UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
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 001-16817
FIVE STAR QUALITY CARE, INC.
(Exact name of Registrant as Specified in Its Charter)
Maryland 04-3516029
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
400 Centre Street, Newton, Massachusetts 02458
(Address of Principal Executive Offices) (Zip Code)
617-796-8387
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Number of Common Shares outstanding at November 13, 2002: 8,452,633 shares of
common stock, $0.01 par value.
FIVE STAR QUALITY CARE, INC.
FORM 10-Q
September 30, 2002
INDEX
Page
----
PART I Financial Information
---------------------
Item 1. Consolidated Financial Statements (unaudited)
Consolidated Balance Sheet - September 30, 2002 and December 31, 2001 1
Consolidated Statement of Operations - Three and Nine Months Ended September 30, 2002 and
2001 2
Consolidated Statement of Cash Flows - Nine Months Ended September 30, 2002 and 2001 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
Item 4. Controls and Procedures 15
Forward Looking Statements 16
PART II Other Information
-----------------
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
Certifications 19
Part I. Financial Information
Item 1. Consolidated Financial Statements
FIVE STAR QUALITY CARE, INC.
CONSOLIDATED BALANCE SHEET
(dollars in thousands, except share amounts)
September 30, December 31,
2002 2001
-------------------------------
(unaudited)
Assets
Current assets:
Cash and cash equivalents $ 12,005 $ 24,943
Accounts receivable, net of reserve
of $7,662 and $3,787 at September 30, 2002, and
December 31, 2001, respectively 37,972 39,132
Due from Marriott Senior Living Services 4,620 --
Prepaid expenses and other current assets 4,370 1,054
-------------------------------
Total current assets 58,967 65,129
Property and equipment, net 53,083 2,914
Restricted cash 4,378 --
-------------------------------
$ 116,428 $ 68,043
===============================
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 23,170 $ 7,141
Accrued compensation and benefits 5,465 5,288
Accrued real estate taxes 6,202 1,485
Due to affiliates, net 747 2,232
Other current liabilities 880 1,664
-------------------------------
Total current liabilities 36,464 17,810
Long term liabilities 14,948 --
Commitments and contingencies
Shareholders' equity:
Preferred stock, par value $0.01;
none issued -- --
Common stock, par value $0.01;
8,452,633 and 4,374,334 shares issued
and outstanding as of September 30, 2002,
and December 31, 2001, respectively 85 44
Additional paid in capital 78,926 50,978
Accumulated deficit (13,995) (789)
-------------------------------
Total shareholders' equity 65,016 50,233
-------------------------------
$ 116,428 $ 68,043
===============================
See accompanying notes
1
FIVE STAR QUALITY CARE, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(dollars in thousands, except per share amounts)
(unaudited)
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2002 2001 2002 2001
---- ---- ---- ----
Revenues:
Net revenues from residents $ 132,847 $ 55,971 $ 382,085 $ 164,081
Interest income 48 36 230 82
----------------------------------------------------------------------
Total revenues 132,895 56,007 382,315 164,163
Expenses:
Wages and benefits 59,535 38,445 173,985 114,001
Other operating expenses 46,263 12,753 133,506 36,983
Management fee to Marriott Senior Living
Services 4,943 -- 12,354 --
Rent expense 19,687 11 56,596 55
General and administrative 3,620 2,897 11,248 12,487
Depreciation 517 349 1,240 981
Impairment of assets -- -- 150 --
Restructuring costs 10 -- 122 --
Spin off and merger expense, non recurring -- -- 2,829 --
----------------------------------------------------------------------
Total expenses 134,575 54,455 392,030 164,507
----------------------------------------------------------------------
(Loss) income from continuing operations
before income taxes (1,680) 1,552 (9,715) (344)
Provision for income taxes -- -- -- --
----------------------------------------------------------------------
(Loss) income from continuing operations (1,680) 1,552 (9,715) (344)
Loss from discontinued operations (826) (314) (3,491) (416)
----------------------------------------------------------------------
Net (loss) income $ (2,506) $ 1,238 $ (13,206) $ (760)
======================================================================
Weighted average shares outstanding 8,453 4,374 7,254 4,374
======================================================================
Basic and diluted (loss) income per share from:
Continuing operations $ (0.20) $ 0.35 $ (1.34) $ (0.08)
Discontinued operations (0.10) (0.07) (0.48) (0.09)
----------------------------------------------------------------------
Net (loss) income per share $ (0.30) $ 0.28 $ (1.82) $ (0.17)
======================================================================
See accompanying notes
2
FIVE STAR QUALITY CARE, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(dollars in thousands)
(unaudited)
Nine Months Ended September 30,
----------------------------------
2002 2001
----------------------------------
Cash flows from operating activities:
Net loss $(13,206) $ (760)
Adjustments to reconcile net loss to cash provided by (used in)
operating activities:
Spin off and merger expense 2,829 --
Depreciation 1,187 937
Impairment of assets 150 --
Net loss from discontinued operations 3,491 432
Changes in assets and liabilities:
Accounts receivable, net 9,038 8,476
Due from Marriott Senior Living Services (4,620) --
Prepaid expenses and other current assets (1,793) (2,922)
Accounts payable and accrued expenses 12,092 (3,313)
Accrued compensation and benefits 177 116
Due to affiliates, net (2,671) --
Other current and long term liabilities (784) (5,708)
----------------------------------
Cash provided by (used in) operating activities 5,890 (2,742)
----------------------------------
Cash flows from investing activities:
Proceeds from affiliates 10,722 --
Change in restricted cash (3,900) --
Real estate purchases (46,157) --
Furniture, fixtures and equipment purchases (4,372) (1,861)
----------------------------------
Cash used in investing activities (43,707) (1,861)
----------------------------------
Cash flows from financing activities:
Proceeds from issuance of common stock, net 26,114 --
Proceeds from issuance of mortgages -- 9,100
Distributions to Senior Housing -- (3,635)
----------------------------------
Cash provided by financing activities 26,114 5,465
Net cash used in discontinued operations (1,235) (432)
----------------------------------
Change in cash and cash equivalents (12,938) 430
Cash and cash equivalents at beginning of period 24,943 7,178
----------------------------------
Cash and cash equivalents at end of period $ 12,005 $ 7,608
==================================
Non-cash investing and financing activities:
Acquisition of assets by merger $ (1,052) $--
Assumption of liabilities by merger 2,006 --
Issuance of common stock for merger 1,875 --
See accompanying notes
3
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
(Unaudited)
Note 1. Basis of Presentation and Organization
The accompanying condensed consolidated financial statements of Five Star
Quality Care, Inc. and its subsidiaries have been prepared without audit.
