SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): October 25, 2002
FIVE STAR QUALITY CARE, INC.
(Exact name of registrant as specified in charter)
Maryland 001-16817 04-3516029
State or other jurisdiction (Commission (I.R.S. employer
of incorporation) file number) identification number)
400 Centre Street, Newton, Massachusetts 02458
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: 617-796-8387
This Current Report on Form 8-K/A amends and restates, in its entirety, the
Current Report on Form 8-K (dated October 25, 2002), which was filed with the
Securities and Exchange Commission on November 12, 2002.
Item 2. Acquisition or Disposition of Assets.
On October 25, 2002, Five Star Quality Care, Inc. ("we," "us" or "Five
Star," which term includes our consolidated subsidiaries unless the context
requires otherwise), Senior Housing Properties Trust ("Senior Housing"),
Constellation Health Services, Inc. and certain of its subsidiaries
(collectively "CHSI") completed the transactions contemplated by a Purchase and
Sale Agreement dated August 26, 2002, between Senior Housing and CHSI, as
amended by the First Amendment to Purchase and Sale Agreement dated October 25,
2002, among Five Star, Senior Housing and CHSI (as amended, the "Purchase
Agreement"). Under the Purchase Agreement, we and SNH acquired assets of CHSI
consisting of 15 senior living communities that have an aggregate of 1,016
units, as more fully described below.
We acquired seven senior living communities directly from CHSI
(collectively, the "Five Star Communities"). Senior Housing acquired eight other
senior living communities (the "Leased Communities") and we acquired certain
operating assets and liabilities of the Leased Communities and entered into a
lease with Senior Housing for the Leased Communities.
We and Senior Housing are jointly and severally liable for the
obligations and liabilities under the Purchase Agreement. Except as otherwise
provided in our lease for the Leased Communities, we and Senior Housing have
agreed that we will each have all of the rights and remedies, perform all of the
obligations, and assume the liabilities, each under the Purchase Agreement,
relating to the Five Star Communities and the Leased Communities, respectively.
The purchase price paid to CHSI pursuant to the Purchase Agreement was
$77.15 million, comprised of cash and the assumption of certain liabilities
relating to the 15 senior living communities. We paid $27 million of the
Purchase Agreement's total purchase price by assuming $15.8 million of HUD
insured mortgage debt encumbering one of the Five Star Communities and by paying
CHSI the balance of $11.2 million in cash.
Simultaneously with the closing under the Purchase Agreement: (i) we
sold to Senior Housing our senior living community located in Overland Park,
Kansas, for approximately $12.7 million in cash; and (ii) we leased from Senior
Housing the Leased Communities and the property located in Overland Park,
Kansas.
The material terms of our lease with Senior Housing for the Leased
Communities and Overland Park are substantially the same as our existing leases
with Senior Housing, except as follows: We are required to pay to Senior Housing
for the Leased Communities and Overland Park minimum rent equal to $6.285
million per year. In addition, starting in 2005, we are required to pay
additional rent with respect to each lease year in an amount equal to four
percent (4%) of net patient revenues at each leased facility in excess of net
patient revenues at such facility during 2004. The initial term of the lease is
for 17 years, expiring December 31, 2019. We have the option to renew the lease
for all, but not less than all, of the Leased Communities and Overland Park for
one renewal term of 15 years thereafter.
-2-
We intend to continue to operate the 15 CHSI communities acquired as
senior living communities.
All of our directors, except for Dr. Bruce M. Gans, are trustees of
Senior Housing. Our president and treasurer are also employees of Reit
Management & Research LLC ("RMR"), the investment manager to Senior Housing. RMR
also provides certain administrative services to us. Gerard M. Martin and Barry
M. Portnoy, our two managing directors, are directors and 50% owners of RMR.
Substantially all of our properties are leased from Senior Housing. Messrs.
Martin and Portnoy also own the building in which our headquarters are located,
and we lease the headquarters under a lease expiring in 2011. We have previously
disclosed other relationships between us, Messrs. Martin and Portnoy and Senior
Housing in our Annual Report on Form 10-K for the year ended December 31, 2001.
WARNING REGARDING FORWARD LOOKING STATEMENTS
THIS CURRENT REPORT ON FORM 8-K CONTAINS FORWARD LOOKING STATEMENTS
WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 AND
FEDERAL SECURITIES LAWS, INCLUDING STATEMENTS REGARDING FIVE STAR'S INTENTION TO
CONTINUE TO OPERATE THE NEWLY ACQUIRED COMMUNITIES AS SENIOR LIVING COMMUNITIES.
FIVE STAR MAY BE UNABLE OR UNWILLING TO CONTINUE TO OPERATE THE NEWLY ACQUIRED
COMMUNITIES AS SENIOR LIVING COMMUNITIES. SIMILARLY, THE OPERATION OF THE NEWLY
ACQUIRED COMMUNITIES OR OTHER ASPECTS OF FIVE STAR'S BUSINESS MAY PRODUCE
OPERATING LOSSES WHICH MAKE IT IMPOSSIBLE FOR FIVE STAR TO PAY RENT TO SENIOR
HOUSING. FORWARD LOOKING STATEMENTS ARE EXPRESSIONS OF FIVE STAR'S CURRENT
BELIEFS AND EXPECTATIONS, BUT THEY ARE NOT GUARANTEED. INVESTORS SHOULD NOT
PLACE UNDUE RELIANCE UPON FORWARD LOOKING STATEMENTS.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
PAGE
(a) Financial Statements.
Constellation Health Services Facilities
Report of Independent Accountants 4
Combined Balance Sheets at November 30, 2001
and August 31, 2002 (unaudited) 5
Combined Statements of Operations for the twelve months ended
November 30, 2001 and nine months ended August 31, 2001 and 2002
(unaudited) 6
Combined Statement of Changes in Owner Equity for the
year ended November 30, 2001 and for the nine months ended August
31, 2002 (unaudited) 7
Combined Statements of Cash Flows for the twelve months ended
November 30, 2001 and the nine months ended August 31, 2001
and 2002 (unaudited) 8
Notes to the Combined Financial Statements 9-14
-3-
Report of Independent Accountants
To Constellation Health Services, Inc.
