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EX-31.1 - EX-31.1 - FIVE STAR SENIOR LIVING INC.fve-20150930ex3115e6cc0.htm
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EX-31.2 - EX-31.2 - FIVE STAR SENIOR LIVING INC.fve-20150930ex312bb7e97.htm
EX-10.1 - EX-10.1 - FIVE STAR SENIOR LIVING INC.fve-20150930ex101a9b248.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON,  DC 20549 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2015

 

or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

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 Incorporation or Organization)

(IRS Employer Identification No.)

 

400 Centre Street, Newton, Massachusetts 02458

(Address of Principal Executive Offices) (Zip Code)

 

 

(Registrant’s Telephone Number, Including Area Code):  617-796-8387

 

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  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

 

 

 

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

(Do not check if a smaller reporting company)

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  No

 

Number of registrants shares of common stock, $.01 par value, outstanding as of November 5, 2015:  49,035,915. 

 

 


 

FIVE STAR QUALITY CARE, INC.

 

FORM 10-Q

 

SEPTEMBER 30, 2015

 

INDEX

 

 

 

 

PART I 

Financial Information

Page

 

 

 

Item 1. 

Condensed Consolidated Financial Statements (unaudited)

1

 

 

 

 

Condensed Consolidated Balance Sheets – September 30, 2015 and December 31, 2014

1

 

 

 

 

Condensed Consolidated Statements of Operations – Three and Nine Months Ended September 30, 2015 and 2014

2

 

 

 

 

Condensed Consolidated Statements of Comprehensive Loss – Three and Nine Months Ended September 30, 2015 and 2014

3

 

 

 

 

Condensed Consolidated Statements of Cash Flows – Nine Months Ended September 30, 2015 and 2014

4

 

 

 

 

Notes to Condensed Consolidated Financial Statements

5

 

 

 

Item 2. 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

17

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

28

 

 

 

Item 4. 

Controls and Procedures

28

 

 

 

PART II 

Other Information

 

 

 

 

Item 1. 

Legal Proceedings

29

 

 

 

Item 1A.

Risk Factors

29

 

 

 

Item 6. 

Exhibits

29

 

 

 

 

Warning Concerning Forward Looking Statements

30

 

 

 

 

Signatures

34

 

References in this Quarterly Report on Form 10-Q to “we”, “us” or “our” include Five Star Quality Care, Inc. and its consolidated subsidiaries unless otherwise expressly stated or the context indicates otherwise.

 

 

 


 

Part I.   Financial Information

Item 1.  Condensed Consolidated Financial Statements

 

FIVE STAR QUALITY CARE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

(unaudited)

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

 

    

2015

    

2014

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

19,826

 

$

20,988

 

Accounts receivable, net of allowance of $4,617 and $3,416 at September 30, 2015 and December 31, 2014, respectively

 

 

37,983

 

 

38,814

 

Due from related persons

 

 

9,558

 

 

12,641

 

Investments in available for sale securities, of which $11,717 and $8,352 are restricted as of September 30, 2015 and December 31, 2014, respectively

 

 

26,330

 

 

23,436

 

Restricted cash

 

 

3,018

 

 

2,945

 

Prepaid and other current assets

 

 

22,011

 

 

21,494

 

Assets of discontinued operations

 

 

961

 

 

1,463

 

Total current assets

 

 

119,687

 

 

121,781

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

 

354,514

 

 

357,186

 

Equity investment of an investee

 

 

6,807

 

 

6,827

 

Restricted cash

 

 

2,514

 

 

2,170

 

Restricted investments in available for sale securities

 

 

20,674

 

 

19,835

 

Goodwill and other intangible assets

 

 

468

 

 

25,904

 

Other long term assets

 

 

2,608

 

 

1,270

 

 

 

$

507,272

 

$

534,973

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Revolving credit facilities

 

$

35,000

 

$

35,000

 

Accounts payable and accrued expenses

 

 

83,731

 

 

85,606

 

Accrued compensation and benefits

 

 

44,088

 

 

34,171

 

Due to related persons

 

 

18,036

 

 

20,338

 

Mortgage notes payable

 

 

1,400

 

 

1,786

 

Accrued real estate taxes

 

 

15,485

 

 

11,282

 

Security deposits and current portion of continuing care contracts

 

 

6,737

 

 

7,235

 

Other current liabilities

 

 

25,875

 

 

19,470

 

Liabilities of discontinued operations

 

 

719

 

 

504

 

Total current liabilities

 

 

231,071

 

 

215,392

 

 

 

 

 

 

 

 

 

Long term liabilities:

 

 

 

 

 

 

 

Mortgage notes payable

 

 

42,924

 

 

49,373

 

Continuing care contracts

 

 

1,349

 

 

1,370

 

Accrued self-insurance obligations

 

 

37,577

 

 

37,268

 

Other long term liabilities

 

 

3,887

 

 

4,788

 

Total long term liabilities

 

 

85,737

 

 

92,799

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

Common stock, par value $.01: 75,000,000 shares authorized, 49,035,915 and 48,997,315 shares issued and outstanding at September 30, 2015 and December 31, 2014, respectively

 

 

490

 

 

490

 

Additional paid in capital

 

 

357,999

 

 

357,051

 

Accumulated deficit

 

 

(171,149)

 

 

(134,449)

 

Accumulated other comprehensive income

 

 

3,124

 

 

3,690

 

Total shareholders’ equity

 

 

190,464

 

 

226,782

 

 

 

$

507,272

 

$

534,973

 

See accompanying notes.