Certain information and footnote disclosures required by generally accepted
accounting principles for complete financial statements have been condensed or
omitted. We believe the disclosures made are adequate to make the information
presented not misleading. However, the accompanying financial statements should
be read in conjunction with the financial statements and notes contained in our
Annual Report on Form 10-K for the year ended December 31, 2001. In the opinion
of our management, all adjustments, which include only normal recurring
adjustments considered necessary for a fair presentation, have been included.
All intercompany transactions and balances between us and our subsidiaries have
been eliminated. Our operating results for interim periods are not necessarily
indicative of the results that may be expected for the full year.
Until December 31, 2001, we were a wholly owned subsidiary of Senior Housing
Properties Trust ("Senior Housing"). On December 31, 2001, Senior Housing
distributed substantially all of our common shares to Senior Housing's
shareholders (the "Spin-Off"). We entered into a transaction agreement to govern
our initial capitalization and other events related to the Spin-Off. Pursuant to
the transaction agreement, our initial capitalization was provided by Senior
Housing and we entered into a lease agreement with Senior Housing for certain
facilities. On January 2, 2002, we acquired FSQ, Inc. in a stock for stock
transaction. On January 11, 2002, we entered into a lease with Senior Housing
for 31 independent and assisted living communities managed by a subsidiary of
Marriott International, Inc., Marriott Senior Living Services, Inc.
("Marriott"). In March and April 2002, we completed a public offering of
3,823,300 common shares raising net proceeds of $26,114. On April 1, 2002, we
purchased and began to operate five additional independent and assisted living
communities.
Note 2. Summary of Significant Accounting Policies
REVENUE RECOGNITION. Our revenues are derived primarily from services to
residents at properties we own or lease. We accrue revenues when services are
provided and revenues are earned. Some of our services are provided with the
expectation of payment from governments or other third party payors; related
revenues are reported at their estimated net realizable amounts at the time the
services are provided.
RESERVES FOR ACCOUNTS RECEIVABLE. Accounts receivable are recorded at their
estimated net realizable value. In the case of receivables generated from
residents, reserves for uncollectible amounts are estimated based upon factors,
which include but are not limited to the age of the receivable and the terms of
our agreements with residents or their third party payors. In the case of other
receivables, such as those due to us from various governments or other entities
with which we have transacted business, reserves are estimated based upon
factors which include but are not limited to our agreements with such payors,
their stated intent to pay, their financial capacity and other developments
which may include litigation or other proceedings. Accounts receivable reserves
are only estimates and we periodically review and revise these estimates. Our
review and revision process subjects these reserves to future adjustments based
on new information and these adjustments may be material.
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 at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
INCOME TAXES. Prior to the Spin-Off, substantially all of our taxable income was
included in the taxable income of Senior Housing. After the Spin-Off, we are a
separate entity and are responsible for our own tax liabilities and filings. For
the nine-month periods ended September 30, 2001 and 2002, we generated losses
for income tax purposes which created a net operating loss carry forward.
Because we have a short separate operating history during which we have
generated no taxable income, we have fully reserved the value of this net
operating loss carry forward. As a result, we have recorded no income tax
benefit for the three and nine month periods ended September 30, 2002.
4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
(Unaudited)
Note 2. Summary of Significant Accounting Policies (continued)
PER COMMON SHARE AMOUNTS. Loss per share for the periods ended September 30,
2002, are computed using the weighted average number of shares outstanding
during the periods. Earnings (loss) per share for the periods ended September
30, 2001, have been computed as if the shares outstanding at December 31, 2001,
were outstanding as of January 1, 2001. We have no common share equivalents,
instruments convertible into common shares or other dilutive instruments.
NEW ACCOUNTING PRONOUNCEMENTS. In 2001 the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations", SFAS No. 142, "Goodwill and Other Intangible Assets" and SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets". We
adopted these pronouncements on January 1, 2002. The adoption of these standards
did not have a material effect on our financial position or results of
operations. See footnote 6 regarding discontinued operations.
RESTRICTED CASH. Restricted cash includes $3,860 we have deposited as security
for letters of credit which secure obligations arising from our professional
liability insurance program. Restricted cash also includes $518 we escrowed as
required by certain healthcare regulatory agencies.
PROPERTY AND EQUIPMENT. Property and equipment is stated at cost. We depreciate
furniture, fixtures and equipment on a straight line basis over five to 12 years
and buildings on a straight line basis over 40 years.
IMPAIRMENT. When conditions or events occur that we believe might indicate that
property or other long lived assets are impaired, an analysis of estimated
future undiscounted cash flows is undertaken to determine if any write down of
the carrying value of the asset is required. In the quarter ended June 30, 2002,
we wrote off the carrying value of certain assets that we believed to be
impaired.
SELF INSURANCE. We are self insured up to certain retained limits for our
workers compensation, professional liability, and, as of August 2002, employee
health insurance. Claims in excess of these retained limits are insured by third
party insurance providers up to contractual limits, over which we are self
insured. We accrue the estimated cost of self insured amounts based on projected
settlements for pending claims, known incidents which we expect may result in
claims, estimates of incurred but not yet reported claims and incidents and
expected changes in premiums for insurance provided by third party insurers
where our policies provide for retroactive adjustments. Periodically these
accrued estimates are adjusted based upon our claims experience, recommendations
from our professional consultants, changes in market conditions and other
factors and these adjustments may be material.
RESTRUCTURING COSTS. During 2002, we reduced the number of our regional offices
and had staff reductions in our home office. As a result, we incurred
restructuring costs for severance payments to terminated employees.
WORKING CAPITAL ADVANCES. Under the terms of the management agreements for the
communities managed by Marriott we provide Marriott with the working capital
needed to meet the operating needs of the communities. The working capital,
which consists primarily of cash and cash equivalents, inventories, trade
accounts receivable and accounts payable, is controlled and maintained by
Marriott on our behalf. Accordingly, we include the individual components of
working capital for the Marriott managed communities (including cash and cash
equivalents of $5,126 at September 30, 2002) in our consolidated balance sheet.
RECLASSIFICATIONS. Reclassifications have been made to the prior year's
financial statements to conform to the current year's presentation.
Note 3. Long Term Liabilities
The long term liabilities on our September 30, 2002, balance sheet include
$12,544 of advance payments received from residents at some of our communities
managed by Marriott. These prepayments are amortized into revenues over the
periods in which the service obligations are expected to be satisfied. Also
included in long term liabilities as of September 30, 2002 is $2,404 of reserves
related to our self insurance programs.