In our opinion, the accompanying combined balance sheets and the related
combined statements of operations, changes in owner equity and cash flows,
present fairly, in all material respects, the financial position of
Constellation Health Services Facilities (the "Company") at November 30, 2001,
and the results of its operations and its cash flows for the twelve months then
ended in conformity with accounting principles generally accepted in the United
States of America. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audit of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
January 6, 2003
-4-
Constellation Health Services Facilities
Combined Balance Sheets
-------------------------------------------------------------------------------------------------------------
November 30, August 31,
2001 2002
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 2,290,257 $ 3,731,819
Accounts receivable, (net of allowance of $15,000 and
$18,116, respectively) 686,176 693,313
Prepaid expenses 872,752 726,215
----------- -----------
Total current assets 3,849,185 5,151,347
----------- -----------
Senior living facilities, net 73,500,000 74,325,433
Restricted cash 731,481 531,084
Other assets 1,243,040 1,499,234
----------- -----------
Total assets $79,323,706 $81,507,098
----------- -----------
Liabilities and Owner Equity
Current liabilities:
Current portion of long-term debt $20,146,174 $18,936,702
Accounts payable 588,309 1,311,171
Accrued expenses 662,740 749,145
Accrued interest 274,995 217,223
----------- -----------
Total current liabilities 21,672,218 21,214,241
----------- -----------
Long-term debt, less current portion 20,912,059 20,582,840
Other liabilities 181,667 160,053
----------- -----------
Total liabilities 42,765,944 41,957,134
----------- -----------
Commitments and contingencies
Owner equity 36,557,762 39,549,964
----------- -----------
Total liabilities and owner equity $79,323,706 $81,507,098
=========== ===========
The accompanying notes are an integral part of these combined financial statements.
-5-
Constellation Health Services Facilities
Combined Statements of Operations
----------------------------------------------------------------------------------------------------------
Twelve Months Nine Months
Ended Ended
November 30, August 31,
2001 2001 2002
(unaudited)
Revenue:
Rental and other $ 32,551,096 $ 24,178,075 $ 25,316,974
Interest 216,936 106,022 80,463
------------ ------------ ------------
Total revenue 32,768,032 24,284,097 25,397,437
Expenses:
Salaries and wages 16,500,512 12,312,597 12,838,150
Facility operations 3,101,268 2,582,501 2,484,160
Interest 3,002,567 2,366,108 1,941,240
Property management fees 1,660,175 1,234,027 1,272,068
Utilities 1,285,795 986,098 963,468
General and administrative 969,221 731,219 855,456
Marketing 875,876 708,984 505,204
Real estate tax 807,533 659,093 588,524
Insurance 386,758 266,506 441,019
Repairs and maintenance 430,980 326,113 339,823
Ground lease 131,405 97,658 105,561
Professional fees 120,466 97,648 70,562
Depreciation and amortization 3,912,926 2,830,608 --
Provision for impairment on senior living facilities 9,598,698 -- --
------------ ------------ ------------
Total expenses 42,784,180 25,199,160 22,405,235
------------ ------------ ------------
Income (loss) before income taxes (10,016,148) (915,063) 2,992,202
Income tax benefit (expense) -- -- --
------------ ------------ ------------
Net income (loss) $(10,016,148) $ (915,063) $ 2,992,202
============ ============ ============
The accompanying notes are an integral part of these combined financial statements.
-6-
Constellation Health Services Facilities
Combined Statement of Changes in Owner Equity
--------------------------------------------------------------------------------
Total
Balance at November 30, 2000 $ 44,878,910
Net loss for the twelve months ended November 30, 2001 (10,016,148)
Contributions 1,695,000
------------
Balance as of November 30, 2001 $ 36,557,762
============
Net income for the nine months ended August 31, 2002 (unaudited) 2,992,202
------------
Balance at August 31, 2002 (unaudited) $ 39,549,964
============
The accompanying notes are an integral part of these combined financial
statements.
-7-
Constellation Health Services Facilities
Combined Statements of Cash Flows
--------------------------------------------------------------------------------------------------------------
Twelve Months Nine Months
Ended Ended
November 30, August 31,
2001 2001 2002
(unaudited)
Cash Flows from Operating Activities
Net income ($10,016,148) $ (915,063) $ 2,992,202
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization 3,912,926 2,830,608 --
Provision for impairment 9,598,698 -- --
Changes in operating assets and liabilities:
Accounts receivable 284,879 48,879 (7,137)
Accounts payable/accrued expenses (896,662) (540,124) 809,267
Prepaid expenses (331,523) (442,811) 146,537
Accrued interest (30,046) (42,191) (57,772)
Other assets 340,479 225,452 (256,194)
Other liabilities 15,646 2,866 (21,614)
------------ ------------ ------------
Net cash provided by operating activities 2,878,249 1,167,636 3,605,289
------------ ------------ ------------
Cash Flows from Investing Activities
Purchases of senior living property and equipment (488,334) (128,446) (825,433)
Restricted cash (37,182) (11,871) 200,397
------------ ------------ ------------
Net cash used in investing activities (525,516) (140,317) (625,036)
------------ ------------ ------------
Cash Flows from Financing Activities
Borrowings from/(payments to) affiliate 6,384,673 (1,250,000) (1,034,673)
Principal payments on debt (8,396,065) (623,298) (504,018)
Contributions 1,695,000 1,695,000 --
------------ ------------ ------------
Net cash used in financing activities (316,392) (178,298) (1,538,691)
------------ ------------ ------------
Increase in cash and cash equivalents 2,036,341 849,021 1,441,562
Cash and cash equivalents, beginning of period 253,916 253,916 2,290,257
------------ ------------ ------------
Cash and cash equivalents, end of period $ 2,290,257 $ 1,102,937 $ 3,731,819
============ ============ ============
Supplemental Disclosures
Cash paid for interest $ 3,032,613 $ 2,408,299 $ 1,999,012
The accompanying notes are an integral part of these combined financial statements.
