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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 8-K/A

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

Date of Report (Date of earliest event reported): October 11, 2006

FIVE STAR QUALITY CARE, INC.
(Exact Name of Registrant as Specified in Its Charter)

Maryland
(State or other jurisdiction of incorporation)


Commission File No. 1-16817

 

04-3516029
(IRS Employer
Identification No.)
400 Centre Street, Newton, Massachusetts
(Address of Principal Executive Offices)
  02458
(Zip Code)

Registrant's telephone number, including area code: (617) 796-8387

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

/
/    Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

/
/    Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

/
/    Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

/
/    Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))




Item 8.01.    Other Events.

        This Current Report on Form 8-K/A amends and restates, in its entirety, Item 8.01 of our Current Report on Form 8-K dated October 11, 2006, or the October 2006 8-K, which we filed with the Securities and Exchange Commission to report (i) summary historical and pro forma financial data for the six months ended June 30, 2006, (ii) selected financial data for the years ended December 31, 2003, 2004 and 2005 and for the six months ended June 30, 2005 and 2006, (iii) consolidating subsidiary financial information related to us, our guarantor subsidiaries and our non-guarantor subsidiaries for the years ended December 31, 2003, 2004 and 2005 and for the six months ended June 30, 2005 and 2006 and (iv) unaudited pro forma financial information for the six months ended June 30, 2006. We are amending the consolidating subsidiary financial information related to us, our guarantor subsidiaries and our non-guarantor subsidiaries to reflect certain reclassifications with respect to our guarantor and non-guarantor subsidiaries. All of the other financial information set forth in the October 2006 8-K, as well as Item 9.01 of the October 2006 8-K, remains the same. These reclassifications do not affect our consolidated financial statements.

WARNING CONCERNING FORWARD LOOKING STATEMENTS

        THIS CURRENT REPORT ON FORM 8-K/A CONTAINS FORWARD LOOKING STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 AND OTHER FEDERAL SECURITIES LAWS, INCLUDING WITH RESPECT TO OUR INTENDED USE OF THE PROCEEDS FROM OUR ISSUANCE OF THE 3.75% CONVERTIBLE SENIOR NOTES DUE 2026. THESE FORWARD LOOKING STATEMENTS ARE BASED UPON OUR PRESENT EXPECTATIONS, BUT THESE STATEMENTS AND THE IMPLICATIONS OF THESE STATEMENTS ARE NOT GUARANTEED.

Summary historical, pro forma and selected financial data of the Company; consolidating subsidiary financial information.

Summary historical and pro forma financial data

        The following summary financial data related to our continuing operations has been derived from our historical financial statements for the six months ended June 30, 2006, and shows, for the period or date presented, our summary historical and our pro forma income statement and balance sheet data, giving effect to (1) our April 2006 offering of 11.5 million of our common shares, or the April 2006 equity offering; (2) the reduction in our management fees payable in respect of 10 Sunrise Senior Living Services, Inc., or SLS, management agreements that we terminated in June 2006; and (3) the October 2006 private placement of $80.0 million of our 3.75% convertible senior notes due 2026, or the convertible senior notes (assuming the initial purchasers over-allotment option is not exercised and not giving effect to conversion of the notes), as if these events had been completed as of the beginning of the period presented. The following data should be read in conjunction with, and is qualified in its entirety by reference to, our historical financial statements incorporated by reference from our Annual Report on Form 10-K for the year ended December 31, 2005 and our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2006 and June 30, 2006 and "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Risk Factors" contained therein, and our unaudited pro forma financial statements contained in this Current Report on Form 8-K. Our six month historical financial information contains normal recurring adjustments and is not necessarily indicative of results to be expected in a full year. Comparability of financial results from period to period is affected by acquisitions, closures and our termination of SLS management agreements. Pro forma financial information may not be reflective of what our financial results or financial position would have been had the April 2006 equity offering, the reduction in our management fees payable in respect of 10 SLS management agreements that we terminated in June 2006 and the October 2006

2



private placement of our convertible senior notes been completed as of the dates indicated in our pro forma financial statements. Our pro forma financial information does not give pro forma effect to certain transactions, including, without limitation, the eight senior living communities we began to operate in September and October 2006 and the two rehabilitation hospitals we began to operate in October 2006. You should not place undue reliance on our pro forma financial information.

 
  For the six months ended June 30, 2006

 
 
  Historical
  Adjusted for
April 2006
equity
offering

  Adjusted for
April 2006
equity offering
and 2006 Sunrise
terminations

  Adjusted for
April 2006
equity offering,
2006 Sunrise
terminations and
convertible
senior notes
offering

 
 
  (amounts in thousands, except per share data)

 
Statement of Income Data                          

REVENUES:

 

 

 

 

 

 

 

 

 

 

 

 

 
  Net revenues from residents   $ 365,398   $ 365,398   $ 365,398   $ 365,398  
  Pharmacy revenue     24,410     24,410     24,410     24,410  
   
 
 
 
 
Total revenues     389,808     389,808     389,808     389,808  

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

 
Community level operating expenses     281,381     281,381     281,381     281,381  
Termination payment to SLS     89,833     89,833     89,833     89,833  
Pharmacy expenses     23,189     23,189     23,189     23,189  
Management fee to SLS     6,392     6,392     3,059     3,059  
Rent expense     52,563     52,563     52,563     52,563  
General and administrative     14,635     14,635     14,635     14,635  
Depreciation and amortization     4,561     4,561     4,561     4,561  
   
 
 
 
 
Total operating expenses     472,554     472,554     469,221     469,221  
Operating loss     (82,746 )   (82,746 )   (79,413 )   (79,413 )
  Interest and other income     1,140     1,140     1,140     1,140  
  Interest expense     (1,633 )   (1,633 )   (1,633 )   (3,294 )(1)
   
