SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
FORM 8-K
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
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.
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.
(a) Financial Statements. The financial statements required by
Item 7(a) are not included in this initial Current Report on
Form 8-K and will be filed by amendment within 75 days of
October 25, 2002.
(b) Pro Forma Financial Information. Five Star Quality Care, Inc.
sold a property located in Overland Park, Kansas, and the pro
forma financial information relating to this disposition is
set forth below. The other pro forma financial information
required by Item 7(b) relating to our acquisition and lease of
senior living communities is not included in this initial
Current Report on Form 8-K and will be filed by amendment
within 75 days of October 25, 2002.
PAGE
Unaudited Pro Forma Consolidated Balance Sheet at June 30, 2002 F-2
Unaudited Pro Forma Consolidated Statement of Operations for
the year ended December 31, 2001 F-3
Unaudited Pro Forma Consolidated Statement of Operations for
the six months ended June 30, 2002 F-4
Notes to Unaudited Pro Forma Consolidated Financial Statements F-5 to F-9
(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.
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.
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.
Item 7(b). Pro Forma Financial Information.
INTRODUCTION TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
The unaudited pro forma balance sheet at June 30, 2002, presents the
financial position of Five Star as if the sale/leaseback of its facility located
in Overland Park, Kansas had been completed as of June 30, 2002, as described in
the notes thereto. The unaudited pro forma statement of operations for the six
months ended June 30, 2002, presents the results of operations of Five Star as
if its acquisition of five senior living communities and the sale/leaseback of
its facility located in Overland Park, Kansas 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 preceeding
sentence, its merger with FSQ, Inc., the commencement of its lease of 31
facilities from Senior Housing Properties Trust 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.
The unaudited pro forma financial statements and related notes do not
reflect our acquisition of seven senior living communities from CHSI and our
lease of eight additional senior living communities from Senior Housing, each of
which were formerly owned and operated by CHSI (the "CHSI Transaction"). Our
sale/leaseback of the Overland Park facility with Senior Housing was done in
order to finance our acquisition of the seven senior living communities
previously owned and operated by CHSI.
These unaudited pro forma financial statements do not represent our
financial condition or results of operations for any future date or period.
Actual future results may be materially different from 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 ability to control operating expenses and our capital structure
and other changes. These unaudited pro forma financial statements should be read
in connection 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.
In addition, in connection with these unaudited pro forma financial statements,
you should read the financial statements of the 31 Marriott facilities, as owned
and operated by Crestline Capital Corporation and which are entitled CSL Group,
Inc. and Subsidiaries as Partitioned For Sale to SNH/CSL Properties Trust, as
well as the financial statements of ILM II Senior Living, Inc. and ILM II Lease
Corporation, the owner and operator, respectively, of the five communities we
acquired, each of which are included in our Registration Statement on Form S-1,
File No. 333-83648.
F-1
Five Star Quality Care, Inc.
Unaudited Pro Forma Consolidated Balance Sheet
At June 30, 2002
(amounts in thousands, except per share amounts)
Adjustments
-----------
Overland
Park
Historical Sale Pro Forma
---------- ---- ---------
(A)
ASSETS
Current assets
Cash $ 4,983 $ 12,700 $ 17,683
Accounts receivable, net 27,388 -- 27,388
Due from Marriott Senior Living Services 12,722 -- 12,722
Prepaid expenses and other current assets 4,009 -- 4,009
--------- --------- ---------
Total current assets 49,102 12,700 61,802
Restricted cash 4,318 -- 4,318
Fixed assets, net 50,455 (12,663) 37,792
--------- --------- ---------
Total assets $ 103,875 $ 37 $ 103,912