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share amounts)
(Unaudited)
Note 4. Acquisitions and Pro Forma Results
On January 11, 2002, we entered into a lease with Senior Housing for 31
retirement communities which contain 7,491 living units. These communities are
managed by Marriott under agreements for terms generally expiring in 2027 plus
renewal options for one five year period. Marriott has responsibility for day to
day operations of these communities. These 31 retirement communities are leased
from Senior Housing through 2017, with renewal options totaling an additional 15
years. The minimum rent payable by us for these facilities is $63,000 per year.
As part of our lease obligations and in accordance with the Marriott management
agreements, we make deposits into an escrow account for future capital
expenditures at these 31 communities. These deposits, totaling $1,865 and $5,374
for the three and nine months ended September 30, 2002, respectively, are
included as part of rent expense in the accompanying statement of operations. In
addition, percentage rent will be payable, starting in 2003, in amounts equal to
five percent (5%) of revenues at each of these 31 facilities in excess of
revenues at such facility in 2002.
On April 1, 2002, we purchased and began to operate five independent and
assisted living communities containing 704 units for approximately $46,000.
Had we entered into the lease with Senior Housing for the Marriott managed
communities and acquired the five retirement communities as of January 1, 2001,
on a pro forma basis, our revenues and (loss) income from continuing operations
would have been $393,927 and $(5,255) for the nine months ended September 30,
2002, and $328,077 and $6,642 for the nine months ended September 30, 2001,
respectively.
Note 5. Shareholders' Equity
On March 26, 2002, we issued 3,700,000 common shares, in an underwritten public
offering, for gross proceeds of approximately $27,600. Proceeds received, net of
underwriting commissions and other costs, were $25,251.
On April 5, 2002, the underwriters for our March 2002 offering of common shares
exercised an over allotment option and we issued 123,300 common shares for gross
proceeds of $919. Proceeds received, net of underwriting commissions and other
costs, were $863.
On May 7, 2002, we issued 1,000 common shares to each of our five directors, as
part of their annual compensation. The shares were valued at $7.10 per share,
which was the closing price of our common shares on the American Stock Exchange
on May 7, 2002.
Note 6. Discontinued Operations
During the second quarter of 2002, we ceased operations at two leased nursing
homes: one facility in Phoenix, Arizona, which was leased from Senior Housing;
and one facility in Campbell, Nebraska, which was leased from that municipality.
The Arizona facility was closed. The operations of the Nebraska facility were
assumed by its owner. As of September 30, 2002, substantially all of our assets
and liabilities related to these nursing homes have been disposed of and paid.
During the three months ended September 30, 2002, we decided to sell one
additional nursing home located in Connecticut. Until this decision, we were
exploring alternative uses for this property, including the possibility of
developing age restricted housing at this facility. Our decision to abandon
these efforts and sell this property resulted in our classification of this
facility as a discontinued operation. The shut down of this facility was
accomplished pursuant to an agreement with, and authorization from, the
Connecticut Department of Social Services. That agreement provides for certain
Medicaid rate adjustments to compensate for shut down losses attributable to
Medicaid patients who were resident at the facility. We recorded a receivable of
approximately $1,450 of expected Medicaid rate adjustments for these shut down
costs. In November 2002, we received a revised notice from the Connecticut
Medicaid authorities that rate adjustments totaling about only $693 would be
authorized. We are continuing to pursue collection of the full shut down costs
attributable to Medicaid residents of $1,450. However, we have provided a
reserve for this receivable equal to the difference between the accrued amounts
and the adjustment established by the
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
(Unaudited)
Note 6. Discontinued Operations (continued)
Connecticut Medicaid authorities in November 2002, or $757; and this amount is
included in the loss from discontinued operations for the three months ended
September 30, 2002. In addition, during the quarter ended June 30, 2002, we
recorded an asset impairment charge of $1,499 related to this facility,
primarily because a prior agreement to sell some of our available skilled
nursing bed licenses did not close.
The financial statements for all periods presented have been reclassified to
present these facilities as discontinued operations. Below is a summary of the
operating results of these facilities:
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2002 2001 2002 2001
---- ---- ---- ----
Revenues $ 3 $ 1,495 $ 1,933 $ 6,599
Expenses 829 1,809 5,424 7,015
------- ------- ------- -------
Net loss $ (826) $ (314) $(3,491) $ (416)
======= ======= ======= =======
Note 7. Commitments and Contingencies
Connecticut Strike Costs. During 2001, nursing homes that we operated in
Connecticut were involved in a statewide labor dispute. During a strike, we
incurred costs to hire temporary staff and provide security services for our
residents and temporary employees. At about the time of this strike, the
Governor of Connecticut and the Connecticut Department of Social Services stated
and agreed to adjust Medicaid rates temporarily to compensate for a portion of
these increased costs. Litigation was brought by the striking union against the
Governor and Commissioner of the Department of Social Services, and, on
September 13, 2002, the United States District Court for Connecticut issued a
declaratory ruling that Medicaid subsidies other than those to reimburse costs
incurred to protect the health and safety of residents are violations of federal
labor law. The Connecticut Department of Social Services continues to review and
process our claims for these adjustments, which total approximately $1,500 as of
September 30, 2002. Also, we received and recognized as revenue approximately
$350 of such payments in 2001. In the event that the Connecticut Department of
Social Services determines not to make payments or seeks reimbursement of
payments previously made, and our defenses and claims are not fully successful,
we may incur related losses in the future. We intend to vigorously pursue our
claims.
Receivables from Integrated Health Services. During 2000, we assumed the
operations of 40 nursing homes from Integrated Health Services, Inc. and certain
related entities (together "IHS"), a company in bankruptcy. Because of complex
legal and governmental processes necessary to transfer nursing home licenses and
Medicare and Medicaid payment arrangements, IHS agreed that any payments which
it received for services which we provided would be paid to us by IHS. These
agreements were approved by the bankruptcy court and generally honored by IHS
with respect to approximately $42,000 received by IHS for our account. We
believe IHS has received an additional $2,400 which is due to us and this amount
is included in our accounts receivable at September 30, 2002. When IHS refused
to pay this amount we commenced suit in the bankruptcy court in August 2002.
Recently settlement discussions have begun. We intend to vigorously pursue this
claim, but we can not predict the outcome of this litigation, the settlement
discussion or our ability to collect amounts which are due from IHS. If we do
not collect this claim our uncollected amounts, less applicable reserves, may be
recorded as a loss in future periods.