 
 
 
 
Loss from continuing operations before income taxes     (83,239 )   (83,239 )   (79,906 )   (81,567 )
  Provision for income taxes                  
   
 
 
 
 
Loss from continuing operations   $ (83,239 ) $ (83,239 ) $ (79,906 ) $ (81,567 )
   
 
 
 
 
Weighted Average Shares Outstanding:                          
  Basic     25,551     31,581     31,581     31,581  
  Fully Diluted     25,551     31,581     31,581     31,581  
                           

3



Basic and diluted income per share from continuing operations:

 

 

 

 

 

 

 

 

 

 

 

 

 
  Basic   $ (3.26 ) $ (2.64 ) $ (2.53 ) $ (2.58 )(2)
  Fully Diluted   $ (3.26 ) $ (2.64 ) $ (2.53 ) $ (2.58 )(2)

EBITDA

 

 

 

 

 

 

 

 

 

 

 

 

 
Loss from continuing operations   $ (83,239 ) $ (83,239 ) $ (79,906 ) $ (81,567 )
  Add: income taxes                  
  Add: depreciation and amortization     4,561     4,561     4,561     4,561  
  Add: interest expense     1,633     1,633     1,633     3,294  
  Less: interest and other income     (1,140 )   (1,140 )   (1,140 )   (1,140 )
   
 
 
 
 
EBITDA(3)   $ (78,185 ) $ (78,185 ) $ (74,852 ) $ (74,852 )
   
 
 
 
 
 
  As of June 30, 2006

 
  Actual
  Adjusted for
convertible
senior notes
offering

 
  (dollars in thousands)

Balance Sheet Data            
  Cash and cash equivalents   $ 23,576   $ 101,126
  Total current assets     111,806     189,356
  Total assets     252,334     332,334
  Total current liabilities     83,889     83,889
  Total long term liabilities     71,472     151,472
   
 
  Total shareholders' equity   $ 96,973   $ 96,973
   
 

(1)
We have used an assumed interest rate of 4.0% per annum for the convertible senior notes.

(2)
The loss per share includes a loss of $(2.84) per share relating to the termination fees we incurred for the six months ended June 30, 2006 in connection with our termination of 10 SLS management agreements.

(3)
We consider earnings before interest, taxes, depreciation and amortization, or EBITDA, to be an indicative measure of our operating performance. We believe EBITDA is also useful in measuring our ability to service debt, fund capital expenditures and expand our business. Furthermore, we believe that EBITDA is a meaningful disclosure that may help shareholders to understand better our financial performance, including comparing our performance to other companies. However, EBITDA as presented may not be comparable to amounts calculated by other companies. This information should not be considered as an alternative to net income, income from continuing operations, operating profit, cash flow from operations, or any other operating or liquidity performance measure prescribed by accounting principles generally accepted in the United States. Other income excluded from EBITDA consists primarily of amortization of deferred gains.

4


Selected financial data

        The following table presents selected financial data related to our continuing operations which has been derived from our historical financial statements for the years ended December 31, 2003, 2004 and 2005, and for the six months ended June 30, 2005 and 2006, all of which have been adjusted to remove the operations of two skilled nursing home communities in the state of Connecticut that we classified as discontinued operations in June 2006. The following information should be read in connection with, and is qualified in its entirety by reference to, our consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2005 and from our Quarterly Reports on Form 10-Q for the three months ended March 31, 2006 and the six months ended June 30, 2006. The six month information contains normal recurring adjustments and is not necessarily indicative of the results that may be expected in a full year. Additionally, comparability of financial results from period to period is affected by acquisitions, closures and our termination of SLS management agreements. Accordingly, you should not place undue reliance on our historical financial information.

 
  Year ended December 31,

  Six months ended June 30,

 
 
  2003
  2004
  2005
  2005
  2006
 
 
  (amounts in thousands, except per share data)

 
Revenues:                                
  Net revenues from residents   $ 543,610   $ 584,615   $ 700,891   $ 340,795   $ 365,398  
  Pharmacy revenue     1,770     13,209     33,476     12,356     24,410  
   
 
 
 
 
 
Total revenues     545,380     597,824     734,367     353,151     389,808  
Operating expenses:                                
  Community level operating expenses     434,530     455,755     537,062     260,061     281,381  
  Pharmacy expenses     1,666     12,093     32,167     11,451     23,189  
  Management fee to SLS     17,272     19,293     21,256     11,240     6,392  
  Termination expense for certain SLS management agreements             86,286         89,833  
  Rent expense     76,962     82,453     98,890     48,460     52,563  
  General and administrative     15,892     18,473     26,559     12,702     14,635  
  Depreciation and amortization     3,201     3,371     7,113     3,384     4,561  
  Impairment of assets             2,333          
   
 
 
 
 
 
Total operating expenses     549,523     591,438     811,666     347,298     472,554  

Operating (loss) income

 

 

(4,143

)

 

6,386

 

 

(77,299

)

 

5,853

 

 

(82,746

)
  Interest and other income     503     1,666     1,543     566     1,140  
  Interest expense     (1,439 )   (1,172 )   (3,741 )   (1,860 )   (1,633 )
   
 
 
 
 
 
(Loss) income from continuing operations before income taxes     (5,079 )   6,880     (79,497 )   4,559     (83,239 )
  Provision for income taxes         (120 )       (73 )    
   
 
 
 
 
 
(Loss) income from continuing operations   $ (5,079 ) $ 6,760   $ (79,497 ) $ 4,486   $ (83,239 )
   
 
 
 
 