-8-
Constellation Health Services Facilities
Notes to the Combined Financial Statements
--------------------------------------------------------------------------------
1. Basis of Presentation
Constellation Health Service, Inc., ("Constellation") is a wholly owned
subsidiary of Constellation Real Estate Group, Inc. ("CREG"), which is
a wholly owned subsidiary of Constellation Holdings, Inc., which is a
wholly owned subsidiary of Constellation Enterprises, Inc. which is a
wholly owned subsidiary of Constellation Energy Group, Inc. ("CEG").
During the twelve months ended November 30, 2001 and during the nine
month periods ended August 31, 2002 and 2001, the activities of
Constellation included the ownership and management of fifteen senior
living communities with 1,016 independent living apartments and
assisted living units (the "Communities"). The majority of these
fifteen communities were developed between 1997 and 1999 and are
located in the Baltimore-Washington corridor.
On October 25, 2002, Constellation sold its entire ownership interest
in its independent and assisted living portfolio. A group consisting of
Senior Housing Properties Trust, a publicly traded real estate
investment trust and Five Star Quality Care, Inc., a publicly traded
owner/operator of health care facilities purchased the Constellation
portfolio for an aggregate price of approximately $77,150,000.
The accompanying combined financial statements present the "carved-out"
financial position, results of operations and cash flows of the
Communities which are referred to in these combined financial
statements as Constellation Health Services Facilities (the "Company").
The assets and liabilities contained herein are presented at historical
cost. The combined financial statements presented may not be indicative
of the results that would have been achieved had the Company operated
as a non-affiliated entity.
The combined financial statements as of August 31, 2002 and for the
nine months ended August 31, 2002 and 2001 are unaudited. In the
opinion of management, all adjustments, consisting only of normal,
recurring adjustments, necessary for a fair presentation of such
combined financial statements have been included. The results of
operations for the nine months ended August 31, 2002 are not
necessarily indicative of the Company's future results of operations
for the full year ended November 30, 2002.
2. Summary of Significant Accounting Policies
Principles of Combination
The combined financial statements include the accounts of the
Communities extracted from the books and records of Constellation.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash and cash equivalents. The
majority of these funds are deposited in overnight investments at
several lending institutions and are subject to credit risk. The
amounts reflected in these financial statements only reflect cash and
cash equivalents that are in accounts dedicated to the Company.
-9-
Constellation Health Services Facilities
Notes to the Combined Financial Statements
--------------------------------------------------------------------------------
Senior Living Facilities
Senior living facilities consist of investments in the ownership of
fifteen senior living housing communities. Senior housing facilities
are stated at depreciated cost. Development costs and major renovations
were capitalized as a component of costs, and routine maintenance and
repairs were charged to expense as incurred.
The senior living facilities are subject to the requirements of
Statement of Financial Accounting Standards (FAS) No. 121 "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed of," and are evaluated for impairment through a review of
undiscounted expected future cash flows. If the sum of the undiscounted
expected future cash flows is less than the carrying amount of the
asset, an impairment loss is recognized.
In the fourth quarter of 2001, the Company decided to sell all of its
senior living facilities in 2002. The Constellation recognized a
provision for impairment in the twelve month period ended November 30,
2001 related to the senior living facilities of $9,598,698, which was
determined based upon the excess of the carrying value of the
Constellation senior living facilities over their fair value.
Fair value was determined by various means, including discussions with
outside investment bankers and prospective buyers, and the opinions of
the Company's management.
Depreciation is computed using the straight-line method. The estimated
useful lives are as follows:
Estimated
Useful
Lives
Senior living buildings 40 years
Furniture, fixtures and equipment 3-10 years
Restricted Cash
The Company has restricted funds, consisting of tenant security
deposits, an interest bearing reserve for capital replacements kept in
accordance with the terms of the property management agreement and
mortgage escrow deposits.
Revenue Recognition
Individual units in the Communities are leased under leases with terms
of generally one year or less. Rental revenue is recognized on a
monthly basis under the terms of the lease when earned.
Income Taxes
Constellation is taxable as a so called "C" corporation and files a
consolidated federal income tax return on a calendar year basis with
CEG. For purposes of these combined financial statements, the Company
has provided for income taxes on a separate return basis whereby
current income taxes are based upon the Company's estimated taxable
income or loss and deferred taxes are provided for the expected future
tax effects of estimated temporary differences between the carrying
amounts and the tax bases of its assets and liabilities. As a result of
tax losses in current or prior periods there is no current tax
provision benefit for the year ended November 30, 2001 or the nine
month periods ended August 31, 2000. A full valuation allowance has
been provided to deferred tax balances as of November 30, 2001 and
August 31, 2002 as it is more likely than not that such amounts will
not be realized.
-10-
Constellation Health Services Facilities
Notes to the Combined Financial Statements
--------------------------------------------------------------------------------
Use of Accounting Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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 revenue and expenses during the reporting period.
These estimates involve judgments with respect to, among other things,
various future economic factors which are difficult to predict and are
beyond the control of the Company. Therefore, actual amounts could
differ from these estimates.
Allocated Costs
CEG provides various services to the Company including finance, legal,
planning and human resources. The methods of allocating these
centralized costs to the Company include revenues, assets, headcount
and other bases. The Company's management believes the allocation of
these costs to be reasonable.
Recent Accounting Pronouncements
In October 2001, the FASB issued SFAS No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets". This Statement supersedes
SFAS No. 121 and requires that long-lived assets that are to be
disposed of by sale be measured at the lower of book value or fair
value less costs to sell. SFAS No. 144 retains the fundamental
provisions of SFAS 121 for (a) recognition and measurement of the
impairment of long-lived assets to be held and used, and (b)
measurement of long-lived assets to be disposed of by sale, but
broadens the definition of what constitutes a discontinued operation
and how the results of a discontinued operation are to be measured and
presented. This Statement was effective at the beginning of 2002. The
Company has reviewed the provisions of SFAS 144 and believes that the
impact of adoption will not be material to its financial position,
results of operations and cash flows.