1


 

FIVE STAR QUALITY CARE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

    

Nine Months Ended September 30,

 

 

    

2015

    

2014

 

2015

    

2014

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

Senior living revenue

 

$

279,685

 

$

277,411

 

$

832,793

 

$

824,580

 

Management fee revenue

 

 

2,717

 

 

2,438

 

 

7,939

 

 

7,296

 

Reimbursed costs incurred on behalf of managed communities

 

 

62,170

 

 

54,490

 

 

180,082

 

 

163,673

 

Total revenues

 

 

344,572

 

 

334,339

 

 

1,020,814

 

 

995,549

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Senior living wages and benefits

 

 

135,133

 

 

135,507

 

 

404,737

 

 

402,469

 

Other senior living operating expenses

 

 

72,637

 

 

71,217

 

 

216,107

 

 

214,368

 

Costs incurred on behalf of managed communities

 

 

62,170

 

 

54,490

 

 

180,082

 

 

163,673

 

Rent expense

 

 

49,730

 

 

49,481

 

 

149,015

 

 

147,758

 

General and administrative

 

 

16,587

 

 

17,865

 

 

52,750

 

 

54,187

 

Depreciation and amortization

 

 

8,419

 

 

8,278

 

 

24,637

 

 

23,529

 

Goodwill impairment

 

 

25,344

 

 

 —

 

 

25,344

 

 

 —

 

Long lived asset impairment

 

 

145

 

 

589

 

 

145

 

 

589

 

Total operating expenses

 

 

370,165

 

 

337,427

 

 

1,052,817

 

 

1,006,573

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating loss

 

 

(25,593)

 

 

(3,088)

 

 

(32,003)

 

 

(11,024)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest, dividend and other income

 

 

238

 

 

214

 

 

701

 

 

623

 

Interest and other expense

 

 

(1,106)

 

 

(1,324)

 

 

(3,597)

 

 

(3,803)

 

Gain on early extinguishment of debt

 

 

 —

 

 

 —

 

 

692

 

 

 —

 

Gain on sale of available for sale securities reclassified from other comprehensive (loss) income

 

 

 —

 

 

23

 

 

38

 

 

349

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from continuing operations before income taxes and equity in (loss) earnings of an investee

 

 

(26,461)

 

 

(4,175)

 

 

(34,169)

 

 

(13,855)

 

Benefit from (provision for) income taxes

 

 

236

 

 

1,763

 

 

(348)

 

 

4,558

 

Equity in (loss) earnings of an investee

 

 

(25)

 

 

38

 

 

70

 

 

59

 

Loss from continuing operations

 

 

(26,250)

 

 

(2,374)

 

 

(34,447)

 

 

(9,238)

 

Loss from discontinued operations

 

 

(1,238)

 

 

(634)

 

 

(2,253)

 

 

(2,420)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(27,488)

 

$

(3,008)

 

$

(36,700)

 

$

(11,658)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding—basic and diluted

 

 

48,427

 

 

48,020

 

 

48,397

 

 

48,012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted loss per share from:

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

(0.54)

 

$

(0.05)

 

$

(0.71)

 

$

(0.19)

 

Discontinued operations

 

 

(0.03)

 

 

(0.01)

 

 

(0.05)

 

 

(0.05)

 

Net loss per share—basic and diluted

 

$

(0.57)

 

$

(0.06)

 

$

(0.76)

 

$

(0.24)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes.

 

 

2


 

FIVE STAR QUALITY CARE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(in thousands)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

    

2015

    

2014

 

2015

    

2014

 

Net loss

 

$

(27,488)

 

$

(3,008)

 

$

(36,700)

 

$

(11,658)

 

Other comprehensive (loss) income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized (loss) gain on investments in available for sale securities, net of tax of $0,  $142,  $0 and $(176), respectively

 

 

(311)

 

 

(234)

 

 

(437)

 

 

287

 

Equity in unrealized (loss) gain of an investee, net of tax

 

 

(72)

 

 

(33)

 

 

(91)

 

 

8

 

Realized gain on investments in available for sale securities reclassified and included in net loss, net of tax of $0,  $9,  $0 and $132, respectively

 

 

(0)

 

 

(14)

 

 

(38)

 

 

(216)

 

Other comprehensive (loss) income

 

 

(383)

 

 

(281)

 

 

(566)

 

 

79

 

Comprehensive loss

 

$

(27,871)

 

$

(3,289)

 

$

(37,266)

 

$

(11,579)

 

See accompanying notes.

