700 plus its share of property insurance and maintenance expenses.
There is no written sub-lease. The base lease between Taylor House and an
independent third party expired in March 2000. We are currently exploring the
alternatives of renewing the lease or obtaining office space at another
location.
We lease office space in Raleigh, North Carolina for a regional property
team. The leased premises are controlled by an affiliate. The lease is
month-to-month at a monthly rent of $415. We also lease 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.
Our subsidiary, DSS Funding, Inc., leases office space in New York, New
York from an unrelated third party for approximately $2,200 per month, on a
month-to-month basis. There is no written lease.
PROPERTIES MANAGED AT MARCH 15, 2000
<TABLE>
<CAPTION>
PROPERTY NAME CITY STATE #UNITS
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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
PROPERTY NAME CITY STATE #UNITS
- ---------------------------------------------------------------------------------------------------------------------
(1) Lion's Senior Village Shelby NC 40
Morehead Glen Durham NC 20
Oaks at Spring Garden Greensboro NC 192
Point South Greensboro NC 23
(1) (4) 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
(3) Somerset Court of Hamlet Hamlet NC 60
(3) Somerset Court of Mocksville Mocksville NC 60
(3) Somerset Court of Newport Newport NC 64
(3) Somerset Court of Shelby Shelby NC 64
(1) (2) Somerset House of Pittsboro Pittsboro NC 30
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
PROPERTY NAME CITY STATE #UNITS
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(3) 60 UNIT PROPERTIES UNDER CONSTRUCTION
(2) Somerset Court of Cherryville Cherryville NC 60
(2) Somerset Court of Goldsboro Goldsboro NC 60
(2) Somerset Court of Rocky Mount Rocky Mount NC 60
30 UNITS UNDER CONSTRUCTION
(1)
(2) Somerset House of Kinston Kinston NC 30
</TABLE>
NOTES
(1) Senior housing
(2) Controlled by an affiliate
(3) Assisted living properties
(4) This property was destroyed by flooding resulting from Hurricane Floyd
in the fall of 1999. The owner is rebuilding the property and we
continue to receive a management fee for monitoring construction and
working with the prior residents in interim housing.
INVESTMENT POLICIES
Our developed properties are generally owned by affiliates or by third
party nonprofit entities. We have the right to buy each developed property owned
by an affiliate at the affiliate's cost, but not more than fair market value, at
any time after we determine that the property has achieved stabilized
operations. The definition of "stabilized operations" is determined by
Diversified 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.
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKET INFORMATION
Effective January 10, 1998, Diversified's Common Stock was approved for
quotation on the Nasdaq Small Cap market under the symbol "DISS." The following
table summarizes the high and low sales price for the years ended December 31,
1998 and 1999.
1999
QUARTER HIGH LOW
First $4.8125 $2.4375
Second $4.8750 $3.2500
Third $4.0000 $2.8750
Fourth $3.5000 $2.0000
1998
QUARTER HIGH LOW
First $6.125 $3.875
Second $5.375 $3.500
Third $5.938 $3.688
Fourth $5.063 $3.000
HOLDERS OF RECORD
There were approximately 17 shareholders of record of Common Stock as of
February 25, 2000. This number does not include beneficial owners holding shares
through nominees or "street" names. Diversified believes that it has
approximately 500 beneficial holders of Common Stock.
DIVIDEND POLICY
Diversified 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. We intend to reinvest earnings, if any, in the
development and expansion of our business. Any future declaration of cash
dividends will be at the discretion of the Board of Directors and will depend
upon our earnings, capital requirements and financial position, 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 DIVERSIFIED AND THE NOTES TO FINANCIAL STATEMENTS.
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. Diversified manages apartments, primarily for
seniors, and develops and manages assisted living properties and independent
living properties for seniors. All properties target low and moderate income
residents.
In July 1996 Diversified 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, Diversified completed its initial public
offering. On February 16, 1998, Diversified formed a wholly owned subsidiary,
DSS Funding, Inc. ("DSSF"), a North Carolina corporation, for the purpose of
securing permanent financing for the properties which Diversified develops or
acquires for third party owners. On July 22, 1998, Diversified 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 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 its managed properties.
Diversified anticipates 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. Diversified
anticipates moderate growth in reimbursement income because of increases in
salaries of site personnel and an increase in the number of complexes under
management.
Diversified continues to develop 60-unit assisted living residences and
30-unit independent senior housing residences with services. As of March 15,
2000, Diversified has three assisted living properties in final rent-up, three
nearing the completion of construction, and controls six additional sites
approved under North Carolina's moratorium on new assisted living facilities.
The construction process is estimated to be nine to twelve months for each
60-unit assisted living residence.
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 configured for 43
residents. It was completed in April 1998. On March 1, 2000 Diversified began
managing two 64 resident assisted living facilities located in Newport and
Shelby, North Carolina.
We completed construction of our first 30-unit residence in March 2000, and
we have another site scheduled for completion this summer. 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, 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 vast majority of Diversified's revenues and profits.
Diversified develops properties for third party owners. Diversified
recognizes development fee income on the percentage of completion basis.
Development costs are paid by Diversified 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 the operating expenses of Diversified are related to the personnel
directly performing the management services and the corporate management staff.
Between 70% and 80% 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 Diversified's 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
Diversified expands, but we do not expect the number of corporate staff to
increase significantly during the next several years.
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. Prior to the initial public offering,
Diversified and RPM filed their federal income tax returns as part of Taylor
House's consolidated group. An income tax benefit has been recorded in 1996 and
1997 since the losses of Diversified and RPM were applied to income in Taylor
House's consolidated group. Diversified, RPM, DSSF and DSSVA file separate state
returns since state income tax regulations do not permit filing consolidated
returns.
RESULTS OF OPERATIONS
THE YEAR ENDED DECEMBER 31, 1999 COMPARED TO THE YEAR ENDED DECEMBER 31, 1998
INCOME
Total income increased $1,466,893, to $5,111,050 for the year ended
December 31, 1999 from $3,644,157 for year ended December 31, 1998. The increase
was primarily due to increases in development fees, reimbursement income, and
management fees.