In April 2002, the FASB issued SFAS No. 145 "Rescission of FAS No. 4,
44, and 64, Amendment of FAS 13, and Technical Corrections". This
Statement rescinds FASB No. 4, "Reporting Gains and Losses from
Extinguishment of Debt", and an amendment of that Statement, FASB No.
64, "Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements". This Statement amends FASB No. 13, "Accounting for
Leases". This Statement also amends other existing authoritative
pronouncements to make various technical corrections, clarify meanings
or describe their applicability under changed conditions. This
statement will be effective for the Company's fiscal year ending 2003.
The Company has reviewed the provision of FASB 145 and believes that
the impact of adoption will not be material to its financial position,
results of operations and cash flow.
-11-
Constellation Health Services Facilities
Notes to the Combined Financial Statements
--------------------------------------------------------------------------------
3. Senior Living Facilities, Net
Senior living facilities, net of accumulated depreciation and adjusted
for impairment, consists of the following:
November 30, August 31,
2001 2002
(unaudited)
Land $ 4,956,559 $ 4,956,559
Buildings and improvements 84,149,757 84,870,225
Furniture and equipment 8,763,891 8,868,856
------------ ------------
97,870,207 98,695,640
Less: accumulated depreciation (14,771,509) (14,771,509)
Less: provision for impairment (9,598,698) (9,598,698)
------------ ------------
Senior living facilities, net $ 73,500,000 $ 74,325,433
------------ ------------
-12-
Constellation Health Services Facilities
Notes to the Combined Financial Statements
--------------------------------------------------------------------------------
4. Debt Obligations
Debt obligations consisted of the following:
November 30, August 31,
2001 2002
(Unaudited)
Note payable - lending institution; collateralized by
related land and buildings; interest payable monthly
at LIBOR plus 2.25%; matures May 2003. $ 1,025,703 $ 1,011,597
Note payable - lending institution; collateralized by
related land and buildings; interest payable monthly
at LIBOR plus 2.0%; matures August 2004. 5,618,293 5,533,556
Note payable - lending institution; collateralized by
related land and buildings; interest payable monthly
at LIBOR plus 1.75%; matures June 1, 2003. 6,464,324 6,153,994
Note payable - lending institution; collateralized by
buildings; interest payable monthly at 9.65%;
matures February 2028. 9,431,873 9,387,740
Note payable - lending institution; collateralized by
buildings; interest payable monthly at 8.0%; matures
November 2033. 6,483,367 6,432,255
Related party borrowings - CEG; these unsecured
borrowings are payable on the date CEG retires the
debt and bear interest at CEG's weighted average
interest rate which was 5.78% in 2001. 12,034,673 11,000,000
------------ ------------
Total debt obligations $ 41,058,233 $ 39,519,142
============ ============
Less current portion (20,146,174) (18,936,702)
------------ ------------
Total long-term debt, less current portion $ 20,912,059 $ 20,582,840
============ ============
The aggregate maturities of debt during the years subsequent to
November 30, 2001 are as follows:
Year ended
November 30,
2002 $ 20,146,174
2003 252,191
2004 5,549,136
2005 168,552
2006 184,488
Thereafter 14,757,692
------------
$ 41,058,233
============
-13-
Constellation Health Services Facilities
Notes to the Combined Financial Statements
--------------------------------------------------------------------------------
The Company is liable for the payment and performance of all debt
obligations. Certain notes payable require the Company to be in
compliance with certain debt covenants. The more restrictive covenants
include the requirements to maintain: 1) interest coverage ratios of
not less than 1.25 to 1; and 2) loan to value ratios of not more than
75%. At November 30, 2001, the Company was in violation of debt
covenants on two of the notes payable and accordingly the outstanding
balances of $1,025,703 and $6,464,324, respectively, have been
classified as current liabilities in the combined financial statements.
The weighted average interest rate on external variable rate debt
obligations was 6.34% for the twelve months ended November 30, 2001.
The weighted average interest rate on total debt obligations was 7.02%
for the twelve months ended November 30, 2001. The LIBOR rate was 2.15%
at November 30, 2001.
5. Fair Value of Financial Statements
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires disclosing fair value of financial instruments which are
recognized or unrecognized in the balance sheet. The fair value of the
financial instruments disclosed herein is not necessarily
representative of the amount that could be realized or settled, nor
does the fair value amount consider the tax consequences of realization
or settlement.
For certain financial instruments, including cash and cash equivalents,
receivables, accounts payable, accrued expenses and other assets and
liabilities, it was assumed that the carrying amount approximated fair
value because of the near term maturities of such obligations. The fair
value of long-term debt was determined based on current rates at which
the Company could borrow funds with similar remaining maturities, which
approximates its carrying value.
6. Transactions with Affiliates
The Company incurred costs of $564,192, $431,230 and $619,319 for
certain services provided or overhead costs incurred by CEG for the
twelve months ended November 30, 2001 and the nine months ended August
31, 2001 and 2002, respectively.
7. Commitments and Contingencies
The Company is party to various legal actions and administrative
proceedings and subject to various claims arising in the normal course
of business. The Company believes that the disposition of these matters
will not have a material adverse effect on the financial condition,
results of operations or liquidity of the Company.
The Company has entered into ground lease agreements on two of the
senior living facilities. Ground lease expense for the twelve months
ended November 30, 2001 and the nine months ended August 31, 2001 and
2002 was $131,405, $97,658 and $105,561, respectively.
-14-
(b) Pro Forma Financial Information.