 

 

3


 

FIVE STAR QUALITY CARE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

    

2015

    

2014

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net loss

 

$

(36,700)

 

$

(11,658)

 

Adjustments to reconcile net loss to cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

 

25,046

 

 

24,313

 

Gain on early extinguishment of debt

 

 

(742)

 

 

 —

 

Loss from discontinued operations before income tax

 

 

2,253

 

 

3,927

 

Gain on sale of available for sale securities

 

 

(38)

 

 

(349)

 

Loss on disposal of property and equipment

 

 

98

 

 

 —

 

Goodwill impairment

 

 

25,344

 

 

 —

 

Long lived asset impairment

 

 

145

 

 

589

 

Equity in earnings of an investee

 

 

(70)

 

 

(59)

 

Stock-based compensation

 

 

948

 

 

949

 

Deferred income taxes

 

 

 —

 

 

(6,726)

 

Provision for losses on receivables

 

 

3,520

 

 

1,998

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

(2,689)

 

 

(790)

 

Prepaid expenses and other assets

 

 

(1,962)

 

 

(4,620)

 

Accounts payable and accrued expenses

 

 

330

 

 

1,858

 

Accrued compensation and benefits

 

 

9,917

 

 

11,456

 

Due to related persons, net

 

 

1,026

 

 

(1,952)

 

Other current and long term liabilities

 

 

9,278

 

 

9,347

 

Cash provided by operating activities

 

 

35,704

 

 

28,283

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

(Increase) decrease in restricted cash and investment accounts, net

 

 

(417)

 

 

11,563

 

Acquisition of property and equipment

 

 

(40,867)

 

 

(39,189)

 

Acquisition of senior living communities, net of liabilities assumed

 

 

 —

 

 

(5,926)

 

Purchases of intangible assets

 

 

(191)

 

 

 —

 

Purchases of available for sale securities

 

 

(10,717)

 

 

(21,349)

 

Investment in an investee

 

 

 —

 

 

(825)

 

Proceeds from sale of property and equipment to Senior Housing Properties Trust

 

 

16,425

 

 

23,776

 

Proceeds from sale of available for sale securities

 

 

6,469

 

 

8,737

 

Cash used in investing activities

 

 

(29,298)

 

 

(23,213)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Proceeds from borrowings on credit facilities

 

 

20,000

 

 

10,000

 

Repayments of borrowings on credit facilities

 

 

(20,000)

 

 

(20,000)

 

Repayments of mortgage notes payable

 

 

(5,732)

 

 

(1,064)

 

Payment of deferred financing fees

 

 

(300)

 

 

 —

 

Cash used in financing activities

 

 

(6,032)

 

 

(11,064)

 

 

 

 

 

 

 

 

 

Cash flows from discontinued operations:

 

 

 

 

 

 

 

Net cash (used in) provided by operating activities

 

 

(1,512)

 

 

7,020

 

Net cash (used in) provided by investing activities

 

 

(24)

 

 

293

 

Net cash flows (used in)  provided by discontinued operations

 

 

(1,536)

 

 

7,313

 

 

 

 

 

 

 

 

 

Change in cash and cash equivalents

 

 

(1,162)

 

 

1,319

 

Cash and cash equivalents at beginning of period

 

 

20,988

 

 

23,628

 

Cash and cash equivalents at end of period

 

$

19,826

 

$

24,947

 

 

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

 

 

Cash paid for interest

 

$

3,078

 

$

2,562

 

Cash paid for income taxes, net

 

$

805

 

$

1,041

 

 

 

 

 

 

 

 

 

Non-cash activities:

 

 

 

 

 

 

 

Issuance of common stock

 

$

206

 

$

189

 

Real estate acquisition

 

$

 —

 

$

(15,518)

 

Assumption of mortgage note payable

 

$

 —

 

$

15,518

 

 

See accompanying notes.

 

4


 

Table of Contents

FIVE STAR QUALITY CARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited)

Note 1.  Basis of Presentation and Organization

General

The accompanying condensed consolidated financial statements of Five Star Quality Care, Inc. and its subsidiaries, or we, us or our, are unaudited.  Certain information and disclosures required by U.S. generally accepted accounting principles, or GAAP, 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, 2014, or our Annual Report.  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 with or among our consolidated 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. 

 

We operate senior living communities, including independent living communities, assisted living communities and skilled nursing facilities, or SNFs.  As of September 30, 2015, we operated 272 senior living communities located in 32 states with 31,310 living units, including 241 primarily independent and assisted living communities with 28,503 living units and 31 SNFs with 2,807 living units.  As of September 30, 2015, we owned and operated 31 communities (3,064 living units), we leased and operated 181 communities (20,035 living units) and we managed 60 communities (8,211 living units).  Our 272 senior living communities, as of September 30, 2015, included 10,626 independent living apartments, 15,500 assisted living suites and 5,184 skilled nursing units.  The foregoing numbers exclude: (i) one assisted living community with 32 living units that we own which is being offered for sale and is classified as a discontinued operation; and (ii) one SNF with 116 living units that we lease from Senior Housing Properties Trust or its subsidiaries, or SNH, that is being offered for sale and is classified as a discontinued operation.