MANAGEMENT FEES. Management fees increased $47,789 to $886,595 for 1999
from $838,806 for the year ended December 31, 1998. The increase was due to the
recognition of management fees on the two assisted living facilities developed
by Diversified, which commenced operations during the third quarter of 1999. On
July 31, 1998 Diversified sold the management rights for 361 units, primarily
multi-family, which generated management fees of approximately $10,500 per
month. Diversified expects growth in fee income as the developed assisted living
and independent living properties are completed and rented.
REIMBURSEMENT INCOME. Reimbursement income increased $572,379 to $1,951,977
for 1999 from $1,379,598 for the year ended December 31, 1998. The increase was
the result of income received from the properties for personnel hired to manage
the assisted living facility in Virginia and the two 60-unit assisted living
facilities developed by Diversified that began accepting residents in June and
July of 1999. Diversified expects increases in reimbursement income as the
number of properties under management increases.
DEVELOPMENT FEES. Development fees increased $777,586 to $1,913,365 for the
year ended December 31, 1999 from $1,135,779 for the year ended December 31,
1998. The income is recognized on a percentage of completion basis on the
60-unit assisted living facilities and the 30-unit independent senior housing
residences currently being developed by Diversified. Diversified expects
development fee income to be cyclical, depending on the availability of both
construction and permanent financing at reasonable rates.
OTHER INCOME. Other income increased $69,139 to $359,113 for the year ended
December 31, 1999 from $289,974 for the year ended December 31, 1998. The
increase is due to an increase in consulting fees earned by DSSF offset by a
decrease in home care fees. On June 1, 1999, Diversified sold the home care
business to an independent home care provider. Diversified expects consulting
fees earned by DSSF to be cyclical, just as development fee income mentioned
above.
OPERATING EXPENSES
Operating expenses increased $857,151 to $4,679,693 for the year ended
December 31, 1999 from $3,822,542 for the year ended December 31, 1998. The
increase is due to personnel related expenses and administrative expenses.
PERSONNEL EXPENSE. Personnel expense increased $756,124 to $3,637,120 for
1999 from $2,880,996 for 1998. Site related personnel expense increased $572,379
for the year due to the increase in personnel expense at the Virginia facility
and the two new 60-unit facilities, as mentioned above. Personnel expenses also
increased due to the increased development activity. Diversified expects
increases in personnel expense in future periods depending upon increases in
management and development activity.
Beginning January 1, 1999 Diversified changed its method of accounting for
development related costs, primarily personnel costs. Prior to 1999, personnel
costs related to development activities were capitalized and charged to
development fee income as it was recognized. Had development related personnel
costs been expensed rather than capitalized, personnel costs for 1998 would have
been $3,146,159 compared to $3,637,120 for 1999, an increase of $490,961.
ADMINISTRATIVE AND OTHER EXPENSES. Administration and other expenses
increased $83,456 to $954,709 in 1999 from $871,253 in 1998. The increase
reflects increases in the assisted living and independent senior housing
development activity, and expenses related to operating the public company.
Diversified expects further increases in administrative expenses as the number
of assisted living and independent senior housing properties managed increases
attributable to corporate management of Diversified.
Due to the change in accounting for development related costs mentioned
above, administrative and other expenses would have been $934,656 for the year
ended December 31, 1998 compared to $954,709 for 1999, an increase of $20,053.
OTHER INCOME AND EXPENSES. Diversified earned $277,382 and $166,268 in
interest income from the investment of cash and cash equivalents and interest on
funds loaned to the owners of properties being developed during the year ended
December 31, 1999 and 1998, respectively. The increase is the net effect of an
increase in interest on funds loaned to properties and a decrease in the amount
of funds held for development at December 31, 1999 compared to December 31,
1998. Diversified expects interest income in future periods from funds loaned to
the owners of properties currently being developed.
NET INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR
DEVELOPMENT RELATED COSTS. The net income before the cumulative effect increased
$719,575 to $701,780 for the year ended December 31, 1999 from a net loss of
$17,795 for the year ended December 31, 1998. The increase was due to the
increase 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). Net income increased $391,009 to $373,214 for the year
ended December 31, 1999 from a net loss of $17,795. The increase was due to the
increases in operating and interest income.
PREFERRED STOCK DIVIDENDS. On May 3, July 13 and October 4, 1999,
Diversified issued 1,500 shares, 358 shares and 367 shares, respectively, of 12%
Series B Cumulative Convertible Preferred Stock with no par value per share and
a stated value of $2,000 per share. The Stock pays a 12% dividend semiannually
and has a liquidation preference superior to all stock, common or preferred,
currently issued and outstanding. Preferred stock dividends were $299,941 for
the year ended December 31, 1999.
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS. The net income (loss)
available to common shareholders increased $91,068 ($.03 per share) to $73,273
($.02 per share) for the year ended December 31, 1999 from a net loss of $17,795
($.01 loss per share) for the year ended December 31, 1998. The increase was due
to the net effect of an increase in operating income offset by the cumulative
effect of the change in accounting policy and the preferred stock dividends.
Diversified expects to break even until properties currently being developed are
completed and reach stabilized occupancy.
FINANCIAL CONDITION
DECEMBER 31, 1999 COMPARED TO DECEMBER 31, 1998
Diversified had current assets of $1,941,355 on December 31, 1999 and
$1,056,003 on December 31, 1998. The primary current asset on December 31, 1998
was investments of $819,074. The decrease was due to Diversified's increased
development activity. The primary current asset on December 31, 1999 was
development fees and costs due from affiliates of $1,235,650. This amount was
collected in the first quarter of 2000. See Note 14 to Financial Statements.
Accounts receivable-trade decreased from $113,921 to $86,893 due to decreased
activity in home care and prepaid expenses and other increased from $90,858 to
$120,109 due primarily to the payment of certain expenses for 2000. Diversified
expects receivables to increase as Diversified increases management of apartment
units and assisted living residences.
Development costs decreased to $606,911 at December 31, 1999 from $730,604
at December 31, 1998. During the initial stages of development, certain
development costs are capitalized. When development fee income is recognized on
a certain property, that property's associated costs become receivable from
either Taylor House, on a temporary basis, or from the permanent owner.
Development costs will either be recouped with the successful completion of a
property or written off if a site is abandoned.
Development fees and costs due from properties currently held by Taylor
House increased to $3,917,140 at December 31, 1999 from $2,603,656 at December
31, 1998. The increase is due to development fees and reimbursable costs on
properties currently being developed that are due to Diversified. Development
fees are collected at permanent financing or from operations of the property
after stabilized occupancy depending upon the type and amount of permanent
financing.