Unaudited Pro Forma Consolidated Balance Sheet at
September 30, 2002 16
Unaudited Pro Forma Consolidated Statement of Operations for
the year ended December 31, 2001 17
Unaudited Pro Forma Consolidated Statement of Operations for
the nine months ended September 30, 2002 18
Notes to Unaudited Pro Forma Consolidated Financial Statements 19-25
INTRODUCTION TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
The unaudited pro forma balance sheet at September 30, 2002, presents
the financial position of Five Star Quality Care, Inc. ("Five Star") as if (1)
its acquisition of seven facilities (the "Acquired Constellation Facilities")
from Constellation Health Services, Inc. and certain of its subsidiaries
(collectively "Constellation Health Services"), (2) its lease of eight
facilities (the "Leased Constellation Facilities" and together with the Acquired
Constellation Facilities, the "Constellation Facilities") from Senior Housing
Properties Trust ("Senior Housing") that Senior Housing acquired from
Constellation Health Services and (3) the sale/leaseback of Five Star's facility
located in Overland Park, Kansas with Senior Housing had been completed as of
September 30, 2002, as described in the notes thereto. The unaudited pro forma
statement of operations for the nine months ended September 30, 2002, presents
the results of operations of Five Star as if the transactions described above
involving the Constellation Facilities, the Overland Park, Kansas facility
transaction and Five Star's April 1, 2002 acquisition of senior living
facilities had been completed as of January 1, 2001, as described in the notes
thereto. The unaudited pro forma statement of operations for the year ended
December 31, 2001, presents the results of operations of Five Star as if the
events described in the immediately preceding sentence, its merger with FSQ,
Inc., the commencement of Five Star's lease of 31 facilities from Senior Housing
managed by Marriott Senior Living Services, Inc., its offering of 3,823,300
shares of its common stock, and its spin-off from Senior Housing had been
completed as of January 1, 2001, as described in the notes thereto.
These unaudited pro forma financial statements do not represent Five
Star's financial condition or results of operations for any future date or
period. Actual future results will likely be materially different from these pro
forma results. Differences could arise from many factors, including, but not
limited to, those related to our operations as a separate public company,
competition in our business, the impact of changes to rates under Medicare and
Medicaid reimbursement programs, our ability to successfully attract residents
to our facilities, our financing, acquisition or disposition of facilities,
percentage rent under our various leases, our ability to control operating
expenses and changes to our capital structure and other changes. These unaudited
pro forma financial statements should be read in conjunction with our audited
financial statements and the related management's discussion and analysis of
financial condition and results of operations included in our Annual Report on
Form 10-K for the year ended December 31, 2001, as well as our unaudited
financial statements and the related management's discussion and analysis of
financial condition and results of operations included in our Quarterly Reports
on Form 10-Q for the quarters ended March 31, June 30 and September 30, 2002. In
addition, in conjunction with these unaudited pro forma financial statements,
you should read the financial statements of the Constellation Health Services
Facilities, contained elsewhere in this Form 8-K/A, and the financial statements
of CSL Group, Inc. and Subsidiaries as Partitioned For Sale to SNH/CSL
Properties Trust, ILM II Senior Living, Inc. and ILM II Lease Corporation, each
included in our Registration Statement on Form S-1, File No. 333-83648.
-15-
Five Star Quality Care, Inc.
Unaudited Pro Forma Consolidated Balance Sheet
At September 30, 2002
(amounts in thousands, except per share amounts)
Adjustments
-----------
Overland
Park Constellation
Historical Sale Acquisition Pro Forma
---------- ---- ----------- ---------
(A) (B)
ASSETS
Current assets:
Cash $ 12,005 $ 12,700 $ (13,049) $ 11,656
Accounts receivable, net 37,972 -- 499 38,471
Due from Marriott Senior Living Services 4,620 -- -- 4,620
Prepaid expenses and other current assets 4,370 -- 505 4,875
--------- --------- --------- ---------
Total current assets 58,967 12,700 (12,045) 59,622
Restricted cash 4,378 -- -- 4,378
Fixed assets, net 53,083 (12,663) 28,699 69,119
--------- --------- --------- ---------
Total assets $ 116,428 $ 37 $ 16,654 $ 133,119
========= ========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 23,170 $ -- $ 190 $ 23,360
Accrued compensation 5,465 -- 266 5,731
Accrued real estate taxes 6,202 -- -- 6,202
Due to affilates, net 747 -- -- 747
Other liabilities 880 -- 220 1,100
--------- --------- --------- ---------
Total current liabilities 36,464 -- 676 37,140
Long term liabilities 14,948 37 -- 14,985
Mortgages payable -- -- 15,978 15,978
Shareholders' equity:
Common stock, par value $0.01 per share 85 -- -- 85
Additonal paid in capital 78,926 -- -- 78,926
Accumulated deficit (13,995) -- -- (13,995)
--------- --------- --------- ---------
Total shareholders' equity 65,016 -- -- 65,016
--------- --------- --------- ---------
Total liabilities and shareholders' equity $ 116,428 $ 37 $ 16,654 $ 133,119
========= ========= ========= =========
-16-
Five Star Quality Care, Inc.