Segment Information

We have two operating segments: senior living communities and rehabilitation and wellness. In the senior living community segment, we operate for our own account or manage for the account of third parties independent living communities, assisted living communities and SNFs that are subject to centralized oversight and provide housing and services to elderly residents. Our rehabilitation and wellness operating segment does not meet any of the quantitative thresholds of a reportable segment as prescribed under Financial Accounting Standards Board, or the FASB, Accounting Standards Codification TM, or ASC, Topic 280, and therefore we have determined that our business is comprised of one reportable segment, senior living. All of our operations and assets are located in the United States, except for the operations of our Cayman Islands organized captive insurance company subsidiary, which participates in our workers’ compensation, professional general liability and automobile insurance programs.

Note 2. Recent Accounting Pronouncements

In April 2015, the FASB issued Accounting Standards Update, or ASU, 2015-03, Simplifying the Presentation of Debt Issuance Costs, which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the associated debt liability. In August 2015, the FASB clarified the previous ASU and issued ASU No. 2015-15, Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements – Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting, which addresses the presentation of debt issuance costs related to line of credit arrangements.  These updates are effective for interim and annual reporting periods beginning after December 15, 2015 and require retrospective application.  Debt issuance costs related to line of credit arrangements will remain classified as assets in accordance with ASU No. 2015-15.  The implementation of these updates is not expected to have a material impact on our condensed consolidated financial statements.

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which outlines a comprehensive model for entities to use in accounting for revenue arising from contracts with customers.  This ASU clarifies the principles for recognizing revenue by, among other things, removing inconsistencies in revenue

5


 

Table of Contents

FIVE STAR QUALITY CARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited)

requirements, improving comparability of revenue recognition practices across entities and industries and providing improved disclosure requirements. In July 2015, the FASB approved a one year deferral of the effective date for this ASU to interim and annual reporting periods beginning after December 15, 2017; however, early adoption at the original effective date is still permitted. We are currently evaluating the impact that the adoption of this ASU will have on our condensed consolidated financial statements.

 

In September 2015, the FASB issued ASU No. 2015-16, Simplifying the Accounting for Measurement-Period Adjustments, which eliminates the requirement for an acquirer in a business combination to account for measurement-period adjustments retrospectively. Instead, acquirers must recognize measurement-period adjustments during the period in which they determine the amounts, including the effect on earnings of any amounts that would have been recorded in previous periods if the accounting had been completed at the acquisition date. This update is effective for interim and annual reporting periods beginning after December 15, 2015, with early adoption permitted.  The implementation of this update is not expected to have a material impact on our condensed consolidated financial statements.

Note 3. Property and Equipment

Property and equipment consists of the following:

 

 

 

 

 

 

 

 

    

September 30,

    

December 31,

 

 

2015

 

2014

Land

 

$

24,172

 

$

24,172

Buildings and improvements

 

 

310,713

 

 

308,779

Furniture, fixtures and equipment

 

 

156,565

 

 

136,839

Property and equipment, at cost

 

 

491,450

 

 

469,790

Accumulated depreciation

 

 

(136,936)

 

 

(112,604)

Property and equipment, net

 

$

354,514

 

$

357,186

 

We recorded depreciation expense relating to our property and equipment of $8,406 and $7,504 for the three months ended September 30, 2015 and 2014, respectively, and $24,384 and $21,787 for the nine months ended September 30, 2015 and 2014, respectively.

 

We review the carrying value of long lived assets, excluding goodwill, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If there is an indication that the carrying value of an asset is not recoverable, we determine the amount of impairment loss, if any, by comparing the historical carrying value of the asset to its estimated fair value. We determine estimated fair value based on input from market participants, our experience selling similar assets, market conditions and internally developed cash flow models that our assets or asset groups are expected to generate. As a result of our long lived assets impairment review, excluding goodwill, we recorded $145 and $589 of impairment charges to our long lived assets in continuing operations, excluding goodwill, for the three and nine months ended September 30, 2015 and 2014, respectively.

 

As of September 30, 2015, we had $13,271 of assets included in our property and equipment that we expect to request that SNH purchase from us for an increase in future rent; however, we are not obligated to make these sales and SNH is not obligated to fund such amounts.

 

In November 2015, we acquired two independent living communities with 68 and 84 living units, respectively, located in Tennessee for an aggregate purchase price of approximately $26,000,  excluding closing costs.  We funded this acquisition with cash on hand and by assuming approximately $17,310 of mortgage debt. The purchase price allocation for this acquisition will be performed during the fourth quarter.