Diversified completed the permanent financing on four 60-unit facilities in
June and July of 1999. As part of the transactions, those facilities were
transferred by Taylor House to a third party, not-for-profit organization. As a
result of the transfer from Taylor House to third parties, receivables
previously recorded in development fees and costs due from properties are now
recorded as accounts receivable-properties. At December 31, 1999, receivables
from properties were $687,159. Diversified also took notes totaling $1,760,115
as referenced in Note 4.
Accounts receivable-affiliates increased to $669,507 at December 31, 1999
from $679,595 at December 31, 1998. The increase is the net effect of repayment
of advances to Taylor House offset by increases in Diversified's advances to an
affiliate for operations at the Virginia facility.
Accounts payable-affiliates increased to $760,246 at December 31, 1999 from
$189,926 at December 31, 1998. The increase is due to advances made by Taylor
House for costs associated with the permanent financing of four properties
during the year.
Total liabilities increased $919,978 to $1,541,446 at December 31, 1999
from $621,468 at December 31, 1998 due primarily to accounts payable to
affiliates and preferred dividends payable. The deferred salaries of $191,823
are payable at the discretion of the employees and more than likely will not be
paid from cash.
Shareholder's equity increased to $8,661,176 at December 31, 1999 from
$4,581,826 at December 31, 1998. The increase was the net effect of the proceeds
of $4,022,138 from the issuance of preferred stock, a decrease in unrealized
gains on investment securities of $16,061, a decrease due to the accrual of
preferred dividends of $299,941 and the decrease in accumulated deficit due to
the net income of $373,214.
LIQUIDITY AND CAPITAL RESOURCES
Diversified has operated, and expects to continue to operate, on a negative
cash flow from operations basis due to start-up expenses and length of the
development cycle. Currently, Diversified's primary cash requirements include
covering operating deficits and development expenses related to the development,
construction and fill-up of 60 unit assisted living residences and 30 unit
independent senior housing residences with services.
The net proceeds of the initial public offering were used to pay off the
outstanding balance under the bank line of credit, to provide $3.5 million in
development working capital for the assisted living and independent living
projects and for general corporate purposes. The proceeds from the initial
public offering designated for development were fully invested in assisted
living and independent living properties by the end of the first quarter of
1999. The proceeds from the issuance of preferred stock during the second, third
and fourth quarters provided additional development working capital. The company
anticipates that the proceeds from the issuance of preferred stock, the
collection of development fees and costs receivable, together with construction
funds available for each facility, will be sufficient to complete the current
development pipeline. Future development will require additional debt or equity
financing. Diversified currently has several sources of potential funding and
does not anticipate that liquidity demands will not be met. However, there can
be no assurance that Diversified will be able to obtain financing on a favorable
or timely basis. The type, timing and terms of financing selected by Diversified
will depend on its cash needs, the availability of other financing sources and
the prevailing conditions in the financial markets.
Diversified is the guarantor on the construction loans for the properties
currently under construction owned by Taylor House.
INFLATION AND INTEREST RATES
Inflation has minimal impact on the daily operations of Diversified.
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, Diversified expects the reimbursement to keep pace with
inflation.
The primary concern regarding inflation is interest rate fluctuations. High
interest rates would increase the cost of building new facilities and could slow
down Diversified's development plans.
YEAR 2000
All computer programs currently in use by Diversified 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 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.
Diversified adopted its Stock Incentive Plan effective January 1, 1997. During
1998, Diversified 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, 1999, 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.
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
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, 1999 and
1998 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 6, 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, 1999 and 1998 and the consolidated results of its operations and cash flows
for the years then ended in conformity with generally accepted accounting
principles.
/s/ The Daniel Professional Group, Inc.
March 29, 2000
Winston-Salem, North Carolina
<PAGE>
<TABLE>
<CAPTION>
DIVERSIFIED SENIOR SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
1999 1998
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents (Note 7) $383,701 $32,150
Investments (Note 7) - 819,074
Development fees and costs due from
affiliates (Notes 2 & 14) 1,235,650 -
Accounts receivable--trade (Note 2) 86,893 113,921
Prepaid expenses and other 120,109 90,858
Interest receivable (Notes 4 & 8) 28,796 -
Note receivable-properties (Note 4) 86,206 -
----------- ---------
1,941,355 1,056,003
Furniture and equipment, net (Note 3) 112,852 90,201
Development costs 606,911 730,604
Development fees and costs due from affiliates (Note 2) 3,917,140 2,603,656
Accounts receivable - affiliates (Note 2) 669,507 679,595
Accounts receivable - properties 687,159 -
Interest receivable (Note 4) 43,789 -
Notes receivable - properties (Note 4) 1,673,909 -
Investment in bonds (Note 8) 300,000 -
Other assets (Note 7) 250,000 43,235
----------- ---------
$10,202,622 $5,203,294
=========== ==========
LIABILITIES
Current liabilities:
Accounts payable and accrued expenses $308,047 $200,774
Commitments-affiliates with properties under
construction 38,595 38,945
Preferred dividends payable (Note 5) 242,735 -
----------- ---------
589,377 239,719
Accounts payable - affiliates (Note 2) 760,246 189,926
Deferred salaries and bonuses (Note 10) 191,823 191,823
----------- ---------
1,541,446 621,468
----------- ---------
SHAREHOLDERS' EQUITY
Preferred stock, no par, authorized 100,000,000 shares;
180,611 issued and outstanding at December 31,
1999 and 178,386 at December 31, 1998 (Notes 5 & 14) 4,914,068 891,930
Common stock, no par, authorized 100,000,000 shares;
3,301,400 shares issued and outstanding at
December 31, 1999 and 1998 (Notes 6 & 14) 6,319,246 6,319,246
Deemed distribution (1,335,790) (1,335,790)
Preferred dividends (Note 5) (299,941) -
Accumulated deficit (936,407) (1,293,560)
----------- ---------
8,661,176 4,581,826
----------- ---------
$10,202,622 $5,203,294
=========== ==========
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE>