Marriott Management Agreements. As described above, we lease 31 communities with
7,491 living units from Senior Housing which are managed by Marriott pursuant to
various management agreements . The financial results realized by us at these 31
communities have declined during 2002. Recently, however, Marriott
International, Inc. has stated that its profits from its senior living business
in 2002 have been improving and that it is considering divesting its senior
living business. Also, we are aware that some owners of hotels managed by
Marriott International have brought
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
(Unaudited)
Note 7. Commitments and Contingencies (continued)
litigation to challenge the cost allocations to their hotels and to capture
certain profits realized by Marriott International from their hotels. As a
result, in July 2002, we and Senior Housing asked Marriott to explain allocation
formulas for costs shared by our communities and other businesses operated by
affiliates of Marriott International, to justify certain charges to these
communities, to detail profits made by affiliates of Marriott International from
purchases directed by Marriott for the account of these communities and for
additional information and actions. In September 2002, in response to this
inquiry Marriott paid $409 to us and provided us with some of the requested
information. We sent follow up inquires to Marriott in early October 2002. We
have not had a comprehensive response from Marriott, and on November 13, 2002,
our counsel sent a notice of default to Marriott. These management agreements
provide that Marriott may seek to cure certain defaults within stated times. We
are continuing to pursue these inquires. We intend to carefully monitor Marriott
International's divestment efforts, the responses we receive to our inquires and
any Marriott cure efforts, and to enforce all rights and remedies relative to
these 31 communities.
Note 8. Subsequent Events
On October 1, 2002, certain Medicare rate adjustments expired. This expiration
is sometimes referred to as the "Medicare Cliff". Legislation is currently being
considered which, if enacted, would extend these Medicare rate adjustments. As a
result of the expiration of these Medicare rate adjustments, unless legislation
is enacted to extend the expired adjustments or otherwise increase Medicare
rates, and assuming our current census of Medicare residents remains about what
it was during the three months ended September 30, 2002, we expect that the
revenues we receive from Medicare may decline by approximately $5,300 per annum.
On October 24, 2002, we entered into an agreement for a three year $12,500,
interest only, revolving credit facility. The interest rate under this revolving
credit facility is calculated as a spread above LIBOR. The revolving bank credit
facility is available for acquisitions, working capital and general business
purposes. The credit facility is secured by some of our accounts receivable and
contains certain covenants such as maintenance of collateral, minimum net worth
and certain other financial ratios. As of November 13, 2002, there were no
amounts outstanding under the revolving credit facility.
On October 25, 2002, we acquired seven independent and assisted living
communities for approximately $27,000. These communities contain 407 units. One
hundred percent (100%) of the revenue at these seven properties is paid by
residents or their families from their private resources. One of the communities
is subject to HUD insured mortgage debt of approximately $15,800. We paid the
$11,200 balance of the purchase price in cash. Also on October 25, 2002, we sold
one senior living property to Senior Housing for approximately $12,700, which
was our approximate purchase price of that facility on April 1, 2002, and leased
this property along with eight other senior living properties, from Senior
Housing. These eight communities contain 609 units, the annual rent due from us
to Senior Housing is $6,285 and the lease term extends to 2019.
Also, on October 25, 2002, we agreed to modify the existing lease for the 31
Marriott managed properties leased from Senior Housing (see Note 4). Prior to
this lease modification, we were required to make periodic deposits of funds
into an escrow account for future capital expenditures at these 31 leased
properties. These deposits were paid to Senior Housing and were recorded as
additional rent expense on our consolidated statement of operations. As a result
of this modification, effective October 1, 2002, we will own deposits in these
escrow accounts and Senior Housing will have a security and remainder interest
in these accounts and in all property purchased with funding from these
accounts. The amounts and use of these escrow accounts are unchanged by this
amendment; however subsequent to September 30, 2002, we will not report rent
expense arising from these deposits.
8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
We were a subsidiary of Senior Housing until December 31, 2001. The 2001 results
discussed in this Quarterly Report on Form 10-Q are for a period during which we
were a subsidiary of Senior Housing and they are not indicative of what our
results would have been as a separate public company. Similarly these results
are not indicative of our future financial performance. Our 2002 results of
operations presented in this Quarterly Report on Form 10-Q differ materially
from the 2001 historical results presented. There are material differences
because our current operations include, among other items, rent expense on
leases to Senior Housing, general and administrative costs incurred by us as a
separate public company, revenues and expenses related to the 31 communities
managed by Marriott Senior Living Services, Inc. ("Marriott") and revenues and
expenses related to five communities we purchased on April 1, 2002.
Key Statistical Data:
As Reported (includes facilities from the date operations by Five Star commenced):
Three Months ended 9/30 Nine months ended 9/30
------------------------------------- ---------------------------------------
2002 2001 % Change 2002 2001 % Change
---- ---- -------- ---- ---- --------
Revenues from residents $132,847 $ 55,971 138% $382,085 $164,081 133%
Facility expenses $110,741 $ 51,198 116% $319,845 $150,984 112%
Total expenses $134,575 $ 54,455 147% $392,030 $164,507 138%
No. of facilities (end of period) 90 56 61% 90 56 61%
No. of living units (end of period) 13,186 5,211 153% 13,186 5,211 153%
Occupancy 89% 88% 1% 88% 89% -1%
Average daily rate $ 124 $ 132 -6% $ 120 $ 130 -8%
Revenue per day per
available unit $ 110 $ 117 -6% $ 106 $ 115 -8%
Percent of revenues from
Medicare / Medicaid 40% 79% -39% 39% 78% -39%
Percent of revenues from
private / other 60% 21% 39% 61% 22% 39%
"Same Store" Facilities (facilities Five Star operated continuously since 1/1/01):
Three Months ended 9/30 Nine months ended 9/30
------------------------------------- ---------------------------------------
2002 2001 % Change 2002 2001 % Change
---- ---- -------- ---- ---- --------
Revenues from residents $ 58,882 $ 55,971 5% $170,136 $164,081 4%
Facility expenses $ 53,592 $ 51,173 5% $158,368 $150,542 5%
No. of facilities (end of period) 54 54 -- 54 54 --
No. of living units (end of period) 4,991 4,991 -- 4,991 4,991 --
Occupancy 89% 90% -1% 88% 89% -1%
Average daily rate $ 144 $ 136 6% $ 141 $ 135 4%
Revenue per day per
available unit $ 128 $ 122 5% $ 125 $ 121 3%
Percent of revenues from
Medicare / Medicaid 79% 79% -- 79% 78% 1%
Percent of revenues from
private / other 21% 21% -- 21% 22% -1%
9
Total Portfolio at 9/30/02 (includes data for periods prior to Five Star operation of certain facilities*):
Three Months ended 9/30 Nine months ended 9/30
------------------------------------- ---------------------------------------
2002 2001 % Change 2002 2001 % Change
---- ---- -------- ---- ---- --------
Revenues from residents $132,847 $130,260 2% $393,942 $382,352 3%
Facility expenses $110,741 $105,336 5% $328,000 $307,653 7%
No. of facilities (end of period) 90 90 -- 90 90 --
No. of living units (end of period) 13,186 13,186 -- 13,186 13,186 --
Occupancy 89% 90% -1% 88% 90% -2%
Average daily rate $ 124 $ 119 4% $ 124 $ 118 5%
Revenue per day per
available unit $ 110 $ 107 3% $ 109 $ 106 3%
Percent of revenues from
Medicare / Medicaid 40% 37% 3% 39% 38% 1%
Percent of revenues from
private / other 60% 63% -3% 61% 62% -1%
* Based on data provided to us from prior owners.