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Table of Contents

FIVE STAR QUALITY CARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited)

Note 4. Accumulated Other Comprehensive Income

The following table details the changes in accumulated other comprehensive income, net of tax, for the nine months ended September 30, 2015:

 

 

 

 

 

 

 

 

 

 

 

    

Equity
Investment of an
Investee

    

Investments in
Available for Sale
Securities

    

Accumulated
Other
Comprehensive
Income

Balance at January 1, 2015

 

$

50

 

$

3,640

 

$

3,690

Unrealized loss on investments, net of  tax

 

 

 —

 

 

(437)

 

 

(437)

Equity in unrealized loss of an investee

 

 

(91)

 

 

 —

 

 

(91)

Reclassification adjustment:

 

 

 

 

 

 

 

 

 

Realized gain on investments, net of tax

 

 

 —

 

 

(38)

 

 

(38)

Balance at September 30, 2015

 

$

(41)

 

$

3,165

 

$

3,124

 

Accumulated other comprehensive income represents the unrealized gains and losses of our investments, net of tax, and our share of other comprehensive income (loss) of Affiliates Insurance Company, or AIC.

 

Note 5.  Income Taxes

For the nine months ended  September 30, 2015, we recognized income tax expense from our continuing operations of $348.  We did not recognize any income tax expense or benefit from our discontinued operations for that period.  As of December 31, 2014, our federal net operating loss carry forwards, which are scheduled to begin expiring in 2026 if unused, were approximately $112,182 and our tax credit carry forwards, which begin expiring in 2022 if unused, were approximately $17,191.  We have an additional $333 of federal net operating loss carry forwards not included in the $112,182, that are attributable to unvested stock grants which will be recorded as an increase to additional paid in capital after they are realized in accordance with FASB ASC Topic 718,  Compensation – Stock Compensation. Our net operating loss carry forwards and tax credit carry forwards are subject to possible audits and adjustments by the Internal Revenue Service. 

During the year ended December 31, 2014, we determined it was more likely than not that our net deferred tax assets would not be realized and concluded that a full valuation allowance was required. In the future, if we believe that we will more likely than not realize the benefit of these deferred tax assets, we will adjust our valuation allowance and recognize an income tax benefit in our results of operations.

Note 6.  Earnings Per Share

We computed basic earnings per common share, or EPS, for the three and nine months ended September 30, 2015 and 2014 using the weighted average number of shares of our common stock, $.01 par value per share, or our common shares, outstanding during the periods.  Diluted EPS reflects the more dilutive earnings per common share amount calculated using the two class method or the treasury stock method.    The effect of our unvested restricted shares for the three and nine months ended September 30, 2015 and 2014 was not included in the calculation of diluted EPS because to do so would have been antidilutive.   

 

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Table of Contents

FIVE STAR QUALITY CARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited)

The following table provides a reconciliation of loss from continuing operations and loss from discontinued operations and the number of common shares used in the computations of diluted EPS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

 

 

2015

 

2014

 

 

    

Income

    

 

    

Per

    

Income

    

 

    

Per

 

 

 

(loss)

 

Shares

 

Share

 

(loss)

 

Shares

 

Share

 

Loss from continuing operations

 

$

(26,250)

 

48,427

 

$

(0.54)

 

$

(2,374)

 

48,020

 

$

(0.05)

 

Dilutive effect of unvested restricted shares

 

 

 —

 

 —

 

 

 

 

 

 —

 

 —

 

 

 

 

Diluted loss from continuing operations

 

$

(26,250)

 

48,427

 

$

(0.54)

 

$

(2,374)

 

48,020

 

$

(0.05)

 

Diluted loss from discontinued operations

 

$

(1,238)

 

48,427

 

$

(0.03)

 

$

(634)

 

48,020

 

$

(0.01)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

 

2015

 

2014

 

 

    

Income

    

 

    

Per

    

Income

    

 

    

Per

 

 

 

(loss)

 

Shares

 

Share

 

(loss)

 

Shares

 

Share

 

Loss from continuing operations

 

$

(34,447)

 

48,397

 

$

(0.71)

 

$

(9,238)

 

48,012

 

$

(0.19)

 

Dilutive effect of unvested restricted shares

 

 

 —

 

 —

 

 

 

 

 

 —

 

 —

 

 

 

 

Diluted loss from continuing operations

 

$

(34,447)

 

48,397

 

$

(0.71)

 

$

(9,238)

 

48,012

 

$

(0.19)

 

Diluted loss from discontinued operations

 

$

(2,253)

 

48,397

 

$

(0.05)

 

$

(2,420)

 

48,012

 

$

(0.05)

 

 

 

 

Note 7.  Fair Values of Assets and Liabilities

Our assets recorded at fair value have been categorized based upon a fair value hierarchy in accordance with FASB ASC Topic 820, Fair Value Measurements and Disclosures. We apply the following fair value hierarchy, which prioritizes the inputs used to measure fair value into three levels.