DIVERSIFIED SENIOR SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For The Years Ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
Income:
<S> <C> <C>
Management fees (Note 2) 886,595 838,806
Reimbursement income (Note 2) 1,951,977 1,379,598
Development fees (Note 2) 1,913,365 1,135,779
Other 359,113 289,974
----------- ----------
5,111,050 3,644,157
----------- ----------
Expenses:
Personnel related 3,637,120 2,880,996
Administrative and other 954,709 871,253
Depreciation and amortization (Note 3) 87,864 70,293
----------- ----------
4,679,693 3,822,542
----------- ----------
Operating income (loss) 431,357 (178,385)
Other (income) expenses:
Interest and other income (Notes 2 & 8) 277,382 166,268
Interest and other expense (6,959) (5,678)
----------- ----------
Net income (loss) before cumulative effect of change in
accounting for development related costs 701,780 (17,795)
Cumulative effect of change in accounting
for development related costs (Note 1) 328,566 -
----------- ----------
Net income (loss) 373,214 (17,795)
Preferred stock dividends (Note 5) 299,941 -
----------- ----------
Net income (loss) available for common shareholders $73,273 $(17,795)
=========== ==========
Per share data:
Net income (loss) available to common shareholders
before cumulative effect of change in accounting
for development related costs $0.12 $(0.01)
Cumulative effect of change in accounting
for development related costs 0.10 -
----------- ----------
Net income (loss) per common share-basic and diluted 0.02 (0.01)
=========== ==========
Weighted average shares outstanding-basic 3,301,400 3,246,940
=========== ==========
Weighted average shares outstanding-diluted 3,323,325 3,246,940
=========== ==========
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE>
DIVERSIFIED SENIOR SERVICES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For The Years Ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
Total
Preferred Common Preferred Common Deemed Preferred Accumulated Shareholders'
Shares Shares Stock Stock Distribution Dividends Deficit Equity
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1998 178,386 1,800,000 $ 891,930 $ 100 $(1,335,790) $ - $(1,291,826) $(1,735,586)
Issuance of common stock - 1,501,400 - 6,319,146 - - - 6,319,146
Unrealized loss 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 $(1,335,790) $ - $(1,293,560) $ 4,581,826
Issuance of preferred stock 2,225 - 4,022,138 - - - - 4,022,138
Decrease in unrealized gain - - - - - - (16,061) (16,061)
Preferred dividends - - - - - (299,941) - (299,941)
Net income for the year ended
December 31, 1999 - - - - - - 373,214 373,214
-------- ---------- ---------- ---------- ----------- --------- ----------- -----------
Balance, December 31, 1999 180,611 3,301,400 $4,914,068 $6,319,246 $(1,335,790) $(299,941) $(936,407) $8,661,176
======== ========== ========== ========== =========== ========== =========== ===========
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE>
DIVERSIFIED SENIOR SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Years Ended December 31, 1999 and 1998
Increase (Decrease) in Cash and Cash Equivalents
<TABLE>
<CAPTION>
1999 1998
Operating activities:
<S> <C> <C>
Net income (loss) $373,214 $(17,795)
Adjustments to reconcile net income (loss) to net
cash used by operating activities:
Depreciation and amortization 87,864 70,293
Cumulative effect of write off development related costs 328,566 -
Allowance for uncollectable accounts receivable 40,000 -
Gain on sale of management contracts - (7,700)
Changes in operating assets and liabilities:
Accounts receivable-trade 27,028 (21,043)
Prepaid expenses and other 27,495 (16,338)
Accounts receivable, affiliates - (25,525)
Interest receivable (72,585) -
Development fees receivable, net of collections (1,669,745) (1,135,779)
Accounts payable, trade 39,919 25,066
Accounts payable, affiliates - 38,411
Interest payable - (33,070)
Deferred salaries and bonuses - (620,090)
----------- -----------
Total adjustments (1,191,458) (1,725,775)
----------- -----------
Net cash used by operating activities (818,244) (1,743,570)
----------- -----------
Investing activities:
Investments 803,013 (803,013)
Purchases of furniture and equipment (40,279) (84,848)
Development costs paid (204,873) (456,584)
Advances to properties in exchange for notes receivable (1,760,115) -
Advances to affiliate for properties in development (1,437,625) (1,467,877)
Advances to and investment in properties (158,835) -
Investment in bonds (300,000) -
Investment in certificate of deposit (250,000) -
Other (12) 11,331
----------- -----------
Net cash used by investing activities (3,348,726) (2,800,991)
----------- -----------
Financing activities:
Repayments of borrowings - (1,729,575)
Repayments of capital lease obligation (11,574) -
Proceeds from (costs of) issuance of common stock, net - 6,446,810
Proceeds from issuance of preferred stock, net 4,022,138 -
Advances to (repayments) from affiliates 570,320 (192,148)
Preferred dividends paid (57,206) -
Increase in prepaid expenses and other (56,746) (26,532)
Other 51,589 -
----------- -----------
Net cash provided by financing activities 4,518,521 4,498,555
----------- -----------
Net increase (decrease) in cash 351,551 (46,006)
Cash and cash equivalents - beginning 32,150 78,156
----------- -----------
Cash and cash equivalents - ending $383,701 $32,150
=========== ===========
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE>
DIVERSIFIED SENIOR SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Years Ended December 31, 1999 and 1998
(continued)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Cash payments for interest $ 6,959 $ 38,748
=========== ==========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Capital lease obligation incurred to lease fixed asset $ 27,000 $ -
=========== ==========
Preferred dividends payable $ 242,735 $ -
=========== ==========
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE>
Diversified Senior Services, Inc.
Notes to Consolidated Financial Statements
For The Years Ended December 31, 1999 and 1998
NOTE 1: ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Diversified Senior Services, Inc. ("Diversified"), a North Carolina corporation,
is a public company listed on the Nasdaq Small Cap market. It focuses 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.
Diversified currently operates in the Midatlantic and Southeast sections of the
country. It was founded as a wholly owned subsidiary of Taylor House
Enterprises, Limited ("Taylor House") on May 17, 1996. The officers of
Diversified own the stock of Taylor House. On January 14, 1998, Diversified
completed its initial public offering when it issued 1,500,000 shares of common
stock, which is described in Note 6.
Diversified formed a wholly owned subsidiary, DSS Funding, Inc. ("DSSF"), a
North Carolina corporation, on February 16, 1998. DSSF's primary business
purpose is to secure permanent financing for the properties that Diversified
develops or acquires for third party owners.
On July 22, 1998, Diversified formed a wholly owned subsidiary, Diversified
Senior Services of Virginia, Inc. ("DSSVA"), a Virginia corporation, to develop
and manage properties in Virginia.