 
Weighted average shares outstanding     8,482     8,716     14,879     12,219     25,551  
   
 
 
 
 
 
Basic and diluted (loss) income per share from:                                
  Continuing operations   $ (0.60 ) $ 0.78   $ (5.34 ) $ 0.37   $ (3.26 )
   
 
 
 
 
 

(Loss) income from continuing operations

 

$

(5,079

)

$

6,760

 

$

(79,497

)

$

4,486

 

$

(83,239

)
  Add: income taxes         120         73      
  Add: depreciation and amortization     3,201     3,371     7,113     3,384     4,561  
  Add: interest expense     1,439     1,172     3,741     1,860     1,633  
  Less: interest and other income     (503 )   (1,666 )   (1,543 )   (566 )   (1,140 )
   
 
 
 
 
 
EBITDA   $ (942 ) $ 9,757   $ (70,186 ) $ 9,237   $ (78,185 )
   
 
 
 
 
 

5


        Consolidating financial information related to the Company, its guarantor subsidiaries and non-guarantor subsidiaries as of June 30, 2006 and 2005 are reflected below.

Unaudited Condensed Consolidating Statement of Operations
For the six months ended June 30, 2006
(amounts in thousands)

 
  Parent
  Guarantor
Subsidiaries

  Non- Guarantor
Subsidiaries

  Eliminations
  FVE
Consolidated

 
REVENUES:                                
  Net revenues from residents   $   $ 163,152   $ 202,246   $   $ 365,398  
  Pharmacy revenue             24,410         24,410  
   
 
 
 
 
 
Total revenues         163,152     226,656         389,808  

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Wages and benefits         69,435     117,526         186,961  
  Other operating expenses         47,203     47,217         94,420  
  Termination payment to SLS         89,833             89,833  
  Pharmacy expenses             23,189         23,189  
  Management fee to SLS         6,392             6,392  
  Rent expense         32,240     20,323         52,563  
  General and administrative         4,241     10,394         14,635  
  Depreciation and amortization         1,964     2,597         4,561  
   
 
 
 
 
 
Total operating expenses         251,308     221,246         472,554  

Operating (loss) income

 

 


 

 

(88,156

)

 

5,410

 

 


 

 

(82,746

)
  Interest and other income         142     998         1,140  
  Interest expense         (3 )   (1,630 )       (1,633 )
  Equity in earnings of subsidiaries     (85,532 )           85,532      
   
 
 
 
 
 
(Loss) income from continuing operations before income taxes     (85,532 )   (88,017 )   4,778     85,532     (83,239 )
  Provision for income taxes                      
   
 
 
 
 
 
(Loss) income from continuing operations     (85,532 )   (88,017 )   4,778     85,532     (83,239 )
Loss from discontinued operations         (94 )   (2,199 )       (2,293 )
   
 
 
 
 
 
Net (loss) income   $ (85,532 ) $ (88,111 ) $ 2,579   $ 85,532   $ (85,532 )
   
 
 
 
 
 

6


Unaudited Condensed Consolidating Statement of Operations
For the six months ended June 30, 2005
(amounts in thousands)

 
  Parent
  Guarantor
Subsidiaries

  Non- Guarantor
Subsidiaries

  Eliminations
  FVE
Consolidated

 
REVENUES:                                
  Net revenues from residents   $   $ 156,454   $ 184,341   $   $ 340,795  
  Pharmacy revenue             12,356         12,356  
   
 
 
 
 
 
Total revenues         156,454     196,697         353,151  

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Wages and benefits         65,697     108,629         174,326  
  Other operating expenses         42,815     42,920         85,735  
  Pharmacy expenses             11,451         11,451  
  Management fee to SLS         11,240             11,240  
  Rent expense         32,201     16,259         48,460  
  General and administrative             12,702         12,702  
  Depreciation and amortization         1,246     2,138         3,384  
   
 
 
 
 
 
Total operating expenses         153,199     194,099         347,298  

Operating income

 

 


 

 

3,255

 

 

2,598

 

 


 

 

5,853

 
  Interest and other income         114     452         566  
  Interest expense             (1,860 )       (1,860 )
  Equity in earnings of subsidiaries     2,420             (2,420 )    
   
 
 
 
 
 
Income (loss) from continuing operations before income taxes     2,420     3,369     1,190     (2,420 )   4,559  
  Provision for income taxes             (73 )       (73 )
   
 
 
 
 
 
Income (loss) from continuing operations     2,420     3,369     1,117     (2,420 )   4,486  
Loss from discontinued operations         (71 )   (1,995 )       (2,066 )
   
 
 
 
 
 
Net income (loss)   $ 2,420   $ 3,298   $ (878 ) $ (2,420 ) $ 2,420  
   
 
 
 
 
 

7


Unaudited Condensed Consolidating Balance Sheet
As of June 30, 2006
(amounts in thousands)

 
  Parent
  Guarantor
Subsidiaries

  Non- Guarantor
Subsidiaries

  Eliminations
  FVE
Consolidated

ASSETS                              
Current Assets                              
Cash   $   $ 2,499   $ 21,077   $   $ 23,576
Accounts receivable, net         13,892     32,448         46,340
Prepaid expenses and other current assets         3,309     38,581         41,890
   
 
 
 
 
Total current assets         19,700     92,106         111,806

Property and equipment, net

 

 


 

 

19,820

 

 

82,230

 

 


 

 

102,050
Investment in subsidiary and long term recievable from (to) subsidiaries     200         200     (400 )  
Restricted cash             13,697         13,697
Intercompany     227,808             (227,808 )  
Mortgage notes receivable             3,725         3,725
Goodwill             16,901         16,901
Other long term assets         402     3,753         4,155
   