Three Months Ended September 30, 2002, Compared to Three Months Ended September
30, 2001
Revenues from residents for the three months ended September 30, 2002, were
$132.8 million, an increase of 138% over revenues from residents of $56.0
million for the 2001 third quarter. This increase is attributable primarily to
our lease of 31 communities on January 11, 2002, and our purchase of five
communities on April 1, 2002. Revenues from residents at the communities we
operated throughout each of the three-month periods ended September 30, 2002 and
2001, were $58.9 and $56.0 million, respectively, an increase of 5%. This
increase is due primarily to higher per diem charges to residents. Revenues from
residents at the 90 communities we operated at September 30, 2002, were $132.8
million for the three months ended September 30, 2002, an increase of 2% over
revenues from residents of $130.3 million for the comparable period in 2001
(including revenues which relate to periods prior to our operation of some of
these communities). This increase is attributable to higher resident charges
offset somewhat by slightly lower occupancy. About 40% of our revenues from
residents in the three months ended September 30, 2002, were received from
Medicare and Medicaid, compared to 79% in the 2001 period. This decrease is due
largely to our lease of 31 and purchase of five communities during 2002, all of
which focus our services to residents who pay with private resources. On October
1, 2002, temporary increases in Medicare payment rates expired. Our Medicare
revenues totaled $13.9 million and $9.6 million during the three months ended
September 30, 2002 and 2001, respectively. As a result of these expirations,
sometimes referred to as the "Medicare Cliff", and unless or until Medicare rate
increases are reinstated, or other Medicare rate increases are taken by the
Federal government, our revenues from Medicare are likely to be less than
previous amounts. We cannot predict the exact amount of the decline in our
Medicare revenue, but we expect it will be about $5.3 million per annum. We also
cannot predict whether the Federal government will provide any reinstatement or
other Medicare rate increases.
Interest income increased by $12,000 in the three months ended September 30,
2002 compared to the comparable period in 2001 due to earnings on higher cash
balances in the 2002 period.
Expenses for the three months ended September 30, 2002, were $134.6 million, an
increase of 147% over expenses of $54.5 million for the 2001 third quarter. Our
wages and benefits costs increased from $38.4 million to $59.5 million, or 55%,
primarily due to expenses at the 31 leased and five purchased communities
discussed above. Other operating expenses, which include utilities,
housekeeping, dietary, maintenance, insurance and facility level administrative
costs, rose from $12.7 million to $46.3 million or 265%, again primarily due to
expenses at our leased 31 and our five purchased communities discussed above.
During 2001, Marriott did not manage any communities for us and we were a
subsidiary of Senior Housing and did not lease any facilities. As a result, we
did not incur management fees to Marriott or rent expense in 2001. Facility
level operating expenses related to the communities we operated throughout each
of the three-month periods ended September 30, 2002 and 2001, were $53.6 million
and $51.2 million, respectively, an increase of 5%. This increase is principally
attributable to higher insurance premiums, an increase in reserves for the self
funded portion of our insurance programs, an increase in accounts receivable
reserves and higher wage and benefit costs, which were partially offset by a
decrease in expenses from our reduced use of higher cost, third party staffing.
Facility level operating expenses at the 90 communities that we operated at
September 30, 2002,
10
were $110.7 million for the three months ended September 30, 2002, an increase
of 5% over facility expenses of $105.3 million for the comparable period in 2001
(including expenses which relate to periods prior to our operation of some of
these communities). This increase results principally from higher insurance
premiums, an increase in reserves for the self funded portion of our insurance
programs, an increase in accounts receivable reserves and higher wage and
benefit costs.
Our general and administrative expenses for the three months ended September 30,
2002 were $3.6 million, an increase of 24% over the 2001 period, primarily due
to the increased costs associated with operating as a separate, larger company
that is publicly owned and the increased size of our operations in 2002.
Depreciation expense for the three months ended September 30, 2002, was
$517,000, an increase of 48% over depreciation expense of $349,000 in the 2001
period. The increase is attributable to our purchase of five communities
discussed above.
Discontinued operations relate to three closed facilities. Loss from
discontinued operations for the three months ended September 30, 2002, was
$826,000, an increase of $512,000, over the comparable 2001 period. The increase
in the loss was primarily a result of our cessation of revenue generating
activities and our provision for additional reserves recorded for amounts due
from the State of Connecticut related to closure costs. We may close additional
facilities before the end of 2002.
As a result of the factors described above, net loss for the three months ended
September 30, 2002, was $2.5 million, compared to net income of $1.2 million in
the 2001 period.
Nine Months Ended September 30, 2002, Compared to Nine Months Ended September
30, 2001
Revenues from residents for the nine months ended September 30, 2002, were
$382.1 million, an increase of 133% over revenues from residents of $164.1
million for the 2001 period. This increase is attributable primarily to our
lease of 31 communities on January 11, 2002, and our purchase of five
communities on April 1, 2002. Revenues from residents at the communities we
operated throughout each of the nine-month periods ended September 30, 2002 and
2001, were $170.1 and $164.1 million, respectively, an increase of 4%. This
increase is due primarily to higher per diem charges to residents, somewhat
offset by slightly lower occupancy. Revenues from residents at the 90
communities we operated at September 30, 2002, were $394.0 million for the nine
months ended September 30, 2002, an increase of 3% over revenues from residents
of $382.4 million for the comparable period in 2001 (including revenues which
relate to periods prior to our operation of some of these communities). This
increase is attributable to higher resident charges offset somewhat by lower
occupancy. About 39% of our revenues from residents in the nine months ended
September 30, 2002, were received from Medicare and Medicaid, compared to 78% in
the 2001 period. This decrease is due largely to our lease of 31 and purchase of
five communities during 2002 all of which focus our services to residents who
pay with private resources. On October 1, 2002, temporary increases in Medicare
payment rates expired. Our Medicare revenues totaled $40.2 million and $26.6
million during the nine months ended September 30, 2002 and 2001, respectively.