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 16,823 $ -- $ 16,823
Accrued compensation 5,858 -- 5,858
Accrued real estate taxes 1,519 -- 1,519
Due to affilates, net 20 -- 20
Other liabilities 542 -- 542
--------- --------- ---------
Total current liabilities 24,762 -- 24,762
Long term liabilities 11,568 37 11,605
Shareholders' equity
Common stock, par value $0.01 per share 85 -- 85
Additonal paid in capital 78,948 -- 78,948
Accumulated deficit (11,488) -- (11,488)
--------- --------- ---------
Total shareholders' equity 67,545 -- 67,545
Total liabilities and shareholders' equity $ 103,875 $ 37 $ 103,912
========= ========= =========
F-2
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
---------- ----------- ---------- ----------- -----------
(G) (M)
Revenues $ 229,235 $ -- $ 277,499 $ -- $ -- $ 506,734
EXPENSES
Property level operating costs and
expenses 211,850 -- 185,042 -- -- 396,892
Depreciation and amortization 1,274 (868) (B) 24,155 (24,155) (H) -- 406
General and administrative 15,627 (3,298) (C) 20,115 (307) (I) -- 32,137
Rent -- 7,000 (D) -- 63,000 (J) -- 70,000
FF&E Rent -- -- -- 7,354 (K) -- 7,354
Interest, net (43) 43 (E) 19,335 (19,335) (L) -- --
--------- ---------- ----------- --------- ------- ---------
Total expenses 228,708 2,877 248,647 26,557 -- 506,789
Income (loss) before income taxes 527 (2,877) 28,852 (26,557) -- (55)
Provision for income taxes -- (823) 10,098 (9,295) -- (20)
--------- ---------- ----------- --------- ------- ---------
Net Income $ 527 $ (2,054) $ 18,754 $ (17,262) $ -- $ (35)
========= ========== =========== ========= ====== =========
Weighted Average Shares Outstanding 4,374 250 (F) 3,823 8,447
Earnings per Share $ 0.12
April 1, 2002 Acquisition Overland
---------------------------------- Park
Historical Adjustments Sale / Leaseback Pro forma
---------- ----------- ---------------- ---------
(N)
Revenues $ 14,217 $ -- $ 520,951 $ -- $ 520,951
EXPENSES
Property level operating costs and
expenses 8,505 -- 405,397 -- 405,397
Depreciation and amortization 313 722 (O) 1,441 (360) (R) 1,081
General and administrative 1,462 (1,377) (P) 32,222 -- 32,222
Rent 4,579 (4,579) (Q) 70,000 1,268 (S) 71,268
FF&E Rent -- -- 7,354 -- 7,354
Interest, net -- -- -- -- --
--------- -------- --------- --------- ---------
Total expenses 14,859 (5,234) 516,414 908 517,322
Income (loss) before income taxes (642) 5,234 4,537 (908) 3,629
Provision for income taxes (225) 1,832 1,587 (318) 1,269 (T)
--------- -------- --------- --------- ---------
Net Income $ (417) $ 3,402 $ 2,950 $ (590) $ 2,360
========= ======== ========= ========= =========
Weighted Average Shares Outstanding 8,447
Earnings per Share $ 0.28
F-3
Five Star Quality Care, Inc.
Unaudited Pro Forma Consolidated Statement of Operations
For the six months ended June 30, 2002
(amounts in thousands, except per share amounts)
April 1, 2002
Acquisition and
Overland Park
Historical Sale / Leaseback Pro Forma
---------- ---------------- ---------
Revenues:
Revenues from residents $ 249,238 $ 3,627 (U) $ 252,865
Interest income 182 -- 182
--------- --------- ---------
249,420 3,627 253,047
Expenses:
Property level operating expenses 201,157 2,316 (U) 203,473
Management fee to Marriott 8,056 -- 8,056
Rent expense 36,977 634 (V) 37,611
General and administrative 7,690 -- 7,690
Depreciation 671 (180) (W) 491
Impairment of assets 1,649 -- 1,649
Restructuring costs 112 -- 112
Spin off and merger expense, non recurring 2,829 -- 2,829
--------- --------- ---------
Total expenses 259,141 2,770 261,911
Loss from continuing operations before income taxes (9,721) 857 (8,864)
Provision for income taxes -- -- --
--------- --------- ---------
Loss from continuing operations (9,721) 857 (8,864)
Loss from discontinued operations (978) -- (978)
--------- --------- ---------
Net loss $ (10,699) $ 857 $ (9,842)
========= ========= =========
Weighted Average Shares Outstanding 6,644 6,644
Basic and diluted loss per share from:
Continuing operations $ (1.46) $ (1.33)
Discontinued operations (0.15) (0.15)
--------- ---------
Net loss per share $ (1.61) $ (1.48)
========= =========
F-4
Five Star Quality Care, Inc.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL
STATEMENTS
(amounts in thousands, except per share amounts)
Pro Forma Consolidated Balance Sheet Adjustments
A. Represents our sale of the unencumbered Overland Park facility to
Senior Housing for cash in the amount of $12,700 on October 25, 2002.