The following significant accounting policies have been followed in the
preparation of Diversified's financial statements.
CONSOLIDATION
The consolidated financial statements include the accounts of Diversified
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, Diversified considers all
highly liquid investments purchased within three months of maturity to be
cash equivalents.
INVESTMENTS
All investments with a maturity greater than three months are accounted for
under Financial Accounting Standards Board (FASB) Statement No. 115
"Accounting for Certain Investments in Debt and Equity Securities.
Investments are classified as available-for-sale or held-to-maturity.
Diversified determines the appropriate classification at the time of
purchase. Investments classified as available-for-sale are stated at fair
value, with unrealized gains and losses, net of tax, reported in a separate
component of shareholders' equity. Realized gains and losses on sales of
investments are included in other income. Securities are classified as
held-to-maturity when Diversified has the positive intent and ability to
hold the securities to maturity. Held-to-maturity securities are stated at
amortized cost.
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.
ACCOUNTS RECEIVABLE - TRADE
Accounts receivable - trade consists of management fees and administrative
services reimbursements due from partnerships and other entities whose
properties are managed by Diversified and RPM. Diversified and its
subsidiaries provide services to customers and clients on a
noncollateralized basis.
FURNITURE AND EQUIPMENT
Furniture and equipment are stated at cost less accumulated depreciation.
Depreciation is determined using the straight-line method and is based on
the estimated useful lives of three to five years for the related assets.
Expenditures for maintenance and repairs that 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.
ACCOUNTS RECEIVABLE-AFFILIATES
Accounts receivable-affiliates consist primarily of management fees,
reimbursable administrative costs, and advances due from entities
affiliated through common ownership. The accounts receivable are classified
as long-term assets when Diversified expects to realize amounts later than
one year from its current fiscal year end.
ACCOUNTS AND INTEREST RECEIVABLE-PROPERTIES
Accounts receivable and interest receivable-properties consist primarily of
development costs and fees, management fees and interest on unpaid accounts
receivable from properties. Diversified has entered into a subordination
agreement or has otherwise agreed to defer collection of certain amounts
pending the satisfaction of certain debt obligations by the property owners
under separate financing arrangements or the achievement of certain
operating results by the managed facilities. Amounts due are classified as
long-term assets when Diversified expects to realize amounts subordinated
or deferred amounts later than one year from its current fiscal year end.
NOTES RECEIVABLE-PROPERTIES
Notes receivable-properties consist of loans to independent owners of
assisted living facilities for closing costs associated with the obtaining
of permanent financing for the purchase of the facilities. The notes range
in length from 9 to 40 years with restrictions on certain payments of
principal and interest as defined in the individual note agreements. The
restrictions consist mainly of the owners' satisfaction of primary debt
obligations relating to the purchase of the facilities prior to the payment
of principal and interest to Diversified. Diversified's secondary security
interests in the facilities secure the notes receivable. Notes receivable
principal balances due within one year of Diversified's current fiscal year
end are classified as current assets.
DEVELOPMENT COSTS
Development costs are capitalized expenses incurred during the development
of new facilities. The facilities are developed for third party owners and
the development costs are reimbursed based upon the terms of the
development agreements and/or financing arrangements. Costs for abandoned
sites are written off when the sites are considered not feasible.
In the first quarter of 1999, Diversified changed its method of accounting
for salaries and administrative and other expenses (collectively "items")
of certain company employees directly involved in the development of new
facilities. The change involved expensing the items as incurred, rather
than capitalizing the items as development costs.
The change in accounting policy resulted in the write off of items
capitalized at January 1, 1999. The cumulative effect of the write off,
which totals $328,566 ($.10 per share), has been expensed and reflected in
the 1999 statement of operations.
NET INCOME (LOSS) PER SHARE
Basic net income (loss) per common share is computed by dividing income
(loss) available to common shareholders by the weighted average number of
common shares outstanding for the year. Diluted income (loss) per share
reflects the potential dilution that could occur if dilutive securities and
other contracts to issue common stock were exercised or converted into
common stock or resulted in the issuance of common stock that then shared
in the earnings of Diversified.
ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with generally
accepted accounting principles (GAAP) requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of income and expenses during
the reporting period. Actual results could differ from those estimates.
NOTE 1: ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
- --------------------------------------------------------------------------------
INCOME TAXES
Diversified is a C corporation for income tax purposes. Effective with the
initial public offering on January 14, 1998, Diversified and its
subsidiaries file consolidated federal income tax returns. Prior to the
initial public offering, Diversified filed its federal income tax returns
as part of a consolidated group with Taylor House. Tax expense or benefit
was allocated based on net income or loss for each entity in the
consolidated group.
State income tax regulations generally do not permit filing of consolidated
income tax returns. Accordingly, Diversified and its subsidiaries file
separate state corporate income tax returns as described further in Note
11.
Diversified 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 earned based on the provisions of management
agreements with the property owners. Generally, management fees are earned
based on a specified percentage of gross income (as defined in the
individual management agreements) of the properties. Management agreements
may also contain maximum annual compensation provisions and fee provisions
for bookkeeping, accounting and property manager services. In certain
instances, collection of management fees may be deferred pending the
satisfaction of debt obligations by the property owners under separate
financing arrangements or the achievement of specified operating results by
the managed facilities.
Reimbursement income consists primarily of amounts charged to the managed
properties for Diversified's management and maintenance personnel services.
The related expenses are included in Diversified's consolidated statement
of operations as operating expenses.
Development fee income is earned based on the provisions of development
agreements with the property owners. Generally, development fees are
calculated based on a specified percentage of the total cost (without
regard to the development fee) of completing a residence. Development fees
are earned based on the estimated percentage of obligations completed by
Diversified as compared to the total obligations to be completed under the
development agreements (the percentage of completion basis). In certain
instances, collection of development fees may be deferred pending the
satisfaction of debt obligations by the property owners under separate
financing arrangements or the achievement of specified operating results by
the managed facilities.
PREFERRED STOCK
Diversified'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.