As a result of these expirations, sometimes referred to as the "Medicare Cliff",
and unless or until rate increases are reinstated, or other Medicare rate
increases are taken by the Federal government, our revenues from Medicare are
likely to be less than previous amounts. We cannot predict the exact amount of
the decline in our Medicare revenues, but we expect it will be about $5.3
million per annum. We also cannot predict whether the Federal government will
provide any reinstatement or other Medicare rate increase.
Interest income increased by $148,000 in the nine months ended September 30,
2002 compared to the comparable period in 2001 due to earnings on higher cash
balances in the 2002 period.
Expenses for the nine months ended September 30, 2002, were $392.0 million, an
increase of 138% over expenses of $164.5 million for the 2001 period. Our wages
and benefits costs increased from $114.0 million to $174.0 million, or 60%,
primarily due to expenses at the 31 leased and five purchased communities
discussed above. Other operating expenses, which include utilities,
housekeeping, dietary, maintenance, insurance and facility level administrative
costs, rose from $36.9 million to $133.5 million or 262%, again primarily due to
expenses at our 31 leased and our five purchased communities discussed above.
During 2001, Marriott did not manage any communities for us and we were a
subsidiary of Senior Housing that did not lease any facilities. As a result, we
did not incur management fees to Marriott or rent expense in 2001. Facility
level operating expenses related to the communities we operated throughout each
of the nine-month periods ended September 30, 2002 and 2001, were $158.4 million
and $150.5 million, respectively, an increase of 5%. This increase is
principally attributable to higher insurance premiums, an
11
increase in reserves for the self funded portion of our insurance programs, and
higher wage and benefit costs, which were partially offset by a decrease in
expenses from our reduced use of higher cost, third party staffing. Facility
level operating expenses at the 90 communities that we operated at September 30,
2002, were $328.0 million for the nine months ended September 30, 2002, an
increase of 7% over facility expenses for the comparable period in
2001(including expenses which relate to periods prior to our operation at some
off these communities). This increase results principally from higher insurance
premiums, an increase in reserves for the self funded portion of our insurance
programs, and higher wage and benefit costs.
Our general and administrative expenses for the nine months ended September 30,
2002 were $11.2 million, a decrease of 10% over the 2001 period, primarily due
to non recurring operational start up costs incurred during the 2001 period
which were only partially offset by the increased costs associated with
operating as a separate, larger company that is publicly owned in 2002.
Our expenses during the nine months ended September 30, 2002, period include
some large amounts which we do not expect to occur on a regular basis. These
expenses arose as follows:
o In January we incurred $2.8 million of expenses related to our
spin off from Senior Housing and merger with FSQ, Inc.
o During June 2002, when we implemented new programs for
liability, workers compensation and employee health insurance,
we re-evaluated our insurance reserves and increased estimates
for pending claims by $3.2 million. Reserve estimates arise
from the retention or self funded portion of our insurance
programs. Reserve account adjustments are made on the basis of
periodic review of pending claims and reported incidents which
may result in claims. Our new insurance programs have
increased costs by about $450,000 per month starting in July
2002, but the $3.2 million change in reserve estimates may be
non recurring.
o Also, during the nine months ended September 30, 2002, a
review by Marriott of its accounting for the 31 communities
which it manages for us resulted in a change in bad debt
reserves and other one time charges totaling approximately
$850,000.
o We incurred an asset impairment charge of $150,000 in the nine
months ended September 30, 2002.
o We incurred a $122,000 restructuring charge in the nine months
ended September 30, 2002.
Depreciation expense for the nine months ended September 30, 2002, was $1.2
million, an increase of 27% over the 2001 period. The increase is attributable
to our purchase of five communities on April 1, 2002.
Loss from discontinued operations for the nine months ended September 30, 2002
was $3.5 million, an increase of $3.1 million, over the loss in the comparable
2001 period. This increase was the result of additional reserves recorded for
amounts due from the State of Connecticut related to closure costs and an asset
impairment charge related to a closed facility. This increase was primarily a
result of our cessation of revenue generating activities and our provision for
reserves discussed above. We may decide to close and dispose of additional
facilities.
As a result of the factors described above, net loss for the nine months ended
September 30, 2002, was $13.2 million, an increase of $12.4 million, over the
loss in the 2001 period.
LIQUIDITY AND CAPITAL RESOURCES
At the time of our spin off from Senior Housing on December 31, 2001, we had
cash and cash equivalents of $24.9 million. In March and April 2002, we
completed a public offering of our common shares raising net proceeds of $26.1
million. A significant amount of our cash was used to acquire five senior living
communities for $45.5 million on April 1, 2002. At September 30, 2002, we had
cash and equivalents of $12.0 million, including $5.1 million of cash controlled
by Marriott.
Our primary source of cash to fund operating expenses, including rent and
routine capital expenditures, is our revenues from services to residents at our
facilities. Changes in laws and regulations which impact Medicare or Medicaid
rates, on which some of our facilities rely, may materially affect our future
results. Similarly, recent increases in the costs of insurance, especially tort
liability insurance, workers compensation and employee health insurance costs,
which are
12
affecting the senior living industry, will continue to have a material adverse
impact upon our future results of operations. As discussed above in footnote 7
to our financial statements, a failure by IHS or the State of Connecticut to
make payments that we believe are due to us would have a material adverse impact
upon our future results and deny us access to those cash proceeds to which we
believe we are entitled. It is also possible that termination of the Marriott
management agreements, as discussed in that footnote 7 to our financial
statements, may have a short term adverse impact on our financial results or
increase our working capital requirements. Despite these contingencies, however,
we believe that our revenues and possible borrowings under our line of credit
will be sufficient to allow us to meet our ongoing operating expenses, working
capital needs and rent payments to Senior Housing in the short term, or next 12
months, and long term.