 
 
 
 
Total assets   $ 228,008   $ 39,922   $ 212,612   $ (228,208 ) $ 252,334
   
 
 
 
 

LIABILITIES AND SHAREHOLDERS' EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Current Liabilities                              
Accounts payable and other current liabilities   $   $ 27,898   $ 55,365   $   $ 83,263
Current mortgage notes payable             626         626
   
 
 
 
 
Total current liabilities         27,898     55,991         83,889

Long term liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Mortgage notes payable             44,423         44,423
Notes payable to related parties     200             (200 )  
Other long term liabilities         7,128     19,921         27,049
   
 
 
 
 
Total long term liabilities     200     7,128     64,344     (200 )   71,472
Total shareholders' equity     227,808     4,896     92,277     (228,008 )   96,973
   
 
 
 
 
Total liabilities and shareholders' equity   $ 228,008   $ 39,922   $ 212,612   $ (228,208 ) $ 252,334
   
 
 
 
 

8


Unaudited Condensed Consolidating Balance Sheet
As of June 30, 2005
(amounts in thousands)

 
  Parent
  Guarantor
Subsidiaries

  Non- Guarantor
Subsidiaries

  Eliminations
  FVE
Consolidated

ASSETS                              
Current Assets                              
Cash   $   $ 12,698   $ 6,006   $   $ 18,704
Accounts receivable, net         11,937     27,315         39,252
Prepaid expenses and other current assets         10,395     16,309         26,704
   
 
 
 
 
Total current assets         35,030     49,630         84,660

Property and equipment, net

 

 


 

 

13,858

 

 

133,303

 

 


 

 

147,161
Investment in subsidiary and long term recievable from (to) subsidiaries     200         200     (400 )  
Restricted cash             16,631         16,631
Intercompany     56,654             (56,654 )  
Mortgage notes receivable             6,036         6,036
Goodwill             16,746         16,746
Other long term assets         402     (402 )      
   
 
 
 
 
Total assets   $ 56,854   $ 49,290   $ 222,144   $ (57,054 ) $ 271,234
   
 
 
 
 

LIABILITIES AND SHAREHOLDERS' EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Current Liabilities                              
Accounts payable and other current liabilities   $   $ 32,403   $ 41,015   $   $ 73,418
Current mortgage notes payable             6,051         6,051
   
 
 
 
 
Total current liabilities         32,403     47,066         79,469

Long term liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Mortgage notes payable             69,056         69,056
Notes payable to related parties     200             (200 )  
Other long term liabilities         6,770     17,345         24,115
   
 
 
 
 
Total long term liabilities     200     6,770     86,401     (200 )   93,171
Total shareholders' equity     56,654     10,117     88,677     (56,854 )   98,594
   
 
 
 
 
Total liabilities and shareholders' equity   $ 56,854   $ 49,290   $ 222,144   $ (57,054 ) $ 271,234
   
 
 
 
 

9


Unaudited Condensed Consolidating Cash Flow Statement
For the six months ended June 30, 2006
(amounts in thousands)

 
  Parent
  Guarantor
Subsidiaries

  Non- Guarantor
Subsidiaries

  Eliminations
  FVE
Consolidated

 
Cash Flows from operating activities:                                
Net (loss) income   $ (85,532 ) $ (88,111 ) $ 2,579   $ 85,532   $ (85,532 )
Undistributed equity in earnings of subsidiaries     85,532             (85,532 )    
Adjustments to reconcile net (loss) income to cash provided by (used in) operating activities, net         84,949     (91,142 )       (6,193 )
   
 
 
 
 
 
  Net cash used in operating activities         (3,162 )   (88,563 )       (91,725 )
Cash Flows from investing activities:                                
Capital expenditures         (8,323 )   (15,263 )       (23,586 )
Proceeds from the sale of property and equipment         5,746     5,331         11,077  
Other, net         1,012     (3,710 )       (2,698 )
   
 
 
 
 
 
  Net cash used in investing activities         (1,565 )   (13,642 )       (15,207 )
Cash Flows from financing activities:                                
Proceeds from issuance of common shares, net             114,059         114,059  
Change in borrowings, net             (280 )       (280 )
Other, net                      
   
 
 
 
 
 
  Net cash provided by financing activities             113,779         113,779  
Change in cash and cash equivalents         (4,727 )   11,574         6,847  
Cash and cash equivalents at beginning of period         7,226     9,503         16,729  
   
 
 
 
 
 
Cash and cash equivalents at end of period   $   $ 2,499   $ 21,077   $   $ 23,576  
   
 
 
 
 
 

10


Unaudited Condensed Consolidating Cash Flow Statement
For the six months ended June 30, 2005
(amounts in thousands)

 
  Parent
  Guarantor
Subsidiaries

  Non- Guarantor
Subsidiaries

  Eliminations
  FVE
Consolidated

 
Cash Flows from operating activities:                                
Net income (loss)   $ 2,420   $ 3,298   $ (878 ) $ (2,420 ) $ 2,420  
Undistributed equity in earnings of subsidiaries     (2,420 )           2,420      
Adjustments to reconcile net income (loss) to cash provided by operating activities, net         3,666     12,687         16,353  
   
 
 
 
 
 
  Net cash provided by operating activities         6,964     11,809         18,773  
Cash Flows from investing activities:                                
Capital expenditures         (7,012 )   (79,802 )       (86,814 )
Proceeds from the sale of property and equipment         3,988     25,574         29,562  
Other, net         371     (6,656 )       (6,285 )
   
 
 
 
 
 
  Net cash used in investing activities         (2,653 )   (60,884 )       (63,537 )

Cash Flows from financing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Proceeds from issuance of common shares, net                      
Change in borrowings, net             32,526         32,526  
Other, net                      
   
 
 
 
 
 
  Net cash provided by financing activities             32,526         32,526  
Change in cash and cash equivalents         4,311     (16,549 )       (12,238 )
Cash and cash equivalents at beginning of period         8,387     22,555         30,942  
   
 
 
 
 
 
Cash and cash equivalents at end of period   $   $ 12,698   $ 6,006   $   $ 18,704  
   
 
 
 
 
 

11


        Consolidating financial information related to the Company, its guarantor subsidiaries and non-guarantor subsidiaries as of December 31, 2005, 2004 and 2003 are reflected below.