Diversified issued a total of 2,225 shares of 12% Series B Cumulative
Convertible Preferred Stock with no par value and a stated value of $2,000
per share during the second, third and fourth quarters of 1999. Diversified
realized net proceeds of $4,022,138 from the preferred stock issuance. The
preferred stock pays a 12% dividend semiannually and has a liquidation
preference superior to all common and preferred stock currently issued and
outstanding. The preferred stock may be converted to common stock at $4 per
common share through January 2000, and the lesser of $4 per common share of
the lowest market price on the day prior to conversion after January 2000.
STOCK OPTIONS
Diversified 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.
RECLASSIFICATIONS
Certain amounts in the 1998 consolidated financial statements have been
reclassified to conform to the 1999 presentation.
NOTE 2: 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, Diversified's
majority stockholder. Taylor House intends to sell the properties to third party
owners after permanent financing is arranged. At December 31, 1999, development
fees of $2,020,105 and reimbursable development costs of $2,905,502 are due to
Diversified from Taylor House. At December 31, 1999, Diversified is the
guarantor for $1,913,064 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.
RPM leases certain computer equipment from Taylor House under operating leases
agreements that expire in 2003. These lease agreements are included in the lease
information discussed in Note 12.
From time to time, Diversified advances to or borrows funds from Taylor House or
other related entities . At December 31, 1999, Accounts receivable-affiliates
includes $386,269 outstanding advances to related entities, and the $760,246
Accounts payable-affiliates balance represents outstanding advances from related
entities.
The following schedule summarizes the related party transactions for the years
ended December 31, 1999 and 1998:
<TABLE>
<CAPTION>
Due from Due (to) from
Affiliated Taylor House &
PARTNERSHIPS SUBSIDIARIES TOTAL
<S> <C> <C> <C>
Amounts due (to) from affiliates at January 1, 1998: $ 233,616 $ 76,791 $ 310,407
Computer equipment lease
payment due to Taylor House - (6,011) (6,011)
Rent due to Taylor House (32,400) (32,400)
Development fees and costs due
from properties currently held by Taylor House - 2,603,656 2,603,656
Advances due from affiliate - 142,705 142,705
Repayments to Taylor House - 277,242 277,242
Advances from Taylor House - (202,274) (202,274)
----------- -------------- ------------
Balance, December 31, 1998 233,616 2,859,709 3,093,325
Computer equipment lease
payment due to Taylor House - (6,011) (6,011)
Rent due to Taylor House - (10,800) (10,800)
Management fees due from affiliates - 39,362 39,362
Development fees and costs due
from properties currently held by Taylor House - 2,321,951 2,321,951
Interest receivable from affiliated properties - 211,829 211,829
Advances due from affiliate 249,178 249,178
Repayments to Taylor House - 347,800 347,800
Advances from Taylor House - (1,184,583) (1,184,583)
----------- ------------ ------------
Balance, December 31, 1999 $ 233,616 $ 4,828,435 $ 5,062,051
=========== =========== ============
</TABLE>
NOTE 2: RELATED PARTY TRANSACTIONS (CONTINUED)
Included in the accompanying balance sheets under the following captions:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Development fees and costs due from affiliates (current asset) $1,235,650 -
Development fees and costs due from affiliates (long-term asset) 3,917,140 $2,603,656
Accounts receivable-affiliates (long-term asset) 669,507 679,595
Accounts payable-affiliates (long-term liability) (760,246) (189,926)
----------- -----------
$5,062,051 $3,093,325
=========== ===========
</TABLE>
Diversified earned interest of $251,829 for the year ended December 31, 1999 on
development fees and costs due from affiliates. The $211,829 interest
receivable, net of a $40,000 allowance, is included in Development fees and
costs due from affiliates (long-term asset) at December 31, 1999. There was no
interest income earned from affiliates during the year ended December 31, 1998.
In the management's opinion, net amounts due from affiliated partnerships are
collectible, but will not be realized until such time as certain partnerships
terminate. Diversified earned income from a wholly owned subsidiary of Taylor
House. Diversified managed partnerships, whose general partner is Diversified's
chief executive officer and a beneficial shareholder of Taylor House. Revenues
from these affiliates for the years ended December 31, 1999 and 1998 are as
follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Management fees $ 345,937 $ 306,233
Reimbursement fees 962,830 591,450
--------------- ------------
$ 1,308,767 $ 897,683
============== =============
</TABLE>
At December 31, 1999 and 1998, uncollected management fees and reimbursement
fees are included in Accounts receivable-trade and Accounts
receivable-affiliates.
NOTE 3: FURNITURE AND EQUIPMENT
Diversified has furniture and equipment as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Computer equipment $ 230,836 $ 163,557
Office furniture 52,005 52,005
-------------- -------------
282,841 215,562
Less accumulated depreciation 169,989 125,361
-------------- -------------
$ 112,852 $ 90,201
============== =============
</TABLE>
Depreciation expense for the years ended December 31, 1999 and 1998 was $44,628
and $52,381, respectively.
NOTE 4: NOTES RECEIVABLE
At December 31, 1999, notes receivable consisted of the following:
9% note receivable with interest
payable semi-annually, due 200 $ 515,921
7% note receivable, principal and interest due 2040 574,133
7% note receivable, principal and interest due 2040 670,061
-------
$ 1,760,115
----------
Less current portion $ (86,206)
Notes receivable-properties 1,673,909
---------
Diversified accrued interest receivable of $63,523 for the year ended December
31, 1999. $19,734 interest receivable is included in Interest receivable as a
current asset. $43,789 interest receivable on the notes receivable due 2040 is
included in the accompanying balance sheet as a long-term asset.
Maturities of the notes receivable for future years are as follows:
2000 $ 86,206
2001 93,965
2002 102,422
2003 111,640
2004 121,688
later years 1,244,194
----------
$ 1,760,115
The notes receivable and interest due 2040 may be prepaid prior to maturity
should the properties owners prepay the primary mortgage obligation prior to
2040. Prepayments of principal and interest on the notes receivable may also be
made by the properties owners from surplus cash flows (as defined in the primary
mortgage agreements between the owners and the lender) of the properties and
with prior written approval of the lender.
NOTE 5: ISSUANCE OF PREFERRED STOCK
On May 3, 1999, July 13, 1999 and October 4, 1999, Diversified issued 1,500
shares, 358 shares and 367 shares, respectively, of 12% Series B Cumulative
Convertible Preferred Stock with no par value per share and a stated value of
$2,000 per share. The following gives the effect of the offering.