Adjustments equal cash received less book value of asset on October 25,
2002. Subsequent to the sale of this facility, we used this cash to
purchase other facilities in the CHSI Transaction. Adjustments are
calculated as follows:
Cash received $ 12,700
Book value as of October 25, 2002 12,663
---------
Deferred Gain on sale of assets $ 37
=========
Pro Forma Consolidated Statement of Operations for the year ended December 31,
2001
B. As part of the spin off from Senior Housing, we transferred
substantially all of our real and personal property to Senior Housing,
and then leased that property, and 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 real estate transferred to us, and the
addition of depreciation expense related to fixed assets acquired by us
in the FSQ, Inc. merger, calculated as follows:
Elimination of historical depreciation expense on assets transferred from us, net of depreciation
expense on real estate transferred to us.......................................................... $(1,096)
Addition of FSQ, Inc. depreciation.................................................................. 228
-------
Total adjustment.................................................................................... $ (868)
=======
C. In connection with our stabilization of 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 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. Since our acquisition of FSQ, Inc.
we manage our facilities directly and have entered a shared services
agreement with Reit Management to purchase the services previously
F-5
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 Mariner and Integrated
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 payments to third parties to convert financial
and patient data previously maintained by Mariner Post-Acute Network
and Integrated Health Services, Inc. to our systems.
D. 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.
E. 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.
F. Represents shares issued as consideration in the FSQ, Inc. merger.
G. Represents the 2001 historical operating revenue 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.
H. 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.
F-6
I. Represents the elimination of historical expenses incurred by the
former owner of the 31 Marriott facilities, and the addition to our
shared services agreement fee applicable to these 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)
=======
J. 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.
K. 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, will be paid
to Senior Housing as additional rent.
L. Represents the elimination of historical interest expense. Incident to
its acquisition of the 31 Marriott facilities, Senior Housing prepaid
or assumed this debt and the obligation for this expense.
M. Represents our issuance of 3,823,300 shares of common stock offered in
March and April 2002 pursuant to an underwritten public offering.
N. Represents historical operating revenues and facility operating
expenses of the five facilities we acquired in April 2002. Amounts
presented are for the seller's year ended November 30, 2001.
O. Represents elimination of historical depreciation expense and the
addition of our depreciation expense based upon the purchase price plus
closing costs totaling $46,000:
Elimination of historical depreciation expense on five communities acquired.......... $ (313)
Addition of depreciation expense based on purchase price plus closing costs.......... 1,035
-------
Total adjustment..................................................................... $ 722
=======
P. Represents the elimination of historically incurred general and
administrative costs of the seller of the five communities acquired net
of our additional costs under our shared services agreement calculated
as follows:
F-7
Elimination of seller's general and administrative expenses........ $(1,462)
Shared services fee:
Pro forma revenues............................................ 14,217
Contract rate................................................. 0.6% 85
-------------------
Total adjustment................................................... $(1,377)
=======
Q. Represents the elimination of historically incurred rental expense.
These five communities are owned by us without a lease obligation.
R. Represents elimination of annual depreciation expense related to
Overland Park.
S. We lease nine senior living communities, including Overland Park, from
Senior Housing under a lease that requires minimum rent payments of
$6,285 per year to Senior Housing, of which $1,270 is allocable to the
Overland Park facility. In addition to minimum rent under this lease,
beginning in 2005 we must pay percentage rent payments equal to four
percent (4%) of net resident revenues in excess of net resident
revenues at each facility during 2004. Rent expense allocable to the
Overland Park facility is offset by amortization of deferred gain.
Amount is calculated as follows:
Annual rent expense $ 1,270
Amortization of deferred gain (2)
--------
Total adjustment $ 1,268
T. 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 six months ended June 30,
2002
U. Adjustment represents the operational results of the acquired assets
for the five senior living communities we acquired on April 1, 2002 for
the period January 1, 2002 to the date of their acquisition. These
properties were acquired by us on April 1, 2002.
V. We lease nine senior living communities, including Overland Park, from
Senior Housing under a lease that requires minimum rent payments of
$6,285 per year to Senior Housing, of which $1,270 is allocable to the
Overland Park facility. In addition to minimum rent under this lease,
beginning in 2005 we must pay percentage rent payments equal to four
percent (4%) of net resident revenues in excess of net resident
revenues at each facility during 2004. Rent expense is offset by
amortization of deferred gain. Amount is calculated as follows:
F-8
Annual rent expense $ 1,270
Amortization of deferred gain (2)
-----------
Total annual adjustment 1,268
Prorated for six months $ 634
W. Represents elimination of six months depreciation expense related to
Overland Park.
F-9
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: November 12, 2002