Unaudited Condensed Consolidating Statement of Operations
For the year ended December 31, 2005
(amounts in thousands)

 
  Parent
  Guarantor
Subsidiaries

  Non- Guarantor
Subsidiaries

  Eliminations
  FVE
Consolidated

 
REVENUES:                                
  Net revenues from residents   $   $ 314,764   $ 386,127   $   $ 700,891  
  Pharmacy revenue             33,476         33,476  
   
 
 
 
 
 
Total revenues         314,764     419,603         734,367  

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Wages and benefits         133,150     223,217         356,367  
  Other operating expenses         90,382     90,313         180,695  
  Termination payment to SLS         86,286             86,286  
  Pharmacy expenses             32,167         32,167  
  Management fee to SLS         21,256             21,256  
  Rent expense         64,556     34,334         98,890  
  General and administrative             26,559         26,559  
  Depreciation and amortization         2,552     4,561         7,113  
  Impairment of assets             2,333         2,333  
   
 
 
 
 
 
Total operating expenses         398,182     413,484         811,666  

Operating (loss) income

 

 


 

 

(83,418

)

 

6,119

 

 


 

 

(77,299

)
  Interest and other income         308     1,235         1,543  
  Interest expense             (3,741 )       (3,741 )
  Equity in earnings of subsidiaries     (84,159 )           84,159      
   
 
 
 
 
 
(Loss) income from continuing operations before income taxes     (84,159 )   (83,110 )   3,613     84,159     (79,497 )
  Provision for income taxes                      
   
 
 
 
 
 
(Loss) income from continuing operations     (84,159 )   (83,110 )   3,613     84,159     (79,497 )
Loss from discontinued operations         (272 )   (4,390 )       (4,662 )
   
 
 
 
 
 
Net (loss) income   $ (84,159 ) $ (83,382 ) $ (777 ) $ 84,159   $ (84,159 )
   
 
 
 
 
 

12


Unaudited Condensed Consolidating Statement of Operations
For the year ended December 31, 2004
(amounts in thousands)

 
  Parent
  Guarantor
Subsidiaries

  Non- Guarantor
Subsidiaries

  Eliminations
  FVE
Consolidated

 
REVENUES:                                
  Net revenues from residents   $   $ 301,550   $ 283,065   $   $ 584,615  
  Pharmacy revenue             13,209         13,209  
   
 
 
 
 
 
Total revenues         301,550     296,274         597,824  

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Wages and benefits         126,868     175,414         302,282  
  Other operating expenses         88,338     65,135         153,473  
  Pharmacy expenses             12,093         12,093  
  Management fee to SLS         19,293             19,293  
  Rent expense         64,023     18,430         82,453  
  General and administrative             18,473         18,473  
  Depreciation and amortization         1,245     2,126         3,371  
   
 
 
 
 
 
Total operating expenses         299,767     291,671         591,438  

Operating income

 

 


 

 

1,783

 

 

4,603

 

 


 

 

6,386

 
  Interest and other income         110     1,556         1,666  
  Interest expense             (1,172 )       (1,172 )
  Equity in earnings of subsidiaries     3,291             (3,291 )    
   
 
 
 
 
 
Income (loss) from continuing operations before income taxes     3,291     1,893     4,987     (3,291 )   6,880  
  Provision for income taxes             (120 )       (120 )
   
 
 
 
 
 
Income (loss) from continuing operations     3,291     1,893     4,867     (3,291 )   6,760  
Loss from discontinued operations         (692 )   (2,777 )       (3,469 )
   
 
 
 
 
 
Net income (loss)   $ 3,291   $ 1,201   $ 2,090   $ (3,291 ) $ 3,291  
   
 
 
 
 
 

13


Unaudited Condensed Consolidating Statement of Operations
For the year ended December 31, 2003
(amounts in thousands)

 
  Parent
  Guarantor
Subsidiaries

  Non- Guarantor
Subsidiaries

  Eliminations
  FVE
Consolidated

 
REVENUES:                                
  Net revenues from residents   $   $ 292,165   $ 251,445   $   $ 543,610  
  Pharmacy revenue             1,770         1,770  
   
 
 
 
 
 
Total revenues         292,165     253,215         545,380  

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Wages and benefits         126,177     165,457         291,634  
  Other operating expenses         86,464     56,432         142,896  
  Pharmacy expenses             1,666         1,666  
  Management fee to SLS         17,272             17,272  
  Rent expense         63,728     13,234         76,962  
  General and administrative             15,892         15,892  
  Depreciation and amortization         416     2,785         3,201  
   
 
 
 
 
 
Total operating expenses         294,057     255,466         549,523  

Operating loss

 

 


 

 

(1,892

)

 

(2,251

)

 


 

 

(4,143

)
  Interest and other income         75     428         503  
  Interest expense             (1,439 )       (1,439 )
  Equity in earnings of subsidiaries     (7,939 )           7,939      
   
 
 
 
 
 
(Loss) income from continuing operations before income taxes     (7,939 )   (1,817 )   (3,262 )   7,939     (5,079 )
  Provision for income taxes                      
   