On October 1, 2002, temporary increases in Medicare payment rates expired. As a
result of these expirations, sometimes referred to as the "Medicare Cliff", and
unless or until these rate increases are reinstated, or other Medicare rate
increases are taken by the Federal government, our revenues from Medicare are
likely to be less than previous amounts. We cannot predict the exact amount of
our expected decline of our Medicare revenue which will result from the Medicare
Cliff, but we expect it to be approximately $5.3 million per annum. We also
cannot predict whether the Federal government will provide any reinstatement or
other Medicare rate increases. The expansion of our business in 2002 by leasing
and acquiring facilities which focus on services to residents who pay with
private resources may lessen the effect of Medicare rate declines on our future
results of operations.
On October 24, 2002, we entered into an agreement for a three year $12.5
million, interest only, revolving credit facility. The interest rate under our
revolving credit facility is calculated as LIBOR plus a spread. This revolving
credit facility is available for acquisitions, working capital and for general
business purposes. The credit facility is secured by some of our accounts
receivable and contains covenants, such as maintenance of collateral, minimum
net worth and various financial ratios. In certain circumstances, amounts
available may be increased to $25 million. As of November 12, 2002, there were
no amounts outstanding under this revolving credit facility.
On October 25, 2002, we acquired seven independent and assisted living
communities with 407 living units for $27 million. All of the revenues at these
communities are paid by residents from private resources. This purchase price
was paid by our assuming $15.8 million of HUD insured mortgage debt which
encumbers one of these communities, and our paying the balance of approximately
$11.2 million in cash.
On October 25, 2002, we sold one senior living community, which we previously
owned unencumbered by mortgage debt, to Senior Housing for $12.7 million. The
proceeds of this sale were used to fund the cash portion of our purchase price
for the seven facilities we purchased on October 25, 2002, and the balance was
added to our working capital for general business purposes.
Also on October 25, 2002, we entered a lease with Senior Housing for nine
independent and assisted living communities, including the one facility we sold
to Senior Housing and eight additional facilities. These nine communities
include 750 living units and all of the revenues which we expect from these
communities are paid by residents from private resources. The lease has an
initial term expiring on December 31, 2019, with an option to renew for one
renewal term of 15 years. We agreed to pay Senior Housing minimum rent equal to
$6.3 million per year, plus percentage rent starting in 2005. The terms of this
new lease are otherwise substantially the same as our other leases with Senior
Housing.
Debt Instruments and Covenants
At September 30, 2002, we had no outstanding obligations for funded debt. The
long term liabilities which appear on our September 30, 2002, balance sheet
include $12.5 million of advance payments and deposits received from residents
at some of our senior living communities plus approximately $2.4 million of
reserves arising from the self funded portion of our insurance programs.
As discussed above, on October 25, 2002, we assumed HUD insured mortgage debt
for approximately $15.8 million. The weighted average interest costs on this
debt is 8.98% per year. Principal and interest is due periodically through 2033.
Although this mortgage is not recourse to us, it is secured by one of our owned
communities with 229 living units. We believe we are in compliance with all
material terms and covenants related to this debt. A portion of this debt is
refinanceable at any time and all of this debt may be refinanced beginning in
2004. We have begun to consider refinance alternatives.
13
Also, as discussed above, on October 24, 2002, we entered a revolving credit
facility for $12.5 million. This credit facility is secured by some of our
accounts receivable and it contains various covenants including our maintenance
of collateral, minimum net worth and various financial ratios. On November 13,
2002, no amounts were drawn under this revolving credit facility, and we believe
we are in compliance with all material terms and covenants applicable to this
credit facility.
Our most significant long term obligations are our lease obligations to Senior
Housing. Including the lease entered on October 25, 2002, as described above,
our lease obligations require minimum rent of $76.3 million per year. At
November 13, we believe we are in compliance with all material lease
obligations.
SEASONALITY
Our business is subject to modest effects of seasonality. During the calendar
fourth quarter holiday periods nursing home and assisted living residents are
sometimes discharged to join family celebrations and admission decisions are
often deferred. The first quarter of each calendar year usually coincides with
increased illness among nursing home and assisted living residents which can
result in increased costs or discharges to hospitals. As a result of these
factors, nursing home and assisted living operations sometimes produce greater
earnings in the second and third quarters of a calendar year and lesser earnings
in the first and fourth quarters. We do not believe that this seasonality will
cause fluctuations in our revenues or operating cash flow to such an extent that
we will have difficulty paying our expenses, including rent, which do not
fluctuate seasonally.
14
Item 3. Quantitative and Qualitative Disclosures About Market Risk
As of September 30, 2002, we had no obligations for funded debt and,
accordingly, are not directly affected by changes in market interest rates.
However, as discussed above, we have entered into a $12.5 million revolving
credit facility secured by certain of our accounts receivable. This facility
will require interest on drawn amounts at floating rates generally equal to
LIBOR plus a spread. Whenever borrowings are outstanding under such a credit
facility we may be exposed to market changes in interest rates, especially
market changes in short term rates. For example, if the full amount of a $12.5
million line of credit were drawn and interest rates decrease or increase by 1%
per annum, our interest expense would decrease or increase by $125,000 per year,
or $0.015 per share, respectively. Depending upon our exposure to interest rate
risks for floating rate obligations outstanding from time to time in the future,
we may decide to purchase interest rate caps or other hedging instruments.
As noted above, on October 25, 2002, we assumed $15.8 million of fixed rate
mortgage debt. Changes in prevailing interest rate may affect the market value
of fixed rate debt. Generally, increases in interest rates reduce the market
value of fixed rate debt, and decreases in interest rates increase the market
value of fixed rate debt. For example: based upon discounted cash flow analysis,
if prevailing interest rates were to decline by 10% and other credit market
considerations remained unchanged, the market value of our $15.8 million
mortgage debt would increase by about $1.3 million; and, similarly, if
prevailing interest rates were to increase by 10%, the market value of our $15.8
million mortgage debt would decline by about $1.1 million. The market values of
long term, fixed rate debt which can be prepaid or refinanced prior to maturity,
such as our $15.8 million mortgage debt, are generally less affected by changes
in interest rates.
Changes in the market value of our long term, fixed rate debt obligations which
are paid according to their terms will not affect our operating results.
However, if we have unhedged amounts of floating rate debt outstanding, changes
in short term rates will impact our operating results. During the past year
short term rates have decreased. We are unable to predict the direction or
amount of interest rate changes during the next year. However, we may incur debt
at floating or fixed rates in the future, which would increase our exposure to
market changes in interest rates.