Gross proceeds (2,225 shares at $2,000 per share) $ 4,450,000
Offering expenses ( 427,862)
-------------
Net proceeds from the offering $ 4,022,138
=============
NOTE 5: ISSUANCE OF PREFERRED STOCK (CONTINUED)
Diversified had preferred stock as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998
------------------- -------------------
SHARES AMOUNT SHARES AMOUNT
--------- ------------- --------- -------------
<S> <C> <C> <C> <C>
Series A 178,386 $ 891,930 178,386 $ 891,930
Series B 2,225 4,022,138 - -
------- ------------- ------- -------------
180,611 $ 4,914,068 178,386 $ 891,930
======= ============= ======= ==============
</TABLE>
NOTE 6: INITIAL PUBLIC OFFERING
On January 14, 1998 Diversified 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
============
NOTE 7: INVESTMENTS
During 1999, Diversified purchased a $500,000 certificate of deposit as
collateral for a $500,000 letter of credit issued by a bank. The certificate of
deposit earned $12,104 interest during 1999. The letter of credit is discussed
further in Note 12.
In March 2000, the bank released $250,000 to Diversified. Effective March 22,
2000, the remaining $250,000 was transferred into a new certificate of deposit
with a 5.95% interest rate maturing September 18, 2000. Upon maturity of the
$250,000 certificate of deposit, management expects to renew the certificate of
deposit with a maturity date beyond December 31, 2000. As such, at December 31,
1999, $250,000 is included in Cash and cash equivalents and $250,000 is included
in Other Assets.
For the year ended December 31, 1999, proceeds from sales of Diversified's
investments were $2,883,359, resulting in gains of $34,279 and realized losses
of $85,987. Proceeds from sales of its 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 in other income in the
financial statements.
NOTE 8: INVESTMENT IN BONDS
Investment in bonds consist of $150,000 Housing Authority of the City of
Goldsboro Senior Lien Revenue Bonds and $150,000 Town of Mocksville Senior Lien
Revenue Bonds. The bonds were issued to finance the costs associated with the
development and purchase of the Goldsboro and Mocksville assisted living
facilities in North Carolina by third-party owners. The bonds bear interest at
7.25% per year and are due February 1, 2029, subject to mandatory, extraordinary
and optional redemption provisions of the Master Trust Indenture for the two
bond issues. The facilities were developed and are managed by Diversified.
Diversified has subordinated its receipt of principal and interest under a
subordination agreement dated February 1, 1999 so that such debt service shall
be payable only from funds available for subordinate obligations after
satisfaction of debt obligations by the property owners under the Master Trust
Indenture. $9,062 of interest receivable at December 31, 1999 was collected by
Diversified in March 2000. Diversified has secondary security interests in the
facilities under provisions of the Master Trust Indenture. The bonds are
classified as held-to-maturity.
NOTE 9: SAVINGS INCENTIVE PLAN
Diversified participates in a defined contribution savings incentive plan
covering substantially all of its full-time employees. On January 1, 1996, the
plan was amended to cover substantially all employees of the controlled group of
companies owned by Taylor House. Diversified's contributions to the plan for the
years ended December 31, 1999 and 1998 were $35,237 and $33,595, respectively,
representing a 50% matching contribution for participant contributions up to the
first 5% of compensation.
NOTE 10: STOCK INCENTIVE PLAN
Effective January 1, 1997, the Directors and shareholder adopted Diversified'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. Diversified 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, 1999 and 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. Options and warrants
granted are as follows:
<TABLE>
<CAPTION>
RANGE OF SHARE WEIGHTED AVERAGE REMAINING LIFE
EXERCISE PRICE OUTSTANDING EXERCISE PRICE (MONTHS)
-------------- ----------- ---------------- ----------
Options:
<S> <C> <C> <C> <C>
$4.75 - $5.225 47,000 $4.91 38
Warrants:
$6.00 - $9.00 45,000 5.93 43
$6.75 50,000 6.75 44
----- ------ ---- --
142,000 $5.88 42
======= ===== ==
</TABLE>
Separate 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
Diversified in consideration for their deferral of certain cash compensation. In
addition, Diversified 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.
Diversified 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 Diversified'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.
Income taxes to do after calculation of provision.
NOTE 11: PROVISION FOR INCOME TAXES
The components of income tax benefit are as follows for the years ended December
31, 1999 and 1998:
<TABLE>
<CAPTION>
12/31/99 12/31/98
-------- --------
Current taxes payable (refundable):
<S> <C> <C>
Federal $ - $ -
State (103,455) -
Utilization of operating loss carryforwards 103,455 -
---------------- -------------
- -
---------------- -------------
Deferred tax expense (benefit):
Deferred compensation 18,500 126,500
Start up costs (3,500) 13,700
Deferred revenues (135,000) -
Management contracts 486,743 -
Generation of state loss carryforwards (8,671) (144,500)
Generation of federal loss carryforward (6,606) (295,000)
Utilization of loss carryforwards (10,099) -
All other changes 11,000 (5,200)
Increase (decrease) in valuation allowance (352,367) 304,500
--------------- -------------
- -
-------------- -------------
Income tax benefit $ - $ -
============== =============
</TABLE>
The actual income tax benefit attributable to income (loss) from continuing
operations for the years ended December 31, 1999 and 1998 differed from the
amounts computed by applying the U.S. federal tax rate of 34 percent to loss
before income tax benefit as a result of the following:
<TABLE>
<CAPTION>
12/31/99 12/31/98
-------- --------
<S> <C> <C>
Computed "expected" tax benefit $ 126,900 $ (6,100)
Timing differences related to deferred compensation 18,500 (111,300)
Timing differences related to depreciation and amortization (6,100) (149,300)
Deferred revenues (135,000) -
Increase in net operating loss carryforward - 295,000
Utilization of net operating loss carryforward 7,000 -
All other changes (11,300) (28,300)
--------------- --------------
Income tax benefit $ - $ -
=============== ==============
</TABLE>
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 Diversified's deferred income tax assets are as follows. There are
no significant deferred income tax liabilities.