 
 
 
 
 
(Loss) income from continuing operations     (7,939 )   (1,817 )   (3,262 )   7,939     (5,079 )
Loss from discontinued operations         (803 )   (2,057 )       (2,860 )
   
 
 
 
 
 
Net (loss) income   $ (7,939 ) $ (2,620 ) $ (5,319 ) $ 7,939   $ (7,939 )
   
 
 
 
 
 

14


Unaudited Condensed Consolidating Balance Sheet
As of December 31, 2005
(amounts in thousands)

 
  Parent
  Guarantor
Subsidiaries

  Non- Guarantor
Subsidiaries

  Eliminations
  FVE
Consolidated

ASSETS                              
Current assets                              
Cash   $   $ 7,226   $ 9,503   $   $ 16,729
Accounts receivable, net         15,535     30,589         46,124
Prepaid expenses and other current assets         9,485     22,542         32,027
   
 
 
 
 
Total current assets         32,246     62,634         94,880

Property and equipment, net

 

 


 

 

19,200

 

 

77,543

 

 


 

 

96,743
Investment in subsidiary and long term recievable from (to) subsidiaries     200         200     (400 )  
Restricted cash             12,957         12,957
Intercompany     113,749             (113,749 )  
Mortgage notes receivable             5,971         5,971
Goodwill             14,059         14,059
Other long term assets         402     3,928         4,330
   
 
 
 
 
Total assets   $ 113,949   $ 51,848   $ 177,292   $ (114,149 ) $ 228,940
   
 
 
 
 

LIABILITIES AND SHAREHOLDERS' EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Accounts payable and other current liabilities   $   $ 32,103   $ 57,239   $   $ 89,342
Current mortgage notes payable             626         626
   
 
 
 
 
Total current liabilities         32,103     57,865         89,968

Long term liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Mortgage notes payable             44,703         44,703
Notes payable to related parties     200             (200 )  
Other long term liabilities         7,086     18,379         25,465
   
 
 
 
 
Total long term liabilities     200     7,086     63,082     (200 )   70,168
Total shareholders' equity     113,749     12,659     56,345     (113,949 )   68,804
   
 
 
 
 
Total liabilities and shareholders' equity   $ 113,949   $ 51,848   $ 177,292   $ (114,149 ) $ 228,940
   
 
 
 
 

15


Unaudited Condensed Consolidating Balance Sheet
As of December 31, 2004
(amounts in thousands)

 
  Parent
  Guarantor
Subsidiaries

  Non- Guarantor
Subsidiaries

  Eliminations
  FVE
Consolidated

ASSETS                              
Current assets                              
Cash   $   $ 8,387   $ 22,555   $   $ 30,942
Accounts receivable, net         10,892     25,850         36,742
Prepaid expenses and other current assets         11,191     16,783         27,974
   
 
 
 
 
Total current assets         30,470     65,188         95,658

Property and equipment, net

 

 


 

 

12,085

 

 

83,104

 

 


 

 

95,189
Investment in subsidiary and long term recievable from (to) subsidiaries     200         200     (400 )  
Restricted cash             10,749         10,749
Intercompany     56,551             (56,551 )  
Mortgage notes receivable             6,099         6,099
Goodwill             11,548         11,548
Other long term assets         402     3,340         3,742
   
 
 
 
 
Total assets   $ 56,751   $ 42,957   $ 180,228   $ (56,951 ) $ 222,985
   
 
 
 
 

LIABILITIES AND SHAREHOLDERS' EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Accounts payable and other current liabilities   $   $ 28,033   $ 38,402   $   $ 66,435
Current mortgage notes payable             463         463
   
 
 
 
 
Total current liabilities         28,033     38,865         66,898

Long term liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Mortgage notes payable             42,118         42,118
Notes payable to related parties     200             (200 )  
Other long term liabilities         6,191     11,874         18,065
   
 
 
 
 
Total long term liabilities     200     6,191     53,992     (200 )   60,183
Total shareholders' equity     56,551     8,733     87,371     (56,751 )   95,904
   
 
 
 
 
Total liabilities and shareholders' equity   $ 56,751   $ 42,957   $ 180,228   $ (56,951 ) $ 222,985
   
 
 
 
 

16


Unaudited Condensed Consolidating Cash Flow Statement
For the year ended December 31, 2005
(amounts in thousands)

 
  Parent
  Guarantor
Subsidiaries

  Non- Guarantor
Subsidiaries

  Eliminations
  FVE
Consolidated

 
Cash Flows from operating activities:                                
Net (loss) income   $ (84,159 ) $ (83,382 ) $ (777 ) $ 84,159   $ (84,159 )
Undistributed equity in earnings of subsidiaries     84,159             (84,159 )    
Adjustments to reconcile net (loss) income to cash provided by (used in) operating activities, net         93,244     (65,962 )       27,282  
   
 
 
 
 
 
  Net cash provided by (used in) operating activities         9,862     (66,739 )       (56,877 )

Cash Flows from investing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Capital expenditures         (20,392 )   (89,962 )       (110,354 )
Proceeds from the sale of property and equipment         7,769     88,379         96,148  
Other, net         1,600     (4,091 )       (2,491 )
   
 
 
 
 
 
  Net cash used in investing activities         (11,023 )   (5,674 )       (16,697 )

Cash Flows from financing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Proceeds from issuance of common shares, net             56,613         56,613  
Change in borrowings, net             2,748         2,748  
Other, net                      
   
 
 
 
 
 
  Net cash provided by financing activities             59,361         59,361  
Change in cash and cash equivalents         (1,161 )   (13,052 )       (14,213 )
Cash and cash equivalents at beginning of period         8,387     22,555         30,942  
   