Item 4. Controls and Procedures
(a) Within the 90 days prior to the filing date of this report, management
of the Company carried out an evaluation, under the supervision and
with the participation of our President and Chief Executive Officer
and Treasurer and Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures
pursuant to Rules 13a-14 and 15d-14 of the Securities Exchange Act of
1934. Based upon that evaluation, the President and Chief Executive
Officer and Treasurer and Chief Financial Officer concluded that our
disclosure controls and procedures are effective in recording,
summarizing and reporting material information required to be included
in our periodic SEC filings in a timely manner.
(b) There have been no significant changes in our internal controls or in
other factors that could significantly affect these controls
subsequent to the date of their evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
15
FORWARD LOOKING STATEMENTS
THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS FORWARD LOOKING STATEMENTS WITHIN
THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 AND THE
FEDERAL SECURITIES LAWS. FOR EXAMPLE, THIS REPORT ON FORM 10-Q STATES OR IMPLIES
THAT WE WILL BE ABLE TO OPERATE OUR PROPERTIES IN A FINANCIALLY SUCCESSFUL
MANNER, THAT CERTAIN LARGE CHARGES AND CHANGES IN INSURANCE RESERVE ESTIMATES
WILL NOT RECUR, THAT WE MAY CLOSE ADDITIONAL FACILITIES, THAT OUR REVENUES FROM
MEDICARE AND MEDICAID WILL DECREASE BY APPROXIMATELY $5.3 MILLION PER ANNUM,
THAT WE BELIEVE WE WILL BE ABLE EXPAND OUR BUSINESS FOCUSED UPON SERVICES TO
RESIDENTS WHO PAY WITH PRIVATE RESOURCES, THAT WE WILL COLLECT AMOUNTS WE
BELIEVE ARE DUE TO US FROM INTERGRATED HEALTH SERVICES AND THE STATE OF
CONNECTICUT AND THAT CANCELLATION OF THE MARRIOTT MANAGEMENT AGREEMENTS WILL NOT
RESULT IN A MATERIAL DECLINE IN THE INCOME WE RECEIVE FROM OUR MARRIOTT MANAGED
LEASED COMMUNITIES. HOWEVER, OUR OPERATING FINANCIAL RESULTS MAY DETERIORATE
BECAUSE OF CHANGES IN MARKET CONDITIONS, GREATER DECLINES IN MEDICARE REVENUES
THAN EXPECTED, LOWER MEDICARE AND MEDICAID RATES, HIGHER INSURANCE COSTS,
RECURRING LARGE CHANGES IN INSURANCE RESERVES OR OTHERWISE; WE MAY BE UNABLE TO
IDENTIFY OR CLOSE EXPANSION OPPORTUNITIES ON ACCEPTABLE TERMS; WE MAY BE UNABLE
TO COLLECT AMOUNTS FROM INTEGRATED HEALTH SERVICES OR THE STATE OF CONNECTICUT
BECAUSE WE CANNOT REACH AGREEMENTS OR SETTLEMENTS, BECAUSE OUR LITIGATION OR
OTHER EFFORTS FAIL OR BECAUSE INTEGRATED HEALTH SERVICES OR THE STATE OF
CONNECTICUT ARE UNABLE TO MAKE PAYMENTS OR FOR OTHER REASONS; AND CANCELLATION
OF THE MARRIOTT MANAGEMENT AGREEMENTS COULD RESULT IN MATERIAL DECLINES IN
REVENUE, INCREASES IN EXPENSES OR INCREASES IN OUR WORKING CAPITAL NEEDS.
FORWARD LOOKING STATEMENTS ARE NOT GUARANTEED TO OCCUR, OUR EXPECTED RESULTS MAY
NOT BE ACHIEVED, AND ACTUAL RESULTS MAY DIFFER MATERIALLY FROM OUR EXPECTATIONS.
INVESTORS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON FORWARD-LOOKING
STATEMENTS. YOU SHOULD NOT RELY UPON FORWARD LOOKING STATEMENTS EXCEPT AS
STATEMENTS OF OUR PRESENT INTENTIONS AND OF OUR PRESENT EXPECTATIONS WHICH MAY
OR MAY NOT OCCUR.
16
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) 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 the Registrant's Current Report on Form 8-K filed on November 12,
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 Five Star Quality Care, Inc.'s Current Report on Form 8-K
filed on November 12, 2002.)
10.1 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 Five Star Quality Care, Inc.'s Current
Report on Form 8-K filed on November 12, 2002.)
10.2 Receivables Purchase and Transfer Agreement, dated as of October 24,
2002, among Five Star Quality Care, Inc., as Primary Servicer, the
Providers named therein, and FSQC Funding Co., LLC, as Purchaser.
10.3 Loan and Security Agreement, dated as of October 24, 2002, among FSQC
Funding Co., LLC, as Borrower, the Lenders party thereto, Dresdner
Kleinwort Wasserstein LLC, as Co-Program Manager, Syndication Agent and
Lead Arranger, Healthcare Finance Group, Inc., as Co-Program Manager,
and HFG Healthco-4 LLC, as Collateral Agent.
10.4 Guaranty Agreement, dated as of October 24, 2002, made by Five Star
Quality, Inc., Five Star Quality Care Trust and Five Star Quality Care
Holding Co., Inc. in favor of FSQC Funding Co., LLC.
10.5 Pledge Agreement, dated as of October 24, 2002, among Five Star Quality
Care Trust and Five Star Quality Care Holding Co., Inc., as Grantors,
and HFG Healthco-4 LLC, as Collateral Agent for the benefit of the
Lenders and as assignee of the Purchaser.
10.6 Assignment of Contracts as Collateral Security, dated as of October 24,
2002, between FSCQ Funding Co., LLC and HFG Healthco-4, LLC, as
Collateral Agent.
99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K:
None.
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FIVE STAR QUALITY CARE, INC.
By: /s/ Evrett W. Benton
Evrett W. Benton
President and Chief Executive Officer
Dated: November 14, 2002
By: /s/ Bruce J. Mackey Jr.
Bruce J. Mackey Jr.
Treasurer and Chief Financial Officer
Dated: November 14, 2002
18
CERTIFICATIONS
I, Evrett W. Benton, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Five
Star Quality Care, Inc.;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 14, 2002 /s/ Evrett W. Benton
Evrett W. Benton
President and Chief Executive Officer
19
I, Bruce J. Mackey Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Five
Star Quality Care, Inc.;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 14, 2002 /s/ Bruce J. Mackey Jr.
Bruce J. Mackey Jr.
Treasurer and Chief Financial Officer
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