 

Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access at the measurement date.

 

Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets and quoted prices in inactive markets.

 

Level 3 inputs are unobservable inputs for the asset or liability in which there is little, if any, market activity for the asset or liability at the measurement date.

 

Recurring Fair Value Measures

 

The tables below present the assets measured at fair value at September 30, 2015 and December 31, 2014 categorized by the level of inputs used in the valuation of each asset.

 

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Table of Contents

FIVE STAR QUALITY CARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of September 30, 2015

 

    

 

 

    

Quoted Prices in

    

 

 

    

 

 

 

 

 

 

 

Active Markets

 

Significant Other

 

Significant

 

 

 

 

 

for Identical

 

Observable

 

Unobservable

 

 

 

 

 

Assets

 

Inputs

 

Inputs

Description

 

Total

 

(Level 1)

 

(Level 2)

 

(Level 3)

Cash equivalents(1)

 

$

5,841

 

$

5,841

 

$

 —

 

$

 —

Available for sale securities:(2)

 

 

 

 

 

 

 

 

 

 

 

 

Equity securities

 

 

 

 

 

 

 

 

 

 

 

 

Financial services industry

 

 

4,075

 

 

4,075

 

 

 —

 

 

 —

REIT industry

 

 

233

 

 

233

 

 

 —

 

 

 —

Other

 

 

3,471

 

 

3,471

 

 

 —

 

 

 —

Total equity securities

 

 

7,779

 

 

7,779

 

 

 —

 

 

 —

Debt securities

 

 

 

 

 

 

 

 

 

 

 

 

International bond fund(3)

 

 

2,407

 

 

 —

 

 

2,407

 

 

 —

High yield fund(4)

 

 

2,295

 

 

 —

 

 

2,295

 

 

 —

Industrial bonds

 

 

7,097

 

 

 —

 

 

7,097

 

 

 —

Government bonds

 

 

14,390

 

 

6,908

 

 

7,482

 

 

 —

Financial bonds

 

 

2,662

 

 

 —

 

 

2,662

 

 

 —

Other

 

 

10,374

 

 

 —

 

 

10,374

 

 

 —

Total debt securities

 

 

39,225

 

 

6,908

 

 

32,317

 

 

 —

Total available for sale securities

 

 

47,004

 

 

14,687

 

 

32,317

 

 

 —

Total

 

$

52,845

 

$

20,528

 

$

32,317

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2014

 

    

 

 

    

Quoted Prices in

    

 

 

    

 

 

 

 

 

 

 

Active Markets

 

Significant Other

 

Significant

 

 

 

 

 

for Identical

 

Observable

 

Unobservable

 

 

 

 

 

Assets

 

Inputs

 

Inputs

Description

 

Total

 

(Level 1)

 

(Level 2)

 

(Level 3)

Cash equivalents(1)

 

$

4,632

 

$

4,632

 

$

 —

 

$

 —

Available for sale securities:(2)

 

 

 

 

 

 

 

 

 

 

 

 

Equity securities

 

 

 

 

 

 

 

 

 

 

 

 

Financial services industry

 

 

4,059

 

 

4,059

 

 

 —

 

 

 —

REIT industry

 

 

330

 

 

330

 

 

 —

 

 

 —

Other

 

 

3,841

 

 

3,841

 

 

 —

 

 

 —

Total equity securities

 

 

8,230

 

 

8,230

 

 

 —

 

 

 —

Debt securities

 

 

 

 

 

 

 

 

 

 

 

 

International bond fund(3)

 

 

2,385

 

 

 —

 

 

2,385

 

 

 —

High yield fund(4)

 

 

2,352

 

 

 —

 

 

2,352

 

 

 —

Industrial bonds

 

 

6,577

 

 

 —

 

 

6,577

 

 

 —

Government bonds

 

 

11,371

 

 

5,683

 

 

5,688

 

 

 —

Financial bonds

 

 

2,704

 

 

 —

 

 

2,704

 

 

 —

Other

 

 

9,652

 

 

 —

 

 

9,652

 

 

 —

Total debt securities

 

 

35,041

 

 

5,683

 

 

29,358

 

 

 —

Total available for sale securities

 

 

43,271

 

 

13,913

 

 

29,358

 

 

 —

Total

 

$

47,903

 

$

18,545

 

$

29,358

 

$

 —

 


(1)

Cash equivalents, consisting of short term, highly liquid investments and money market funds held principally for obligations arising from our self insurance programs. Cash equivalents are reported on our balance sheet as cash and cash equivalents and current and long term restricted cash.  Cash equivalents include $3,746 and $2,792 of balances that are restricted at September 30, 2015 and December 31, 2014, respectively.