<TABLE>
<CAPTION>
12/31/99 12/31/98
-------- --------
Non-current deferred tax asset:
<S> <C> <C>
Deferred compensation $ 83,700 $ 72,900
Start-up costs 25,400 33,100
Deferred revenues (135,000) -
State operating loss carryforwards 124,733 237,300
Federal operating loss carryforward 183,600 295,000
All others 15,300 11,800
-------------- -------------
297,733 650,100
Valuation allowance (297,733) (650,100)
-------------- --------------
Net deferred tax asset $ - $ -
============== =============
</TABLE>
From May 17, 1996 (Date of Inception) through January 13, 1998, Diversified was
included in the consolidated federal return of Taylor House; therefore, loss
carryforwards for federal purposes have been utilized. Effective January 14,
1998, Diversified and its subsidiaries file a consolidated federal return
separate from Taylor House.
At December 31, 1999 Diversified 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
2011 $ - $ 364,267
2012 - 1,217,185
2013 - 552,209
2014 - 123,872
2018 520,353 -
2019 19,430 -
NOTE 12: COMMITMENTS AND CONTINGENCIES
Diversified has various operating leases for office space and equipment. Future
minimum lease payments of $72,942 are as follows for the years ending December
31:
2000 $ 29,253
2001 $ 27,499
2002 $ 15,512
2003 $ 678
Rent expense for the years ended December 31, 1999 and 1998 was $124,238 and
$103,228, respectively.
In May 1997, Diversified entered into a $2,700 month-to-month sublease with
Taylor House for corporate headquarters office space. During 1999, the monthly
rent increased to $3,800.
RPM entered into a $418 month-to-month lease in May 1999 for office space in
Raleigh, NC. The office space is located in an apartment property managed by RPM
and owned by a partnership, whose general partner is Diversified's chief
executive officer and a beneficial shareholder of Taylor House. In addition, RPM
leases computer equipment from Taylor House for $501 per month.
In April 1998, Diversified entered into an approximate $2,200 month-to-month
lease with a non-related third party for DSSF office space in New York, New
York.
Diversified is obligated to pay $25,000 in the year 2000 to a non-related third
party for consulting services.
On July 1, 1999, Diversified entered into a loan agreement with the owner of the
Goldsboro and Mocksville assisted living facilities to provide up to $500,000 of
working capital loans if required by the facilities to fund bond debt
obligations and/or operating and maintenance expenses. Any borrowings by the
owners bear interest at prime plus 1%. The loan agreement is irrevocable by
Diversified and terminates the earlier of the date on which no bonds are
outstanding, the loan is no longer required by the Master Trustee of the bond
indenture, or Diversified's management agreements are terminated by the owners
without cause by or default of Diversified. There were no borrowings under the
loan agreement during the year ended December 31, 1999.
In connection with the loan agreement, Diversified obtained from a bank a
$500,000 irrevocable letter of credit that expires July 27, 2000. Diversified
purchased a $500,000 certificate of deposit as collateral for the letter of
credit (see also Notes 8 and 9).
NOTE 13: EARNINGS PER SHARE
The following is a reconciliation of net income (loss) per share - basic and
diluted for the year ended December 31, 1999 and 1998:
<TABLE>
<CAPTION>
12/31/99 12/31/98
-------- --------
Net income (loss) available for common
<S> <C> <C>
Shareholders - basic and diluted $ 73,273 $ (17,795)
========== ==============
Weighted average shares outstanding - basic 3,301,400 3,246,940
Additional shares issued assuming
exercise of options 76,729 -
Shares assumed repurchased (54,804) -
--------------- -------------
Weighted average shares outstanding - diluted 3,323,325 3,246,940
================ ===============
</TABLE>
For the year ended December 31, 1999, conversion of the Series B Cumulative
Convertible Preferred Stock and an additional 142,000 options and warrants were
not included since conversion would be anti-dilutive.
NOTE 14: SUBSEQUENT EVENTS
As of March 20, 2000, a total of 498 shares of the Series B Cumulative
Convertible Preferred Stock have been converted to 442,222 shares of common
stock.
On February 29, 2000, a third party non-profit entity acquired three assisted
living facilities, one of which was developed by Diversified and commenced
operations in June 1999. The non-profit entity entered into a ten-year
management agreement with Diversified. Diversified earned fees of approximately
$470,000 in connection with the facilities purchase. In connection with the
financing of the facilities by the owner, Diversified was repaid $1,235,650 of
development costs and fees that was outstanding at December 31, 1999.
Subsequent to December 31, 1999, Diversified was named as a defendant in a
personal injury lawsuit involving an accident that occurred at an apartment
complex currently managed by Diversified. Diversified denies any liability for
the alleged personal injury and asserts that it was not involved in management
or ownership of the apartment complex at the time of the accident. The lawsuit
is in its early stages and it is not practical to either assess the outcome or
estimate a range of potential loss for this matter. However, management is of
the opinion that resolution of the lawsuit will not result in any significant
liability to Diversified in relation to its consolidated financial position or
liquidity.
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).
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. Incorporated by reference to Exhibit 3.1(b) to Annual
Report on Form 10-KSB for year ended December 31, 1998.
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). [DELETE
AS EXPIRED?]
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. Incorporated by reference to Exhibit
3.1(b) to Annual Report on Form 10-KSB for year ended December
31, 1998.
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:
<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 29, 2000
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. BENTON Chairman of the Board and Chief March 29, 2000
- ----------------------------- Executive Officer
William G. Benton
/S/ SUSAN L. CHRISTIANSEN Chief Operating Officer and March 29, 2000
- ----------------------------- Director
Susan L. Christiansen
/S/ G.L. CLARK, JR. Chief Financial Officer, March 29, 2000
- ----------------------------- Treasurer and Director
G.L. Clark, Jr.
/S/ SUSAN L. CHRISTIANSEN Director March 29, 2000
- -----------------------------
Susan L. Christiansen
Attorney in Fact for
Perry C. Craven
/S/ SUSAN L. CHRISTIANSEN Director March 29, 2000
- -----------------------------
Attorney in Fact for
Walter H. Ettinger, Jr.
<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, 1999, 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, 2000
/s/ Walter H. Ettinger, Jr.
----------------------------------
Walter H. Ettinger, Jr.
<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, 1999, 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, 2000
/s/ Perry C. Craven
----------------------------------
Perry C. Craven
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
March 29, 2000 on the consolidated financial statements of Diversified Senior
Services, Inc. and subsidiary as of December 31, 1999 and for the year then
ended.
/s/ The Daniel Professional Group, Inc.
THE DANIEL PROFESSIONAL GROUP, INC.
Winston-Salem NC
March 29, 2000