Unaudited Pro Forma Consolidated Statement of Operations
For the Year ended December 31, 2001
(amounts in thousands, except per share amounts)
Spin-Off Lease of 31 Marriott Facilities
and FSQ ------------------------------- Offering
Historical Adjustments Historical Adjustments Adjustments
---------- ----------- ---------- ----------- -----------
(H)
Revenues $ 229,235 $ -- $ 277,499 $ -- $ --
EXPENSES
Property level operating costs and
expenses 211,850 -- 185,042 -- --
Depreciation and amortization 1,274 (868)(C) 24,155 (24,155) (I) --
General and administrative 15,627 (3,298)(D) 20,115 (307) (J) --
Rent -- 7,000 (E) -- 63,000 (K) --
Impairment -- -- -- -- --
FF&E rent -- -- -- 7,354 (L) --
Interest, net (43) 43 (F) 19,335 (19,335) (M) --
--------- --------- --------- --------- -------
Total expenses 228,708 2,877 248,647 26,557 --
Income (loss) before income taxes 527 (2,877) 28,852 (26,557) --
Provision (benefit) for income taxes -- (823) 10,098 (9,295) --
--------- --------- --------- --------- -------
Net Income $ 527 $ (2,054) $ 18,754 $ (17,262) $ --
========= ========= ========= ========= =======
Weighted Average Shares Outstanding 4,374 250 (G) 3,823 (N)
Earnings per Share $ 0.12
April 1, 2002, October 25, 2002,
Acquisition Overland Acquisition
----------------------- Park ------------------------
Historical Adjustments Sale / Leaseback Historical Adjustments Pro Forma
---------- ----------- ---------------- ---------- ----------- ---------
(O) (U)
Revenues $ 14,217 $ -- $ -- $ 32,768 $ -- $ 553,719
EXPENSES
Property level operating costs and
expenses 8,505 -- -- 24,360 -- 429,757
Depreciation and amortization 313 722 (P) (360)(S) 3,912 (3,015) (V) 1,978
General and administrative 1,462 (1,377)(Q) -- 1,780 (864) (W) 33,138
Rent 4,579 (4,579)(R) 1,268 (T) 131 4,938 (X) 76,337
Impairment -- -- -- 9,599 (9,599) (Y) --
FF&E rent -- -- -- -- -- 7,354
Interest, net -- -- -- 3,003 (1,924) (Z) 1,079
-------- ------- ------ -------- -------- ---------
Total expenses 14,859 (5,234) 908 42,785 (10,465) 549,642
Income (loss) before income taxes (642) 5,234 (908) (10,017) 10,465 4,077
Provision (benefit) for income taxes (225) 1,832 (318) (3,506) 3,663 1,426 (AA)
-------- ------- ------ -------- -------- ---------
Net Income $ (417) $ 3,402 $ (590) $ (6,511) $ 6,802 $ 2,651
======== ======= ====== ======== ======== =========
Weighted Average Shares Outstanding 8,447
Earnings per Share $ 0.31
-17-
Five Star Quality Care, Inc.
Unaudited Pro Forma Consolidated Statement of Operations
For the nine months ended September 30, 2002
(amounts in thousands, except per share amounts)
April 1, 2002, October 25, 2002,
Acquisition and Acquisition / Lease
Overland Park ----------------------------
Historical Sale / Leaseback Historical Adjustments Pro Forma
---------- ---------------- ---------- ----------- ---------
(AF)
Revenues:
Revenues from residents $ 382,315 $ 3,627 (AB) $ 25,397 $ -- $ 411,339
Expenses:
Property level operating expenses 307,491 2,316 (AB) 19,015 -- 328,822
Management fee to Marriott 12,354 -- -- -- 12,354
Rent expense 56,596 951 (AC) 106 3,074 (AG) 60,727
General and administrative 11,248 22 (AD) 1,343 (650)(AH) 11,963
Depreciation 1,240 (180)(AE) -- 61 (AI) 1,671
Impairment of assets 150 -- -- -- 150
Restructuring costs 122 -- -- -- 122
Interest expense -- -- 1,941 (1,132)(AJ) 809
Spin off and merger expense, non recurring 2,829 -- -- -- 2,829
--------- -------- -------- --------- ---------
Total expenses 392,030 3,109 22,405 1,903 419,447
Loss from continuing operations before income taxes (9,715) 518 2,992 (1,903) (8,108)
Provision for income taxes -- -- -- -- --
--------- -------- -------- --------- ---------
Loss from contiuing operations (9,715) 518 2,992 (1,903) (8,108)
Loss from discontinued operations (3,491) -- -- -- (3,491)
--------- -------- -------- --------- ---------
Net loss $ (13,206) $ 518 $ 2,992 $ (1,903) $ (11,599)
========= ======== ======== ========= =========
Weighted Average Shares Outstanding 7,254 8,447
Basic and diluted loss per share from:
Continuing operations $ (1.34) $ (0.96)
Discontinued operations (0.48) (0.41)
--------- ---------
Net loss per share $ (1.82) $ (1.37)
========= =========
-18-
Five Star Quality Care, Inc.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share amounts)
Pro Forma Consolidated Balance Sheet Adjustments
A. Represents the sale of our Overland Park, Kansas facility to Senior
Housing for cash on October 25, 2002. The adjustments represent cash
received and elimination of the book value of the facility as of
October 25, 2002. Simultaneously with the sale, we leased this facility
back from Senior Housing and used cash to purchase other facilities in
a related transaction (see note B). Adjustments are calculated as
follows:
Cash received $ 12,700
Book value as of October 25, 2002 12,663
-------------
Deferred gain on sale of asset $ 37
=============
B. On October 25, 2002, we acquired the Acquired Constellation Facilities
along with certain of their operating assets and liabilities from
Constellation Health Services. In addition to this acquisition, on
October 25, 2002, we entered into a lease with Senior Housing for the
Leased Constellation Facilities that were purchased by Senior Housing
from Constellation Health Services. In connection with this lease, we
acquired certain operating assets and liabilities of the Leased
Constellation Facilities. To finance this transaction we assumed two
HUD insured mortgages and paid the balance in cash, calculated as
follows:
Fixed assets $28,699
Accounts receivable acquired 499
Other assets acquired 505
Accounts payable and accrued
expenses assumed (190)
Accrued compensation assumed (266)
Other liabilities assumed (220)
Mortgages payable assumed (15,978)
---------
Cash paid $13,049
=========
Pro Forma Consolidated Statement of Operations for the year ended December 31,
2001 Adjustments
C. As part of our spin-off from Senior Housing, we transferred real and
personal property to Senior Housing, and then leased that property from
Senior Housing. In addition, certain ancillary property was transferred
by Senior Housing to us. This adjustment represents the elimination of
historical depreciation expense from the real and personal property
transferred by us to Senior Housing net of the depreciation expense
from the ancillary property transferred to us, and the addition of
depreciation expense related to fixed assets acquired by us in the FSQ,
Inc. merger, calculated as follows:
-19-
Elimination of historical depreciation expense on
assets transferred from us, net of depreciation
expense on assets transferred to us.................. $(1,096)
Addition of FSQ, Inc. depreciation..................... 228
-------
Total adjustment....................................... $(868)
=======
D. In connection with the stabilization of our facilities' operations
which we assumed from former tenants of Senior Housing, we incurred
certain costs which are not expected to recur. Also, as required by
real estate investment trust ("REIT") tax rules applicable to Senior
Housing and us during 2001, we engaged FSQ, Inc. to manage our
facilities, and FSQ, Inc. purchased certain services from Reit
Management & Research LLC ("Reit Management"). Since our acquisition of
FSQ, Inc. we manage our facilities directly and have entered into a
shared services agreement with Reit Management to purchase the services
previously provided by Reit Management to FSQ, Inc. The net adjustment
to our general and administrative costs is intended to reflect these
charges and is calculated as follows:
Elimination of costs related to Senior
Housing's repossession of certain
facilities and our stabilization of
operations which are not expected to
recur (1).............................. $(4,167)
Elimination of management fees paid to
FSQ, Inc. during 2001.................. (11,460)
Addition of FSQ, Inc. expenses........... 10,954
Shared services fee:
Pro forma revenues....................... $229,235
Contract rate............................ 0.6% 1,375
---------------------
Total adjustment......................... $(3,298)
=======
(1) These costs represent primarily payments to third parties to
convert financial and patient data maintained by previous
operators to our systems.