 

(2)

Investments in available for sale securities are reported on our balance sheet as current and long term investments in available for sale securities and are reported at fair value of $26,330 and $20,674, respectively, at September 30, 2015, and $23,436 and $19,835, respectively, at December 31, 2014. Our investments in available for sale securities had amortized costs of $45,181 and $40,974 as of September 30, 2015 and December 31, 2014, respectively, had unrealized gains of $2,289 and $2,455 as of September 30, 2015 and December 31, 2014, respectively, and had unrealized losses of $466 and $157 as of September 30, 2015 and December 31, 2014, respectively. At September 30, 2015, 21 of the securities we hold, with a fair value of $4,964, have been in a loss position for less than 12 months and 13 of the securities we hold, with a fair value of $1,738, have been in a loss position for greater than 12 months. We do not believe these securities are impaired primarily because they have not been in a loss position for an extended period of time, the financial conditions of the issuers of these securities remain strong with solid fundamentals, we intend to hold these securities until recovery, and other factors that support our conclusion that the loss is temporary. During the nine months ended September 30, 2015 and 2014, we received gross proceeds of $6,469 and $8,737, respectively, in connection with the sales

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Table of Contents

FIVE STAR QUALITY CARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited)

of available for sale securities and recorded gross realized gains totaling $41 and $399, respectively, and gross realized losses totaling $3 and $50, respectively. We record gains and losses on the sales of our available for sale securities using the specific identification method.

 

(3)

The investment strategy of this fund is to invest principally in fixed income securities issued by non-U.S. issuers. The fund invests in such securities or investment vehicles as it considers appropriate to achieve the fund’s investment objective, which is to provide an above average rate of total return while attempting to limit investment risk by investing in a diversified portfolio of U.S. dollar investment grade fixed income securities. There are no unfunded commitments and the investment can be redeemed weekly.

 

(4)

The investment strategy of this fund is to invest principally in fixed income securities. The fund invests in such securities or investment vehicles as it considers appropriate to achieve the fund’s investment objective, which is to provide an above average rate of total return while attempting to limit investment risk by investing in a diversified portfolio of primarily fixed income securities issued by companies with below investment grade ratings. There are no unfunded commitments and the investment can be redeemed weekly.

 

During the nine months ended September 30, 2015, we did not change the type of inputs used to determine the fair value of any of our assets and liabilities that we measure at fair value.  Accordingly, there were no transfers of assets or liabilities between levels of the fair value hierarchy during the nine months ended September 30, 2015.

 

The carrying values of accounts receivable and accounts payable approximate fair value as of September 30, 2015 and December 31, 2014.  The carrying value and fair value of our mortgage notes payable were $44,324 and $47,915, respectively, as of September 30, 2015 and $51,159 and $56,099, respectively, as of December 31, 2014, and are categorized in Level 3 of the fair value hierarchy in their entirety.  We estimate the fair values of our mortgage notes payable by using discounted cash flow analyses and currently prevailing market terms as of the measurement date. 

 

Non-Recurring Fair Value Measures

 

We review the carrying value of long lived assets, excluding goodwill, for impairment whenever events or changes in circumstances indicate that the carrying value of an asset or asset group may not be recoverable. See Note 3 for more information regarding fair value measurements related to impairments of our long lived assets, excluding goodwill.

 

We evaluate the recoverability of goodwill in the fourth quarter of each fiscal year, or more frequently if events or changes in circumstances indicate that goodwill may be impaired.  As part of the preparation of our 2015 third quarter financial statements, we conducted an interim assessment of goodwill which resulted in our recording a non-cash charge for goodwill impairment of $25,344 for the 2015 third quarter.    Goodwill was valued primarily using discounted cash flow models that incorporate assumptions for short and long term revenue growth rates, operating margins and discount rates, which represent our best estimates of current and forecasted market conditions, our current cost structure, and the implied rate of return that our management believes a market participant would require for an investment in a company having similar risks and business characteristics to the reporting unit being assessed, all of which are considered to be Level 3 fair value  measurements. See Note 13 for further information regarding our interim goodwill assessment, the fair value measurements used in this analysis and the non-cash charge for goodwill impairment we recorded for the 2015 third quarter.

 

The fair value of assets held for sale is determined based on the use of appraisals, input from market participants, our experience selling similar assets or internally developed cash flow models, all of which are considered to be Level 3 fair value measurements.

 

Note 8.  Indebtedness

We have a $25,000 revolving secured line of credit, or our Credit Agreement, that is available for general business purposes, including acquisitions.  The maturity date of our Credit Agreement is March 18, 2016.  Our Credit Agreement requires interest at a rate of LIBOR plus a premium of 250 basis points, or 2.70% per annum as of September 30, 2015.  We are also required to pay a quarterly commitment fee of 0.35% per annum on the unused part of our borrowing availability under the Credit Agreement. We may draw, repay and redraw funds until maturity, and no principal repayment is due until maturity.  We made no borrowings under our Credit Agreement during either of the nine months

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Table of Contents

FIVE STAR QUALITY CARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited)

ended September 30, 2015 or 2014 and, as of September 30, 2015, we had no amounts outstanding under our Credit Agreement.  We incurred interest expense and other associated costs related to our Credit Agreement of $48 for each of the three months ended September 30, 2015 and 2014, and $144 for each of the nine months ended September 30, 2015 and 2014.