 
 
 
 
 
Cash and cash equivalents at end of period   $   $ 7,226   $ 9,503   $   $ 16,729  
   
 
 
 
 
 

17


Unaudited Condensed Consolidating Cash Flow Statement
For the year ended December 31, 2004
(amounts in thousands)

 
  Parent
  Guarantor
Subsidiaries

  Non- Guarantor
Subsidiaries

  Eliminations
  FVE
Consolidated

 
Cash Flows from operating activities:                                
Net income (loss)   $ 3,291   $ 1,201   $ 2,090   $ (3,291 ) $ 3,291  
Undistributed equity in earnings of subsidiaries     (3,291 )           3,291      
Adjustments to reconcile net income (loss) to cash (used in) provided by operating activities, net         (4,276 )   627         (3,649 )
   
 
 
 
 
 
  Net cash (used in) provided by operating activities         (3,075 )   2,717         (358 )

Cash Flows from investing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Capital expenditures         (12,269 )   (130,192 )       (142,461 )
Proceeds from the sale of property and equipment         5,746     126,393         132,139  
Other, net         4,679     (2,901 )       1,778  
   
 
 
 
 
 
  Net cash used in investing activities         (1,844 )   (6,700 )       (8,544 )

Cash Flows from financing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Proceeds from issuance of common shares, net             27,685         27,685  
Change in borrowings, net             (5,452 )       (5,452 )
Other, net                      
   
 
 
 
 
 
  Net cash provided by financing activities             22,233         22,233  
Change in cash and cash equivalents         (4,919 )   18,250         13,331  
Cash and cash equivalents at beginning of period         13,306     4,305         17,611  
   
 
 
 
 
 
Cash and cash equivalents at end of period   $   $ 8,387   $ 22,555   $   $ 30,942  
   
 
 
 
 
 

18


Unaudited Condensed Consolidating Cash Flow Statement
For the year ended December 31, 2003
(amounts in thousands)

 
  Parent
  Guarantor
Subsidiaries

  Non- Guarantor
Subsidiaries

  Eliminations
  FVE
Consolidated

 
Cash Flows from operating activities:                                
Net (loss) income   $ (7,939 ) $ (2,620 ) $ (5,319 ) $ 7,939   $ (7,939 )
Undistributed equity in earnings of subsidiaries     7,939             (7,939 )    
Adjustments to reconcile net (loss) income to cash provided by (used in) operating activities, net         23,843     3,008         26,851  
   
 
 
 
 
 
  Net cash provided by (used in) operating activities         21,223     (2,311 )       18,912  

Cash Flows from investing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Capital expenditures         (7,753 )   (11,134 )       (18,887 )
Proceeds from the sale of property and equipment         2,750     24,335         27,085  
Other, net         (5,568 )   (8,514 )       (14,082 )
   
 
 
 
 
 
  Net cash (used in) provided by investing activities         (10,571 )   4,687         (5,884 )

Cash Flows from financing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Proceeds from issuance of common shares, net                      
Change in borrowings, net             (5,687 )       (5,687 )
Other, net                      
   
 
 
 
 
 
  Net cash used in financing activities             (5,687 )       (5,687 )
Change in cash and cash equivalents         10,652     (3,311 )       7,341  
Cash and cash equivalents at beginning of period         2,654     7,616         10,270  
   
 
 
 
 
 
Cash and cash equivalents at end of period   $   $ 13,306   $ 4,305   $   $ 17,611  
   
 
 
 
 
 

19



Five Star Quality Care, Inc.

UNAUDITED PRO FORMA FINANCIAL INFORMATION
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
As of June 30, 2006
(dollars in thousands)

 
  Historical
  Adjustments for
convertible
senior notes
offering

  Adjusted for
convertible
senior notes
offering

ASSETS                  

Current assets

 

 

 

 

 

 

 

 

 
Cash and cash equivalents   $ 23,576   $ 77,550 (A) $ 101,126
Accounts receivable, net     46,340         46,340
Prepaid expenses and other current assets     41,890         41,890
   
 
 
Total current assets     111,806     77,550     189,356

Property and equipment, net

 

 

102,050

 

 


 

 

102,050
Restricted cash     13,697         13,697
Mortgage notes receivable     3,725         3,725
Goodwill     16,901         16,901
Other long term assets     4,155     2,450 (B)   6,605
   
 
 
Total assets   $ 252,334   $ 80,000   $ 332,334
   
 
 

LIABILITIES AND SHAREHOLDERS' EQUITY

 

 

 

 

 

 

 

 

 

Total current liabilities

 

$

83,889

 

$


 

$

83,889
Mortgage notes payable     44,423         44,423
        % Convertible Senior Notes due 2026         80,000 (C)   80,000
Other long term liabilities     27,049         27,049
   
 
 
Total liabilities     155,361     80,000     235,361

Total shareholders' equity

 

 

96,973

 

 


 

 

96,973
   
 
 
Total liabilities and shareholders' equity   $ 252,334   $ 80,000   $ 332,334
   
 
 

20



Five Star Quality Care, Inc.

UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENT
For the six months ended June 30, 2006
(dollars in thousands)

 
  Historical
  Adjustments
for April 2006
equity
offering

  Adjusted for
April 2006
equity
offering

  Adjustments
for 2006
Sunrise
termination

  Adjusted for
April 2006
equity offering
and 2006 Sunrise
termination

  Adjustments
for
convertible
senior note
offering

  Adjusted for April
2006 equity offering,
2006 Sunrise
termination and
convertible senior
note offering

 
REVENUES:                                            
  Net revenues from residents   $ 365,398   $   $ 365,398   $   $ 365,398   $   $ 365,398  
  Pharmacy revenue     24,410         24,410         24,410         24,410  
   
 
 
 
 
 
 
 
Total revenues     389,808         389,808         389,808         389,808  

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Property level operating expenses     281,381         281,381         281,381         281,381  
  Termination payment to SLS     89,833         89,833         89,833         89,833  
  Pharmacy expenses     23,189         23,189         23,189         23,189  
  Management fee to SLS     6,392         6,392     (3,333 )(E)   3,059         3,059  
  Rent expense     52,563         52,563         52,563         52,563  
  General and administrative     14,635         14,635         14,635         14,635  
  Depreciation and amortization     4,561         4,561         4,561         4,561  
   
 
 
 
 
 
 
 
Total operating expenses     472,554         472,554     (3,333 )   469,221         469,221  

Operating (loss) income

 

 

(82,746

)

 


 

 

(82,746

)

 

3,333

 

 

(79,413

)

 


 

 

(79,413

)
  Interest and other income     1,140         1,140         1,140         1,140  
  Interest expense     (1,633 )       (1,633 )       (1,633 )   (1,661 )(F)   (3,294 )
   
       
       
 
 
 
(Loss) income from continuing operations before income taxes     (83,239 )       (83,239 )   3,333     (79,906 )   (1,661 )   (81,567 )
   
       
 
 
 
 
 
  Provision for income taxes                              

(Loss) income from continuing operations

 

$

(83,239

)

$


 

$

(83,239

)

$

3,333

 

$

(79,906

)

$

(1,661

)

$

(81,567

)
   
 
 
 
 
 
 
 
Weighted Average Shares Outstanding:                                            
  Basic     25,551     6,030 (D)   31,581         31,581         31,581  
  Fully Diluted     25,551     6,030     31,581         31,581         31,581  

Basic and diluted loss per share from:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Basic   $ (3.26 )       $ (2.64 )       $ (2.53 )       $ (2.58 )
   
       
       
       
 
  Fully Diluted   $ (3.26 )       $ (2.64 )       $ (2.53 )       $ (2.58 )
   
       
       
       
 

21



Five Star Quality Care, Inc.

NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS

(amounts in thousands, except share and per share amounts)

INTRODUCTION TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS

        The unaudited pro forma consolidated balance sheet as of June 30, 2006, presents the consolidated financial position of Five Star as if our October 2006 private placement of our convertible senior notes had been completed as of June 30, 2006, as described in the notes thereto. The unaudited pro forma consolidated statement of operations for the six months ended June 30, 2006, presents the consolidated results of operations of Five Star as if (1) our April 2006 equity offering; (2) the reduction in our management fees payable in respect of 10 SLS management agreements that we terminated in June 2006; and (3) our October 2006 private placement of our convertible senior notes (assuming the initial purchasers' over-allotment option is not exercised and not giving effect to the conversion of the notes), had been completed as of January 1, 2006, as described in the notes thereto.

        These unaudited pro forma consolidated financial statements do not represent our consolidated financial condition or results of operations for any future date or period. Actual future results may be materially different from pro forma results. Differences could arise from many factors, including, but not limited to, those set forth under "Warning concerning forward looking statements." These unaudited pro forma consolidated financial statements should be read in conjunction with our historical financial statements incorporated by reference from our Annual Report on Form 10-K for the year ended December 31, 2005 and our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2006 and June 30, 2006 and "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Risk Factors" contained therein. These unaudited pro forma consolidated financial statements do not give pro forma effect to certain transactions, including, without limitation, the eight senior living communities we began to operate in September and October 2006 and the two rehabilitation hospitals we began to operate in October 2006.

Pro forma consolidated balance sheet as of June 30, 2006 adjustments

A.
Represents the proceeds we received from our October 2006 private placement of our convertible senior notes as follows:

Convertible senior notes issued   $ 80,000
Initial purchasers discount and commissions and other offering costs, estimated     2,450
   
Net proceeds   $ 77,550
   
B.
Represents deferred finance costs we expect to incur as a result of our October 2006 private placement of our convertible senior notes. Amounts represent estimated initial purchasers discount and commissions and other offering costs which will be amortized over the expected term of the convertible senior notes.

C.
Represents the principal amount of the convertible senior notes.

Pro forma consolidated statement of operations for the six months ended June 30, 2006 adjustments

D.
Represents our issuance of common shares in our April 2006 equity offering. The adjustment has been weighted to reflect shares actually outstanding as of June 30, 2006.

22


E.
Represents the elimination of the contractual management fee with SLS. In connection with the termination of 10 management agreements with SLS, we will no longer be required to make these payments.

F.
Represents the interest expense we will incur on the convertible senior notes, as well as amortization of deferred finance fees. The adjustment is calculated as follows:

Interest expense for six months on the $80,000 of convertible senior notes at an assumed rate of 4.0% per annum     (1,600 )
Amortization of deferred finance fees (see Note B) for six months. Deferred finance costs amortized over expected term of the convertible senior notes, or 20 years     (61 )
   
 
Total adjustment   $ (1,661 )
   
 

23



SIGNATURES

        Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.


 

 

 

 
    FIVE STAR QUALITY CARE, INC.

 

 

BY:

/S/  BRUCE J. MACKEY JR.
      
Name: Bruce J. Mackey Jr.
Title: Treasurer and Chief Financial Officer
Date: November 22, 2006      

24




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Five Star Quality Care, Inc. UNAUDITED PRO FORMA FINANCIAL INFORMATION UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET As of June 30, 2006 (dollars in thousands)
Five Star Quality Care, Inc. UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENT For the six months ended June 30, 2006 (dollars in thousands)
SIGNATURES