E. Our lease for 56 facilities requires minimum rent payments of $7,000
per year to Senior Housing. In addition to minimum rent under this
lease, beginning in 2004 we must pay percentage rent payments equal to
three percent (3%) of net patient revenues at each leased facility in
excess of net patient revenues at such facility during 2003.
F. Represents elimination of interest, net on mortgage debts and related
compensating cash balances on properties transferred to Senior Housing,
which debts Senior Housing assumed as part of the spin-off.
-20-
G. Represents shares issued as consideration in the FSQ, Inc. merger.
H. Represents the 2001 historical operating revenues and facility
operating expenses for the 31 Marriott facilities which we began to
lease on January 11, 2002. The 31 Marriott facilities' results are
accounted for on the basis of 13 four-week periods per fiscal year.
Amounts presented as 2001 and related adjustments represent the period
from December 30, 2000, through December 28, 2001. General and
administrative expenses include management fees paid to Marriott under
the terms of its management agreements.
I. Represents the elimination of historical depreciation and amortization
expense related to the 31 Marriott facilities. These facilities were
acquired by Senior Housing and leased to us. Accordingly, depreciation
and amortization expense will be incurred by Senior Housing.
J. Represents the elimination of historical expenses incurred by the
former owner of the 31 Marriott facilities, and the addition of our
shared services agreement fee applicable to the operations:
Elimination of corporate expenses of seller... $(1,972)
Shared services fee:
Pro forma revenues....................... $277,499
Contract rate............................ 0.6% 1,665
-------------------
Total adjustment.............................. $(307)
=====
K. Our lease for the 31 Marriott facilities requires minimum rent payments
of $63,000 per annum. In addition to minimum rent under this lease,
beginning in 2003 we must make percentage rent payments to Senior
Housing in an amount equal to five percent (5%) of net patient revenues
at each leased facility in excess of net patient revenues at such
facility during 2002.
L. Represents deposits made into reserves for capital improvements in
accordance with the management agreements for the 31 Marriott
facilities and which, under our lease with Senior Housing, were paid to
Senior Housing as additional rent. Pursuant to an amendment to our
lease with Senior Housing effective October 1, 2002, these deposits are
retained by us and not paid to Senior Housing and as such are not
recorded by us as rent expense.
M. Represents the elimination of historical interest expense related to
the 31 Marriott facilities. Incident to its acquisition of the 31
Marriott facilities, Senior Housing prepaid or assumed this debt and
the obligation for this expense.
-21-
N. Represents our issuance of 3,823,300 shares in March and April 2002
pursuant to an underwritten public offering.
O. Represents historical operating revenues and facility operating
expenses of the five facilities we acquired on April 1, 2002. Amounts
presented are for the seller's fiscal year ended November 30, 2001.
P. Represents elimination of historical depreciation expense and the
addition of our estimated depreciation expense for the five facilities
we acquired on April 1, 2002, calculated as follows:
Elimination of historical depreciation expense on five
facilities acquired.................................... $(313)
Addition of estimated depreciation expense based on
purchase price for five facilities..................... 1,035
------
Total adjustment......................................... $722
====
Q. Represents the elimination of historically incurred corporate level
general and administrative costs of the seller of the five facilities
we acquired on April 1, 2002, and the addition of our shared services
agreement fee applicable to the operations:
Elimination of seller's corporate level general
and administrative expenses.................... $(1,462)
Shared services fee:
Pro forma revenues............................. 14,217
Contract rate.................................. 0.6% 85
-----------------
Total adjustment................................. $(1,377)
=======
R. Represents the elimination of historically incurred rental expense.
These five facilities were purchased by us without a lease obligation.
S. Represents elimination of annual pro forma depreciation expense related
to our Overland Park, Kansas facility sold October 25, 2002 (see note
A).
T. The Leased Constellation Facilities and the Overland Park, Kansas
facility are leased from Senior Housing for minimum rent of
approximately $6,300 per year. For purposes of this pro forma
presentation, we have allocated $1,268 of rent to the Overland Park,
Kansas facility and the remaining $5,105 is reflected in note X, below.
In addition to minimum rent under this lease, beginning in 2005 we must
make percentage rent payments to Senior Housing in an amount equal to
four percent (4%) of net resident revenues in excess of net resident
revenues during 2004.
-22-
U. Represents historical operating revenues and facility operating
expenses of the Constellation Facilities. Amounts presented are for the
seller's fiscal year ended November 30, 2001.