 

We are the borrower under our Credit Agreement and certain of our subsidiaries guarantee our obligations under our Credit Agreement, which is secured by our and our guarantor subsidiaries’ accounts receivable and related collateral. Our Credit Agreement provides for acceleration of payment of all amounts outstanding upon the occurrence and continuation of certain events of default, including a change of control of us, which includes termination of our business management agreement with The RMR Group LLC (formerly known as Reit Management & Research LLC), or RMR LLC.

 

We also have a $150,000 secured revolving credit facility, or our Credit Facility, that is available for general business purposes, including acquisitions.  In April 2015, we exercised our option to extend the maturity date of our Credit Facility to April 13, 2016; we paid a fee of $300 in connection with this extension. Subject to the payment of an extension fee and meeting certain other conditions, we have the option to further extend the maturity date of our Credit Facility to April 13, 2017.  Our Credit Facility requires interest at a rate of LIBOR plus a premium of 250 basis points, or 2.70% per annum as of September 30, 2015.  We are also required to pay a quarterly commitment fee of 0.35% per annum on the unused part of our borrowing availability under our Credit Facility. We may draw, repay and redraw funds until maturity, and no principal repayment is due until maturity.  The weighted average annual interest rate for borrowings under our Credit Facility was 2.81% and 2.76% for the nine months ended September 30, 2015 and 2014, respectively.  As of September 30, 2015, we had $35,000 outstanding under our Credit Facility.  We incurred interest expense and other associated costs related to our Credit Facility of $450 and $552 for the three months ended September 30, 2015 and 2014, respectively, and $1,462 and $1,687 for the nine months ended September 30, 2015 and 2014, respectively.

 

We are the borrower under our Credit Facility, and certain of our subsidiaries guarantee our obligations under our Credit Facility, which is secured by real estate mortgages on 15 senior living communities with 1,549 living units owned by our guarantor subsidiaries and our guarantor subsidiaries’ accounts receivable and related collateral.  Our Credit Facility provides for acceleration of payment of all amounts outstanding upon the occurrence and continuation of certain events of default, including a change of control of us.

 

Our Credit Agreement and our Credit Facility contain a number of financial and other covenants, including covenants that restrict our ability to incur indebtedness or to pay dividends or make other distributions under certain circumstances and require us to maintain financial ratios and a minimum net worth.  On March 13, 2015, we and the lenders under our Credit Agreement entered into Amendment No. 3 to the Credit and Security Agreement, which amended the defined term for EBITDA set forth in the Credit Agreement by excluding from the calculation of EBITDA certain costs associated with Medicare compliance deficiencies and made certain changes to the representations and warranties in the Credit Agreement to except certain failures to comply with Medicare billing, recordkeeping, reporting and related practices from events which may otherwise cause our default.

 

At September 30, 2015, four of our senior living communities were encumbered by mortgages with an aggregate outstanding principal balance of $44,324:  (1) two of our communities were encumbered by Federal National Mortgage Association, or FNMA, mortgages and (2) two of our communities were encumbered by Federal Home Loan Mortgage Corporation, or FMCC, mortgages.  These mortgages contain FNMA and FMCC standard mortgage covenants, respectively.  We recorded a mortgage premium in connection with our assumption of the FNMA and FMCC mortgages as part of our acquisitions of the encumbered communities in order to record the assumed mortgages at their estimated fair value.  We are amortizing the mortgage premiums as a reduction of interest expense until the maturity of the respective mortgages.  The weighted average annual interest rate on these four mortgages was 6.48% as of September 30, 2015.  Payments of principal and interest are due monthly under these mortgages until maturities at varying dates ranging from June 2018 to September 2032.  We incurred mortgage interest expense, including premium amortization, of

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Table of Contents

FIVE STAR QUALITY CARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited)

$607 and $709 for the three months ended September 30, 2015 and 2014, respectively, and $1,988 and $1,957 for the nine months ended September 30, 2015 and 2014, respectively.  Our mortgage debts require monthly payments into escrows for taxes, insurance and property replacement funds; withdrawals from these escrows require applicable FNMA and FMCC approvals.

 

In June 2015, we prepaid a mortgage that had a principal balance of $4,873 and required interest at the contracted rate of 8.99% per annum.  In connection with this prepayment, we recorded a gain of $692 on early extinguishment of debt, net of unamortized premiums and a 1% prepayment penalty, for the second quarter of 2015.

 

As of September 30, 2015, we believe we were in compliance with all applicable covenants under our Credit Agreement, Credit Facility and mortgage debts.

 

See Note 3 for information regarding mortgage debt we assumed in connection with our acquisition of two independent living communities in November 2015.

 

Note 9. Off Balance Sheet Arrangements </