V. Represents the elimination of historical depreciation and amortization
expense related to the Constellation Facilities. The amount is offset
by depreciation that we will incur related to the Acquired
Constellation Facilities. Adjustment is calculated as follows:
Elimination of historical depreciation and
amortization......................................... $(3,830)
Deprecation of Acquired Constellation Facilities
based upon our purchase price of $28,699 (see note
B) and our estimated useful lives of 7-40 years...... 815
===
Total adjustment....................................... $(3,015)
=======
W. Represents the elimination of historical third party management fees
related to the Constellation Facilities which we will not incur because
of the termination of the related management contract as of the time we
assumed operation of these facilities, October 25, 2002, for our own
account. The amount is offset by known additional costs that we will
incur as a result of our operation of the Constellation Facilities,
primarily related to our addition of certain management personnel as a
result of this transaction and the addition of our shared services
agreement fee applicable to the operations:
Elimination of historical fees incurred on
terminated contract................................. $(1,782)
Shared services fee:
Pro forma revenues.......................... $32,768
Contract rate............................... 0.6% 197
Other known increases in home office costs............ 721
-------
Total adjustment...................................... $ (864)
=======
X. As described in note T, the Leased Constellation Facilities and the
Overland Park, Kansas facility are leased from Senior Housing for
minimum rent of approximately $6,300 per year. As part of our
transaction for the Acquired Constellation Facilities, a ground lease
for which the seller was historically obligated was terminated. Pro
forma adjustment is calculated as follows:
-23-
Rent expense for the Leased Constellation Facilities and
Overland Park, Kansas facility......................... $ 6,285
Less Overland Park, Kansas facility rent (see note T).... (1,268)
Less terminated ground lease rent incurred by seller .... (79)
-------
Total.................................................... $ 4,938
=======
Y. Represents the elimination of impairment charges incurred by the seller
of the Constellation Facilities for debts not assumed by us.
Z. Represents the elimination of certain historical interest expense
related to the Constellation Facilities for debts not assumed by us.
AA. The pro forma tax provision is based on a blended federal and state
income tax rate of 35%.
Pro Forma Consolidated Statement of Operations for the nine months ended
September 30, 2002 Adjustments
AB. Adjustment represents the historical operating revenues and facility
operating expenses of the acquired assets for the period January 1,
2002 to March 31, 2002. These properties were acquired by us on April
1, 2002.
AC. See note T. The corresponding amount of rent allocated for purposes of
this presentation to the Overland Park, Kansas facility is $951.
AD. Represents our shared services agreement fee applicable to the
operations, calculated as 0.6% of revenue adjustment (note AB).
AE. Represents elimination of depreciation expense related to our Overland
Park, Kansas facility for the period from our April 1, 2002,
acquisition date to our October 25, 2002, sale/leaseback date.
AF. Represents historical operating revenues and facility operating
expenses of the Constellation Facilities. Amounts presented are for the
nine months ended August 31, 2002, the first nine months of the
seller's fiscal year.
AG. As described in note T, the Leased Constellation Facilities and the
Overland Park, Kansas facility are leased from Senior Housing for
minimum rent of approximately $6,300 per year or $4,714 for a nine
month period. As part of our transaction for the Acquired Constellation
Facilities, a ground lease for which the seller was historically
obligated was terminated. Proforma adjustment is calculated as follows:
-24-
Rent expense for the Leased Constellation Facilities
and Overland Park, Kansas facility.................... $ 4,714
Less Overland Park, Kansas facility rent (see note AC).. (951)
Less terminated ground lease rent incurred by seller.... (59)
-------
Total................................................... $ 3,074
=======
AH. Represents the elimination of historical third party management fees
related to the Constellation Facilities which we will not incur because
of the termination of the related management contract as of the time we
assumed operation of these facilities, October 25, 2002, for our own
account. The amount is offset by known additional costs that we will
incur as a result of our operation of the Constellation Facilities,
primarily related to our addition of certain management personnel as a
result of this transaction and the addition of our shared services
agreement fee applicable to the operations:
Elimination of historical fees incurred on
terminated contract.................................. $(1,343)
Shared services fee:
Pro forma revenues......................... $25,397
Contract rate.............................. 0.6% 152
-------
Other known increases in
home office costs.................................... 541
-------
Total adjustment....................................... $ (650)
=======
AI. Represents the depreciation of Acquired Constellation Facilities based
upon our purchase price of $28,699 (see note B) and our estimated
useful lives of 7-40 years.
AJ. Represents the elimination of certain historical interest expense
related to the Constellation Facilities for debts not assumed by us.
-25-
(c) Exhibits.
2.1 Purchase and Sale Agreement, dated as of August 26, 2002, by and among
Constellation Health Services, Inc. and certain of its subsidiaries, as
Seller, and Constellation Real Estate Group, Inc., as Guarantor, and
Senior Housing Properties Trust, as Buyer. (Incorporated by reference
to Exhibit 2.1 to Five Star Quality Care, Inc.'s Current Report on Form
8-K, dated October 25, 2002).
2.2 First Amendment to Purchase and Sale Agreement, dated as of October 25,
2002, by and among Constellation Health Services, Inc. and certain of
its subsidiaries, as Seller, and Senior Housing Properties Trust and
Five Star Quality Care, Inc., collectively as Buyer. (Incorporated by
reference to Exhibit 2.2 to Five Star Quality Care, Inc.'s Current
Report on Form 8-K, dated October 25, 2002).
2.3 Lease Agreement, dated as of October 25, 2002, by and between SNH CHS
Properties Trust, as Landlord, and FVE-CHS LLC, as Tenant.
(Incorporated by reference to Exhibit 2.3 to Five Star Quality Care,
Inc.'s Current Report on Form 8-K, dated October 25, 2002).
23 Consent of PricewaterhouseCoopers LLP.
-26-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
FIVE STAR QUALITY CARE, INC.
By: /s/ Bruce J. Mackey Jr.
Name: Bruce J. Mackey Jr.
Title: Treasurer and Chief Financial
Officer
Date: January 8, 2003