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Exhibits and Financial Statement Schedules
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2011
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
(State of Incorporation)
04-3516029
(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
Securities registered pursuant to Section 12(b) of the Act:
Title Of Each Class
Name Of Each Exchange On Which Registered
Common Stock
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No No
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. 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 Act). Yes No The aggregate market value of the voting shares of common stock, $.01 par value, or common shares, of the registrant held by nonaffiliates was $244.9 million based on the $5.81 closing price per common share on the New York Stock Exchange on June 30, 2011. For
purposes of this calculation, an aggregate of 5,413,227.7 common shares, including 4,235,000 common shares held by Senior Housing
Properties Trust, or SNH, are held by the directors and officers of the registrant and SNH and have been included in the number of common
shares held by affiliates.
Number of the registrant's common shares outstanding as of February 16, 2012: 47,899,312.
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In this Annual Report on Form 10-K, the terms the "Company", "Five Star", "we", "us" or "our", refer to Five Star Quality Care, Inc., and
its consolidated subsidiaries, unless otherwise noted.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information required in Items 10, 11, 12, 13 and 14 of Part III of this Annual Report on Form 10-K is incorporated by reference to
our to be filed definitive Proxy Statement for the Annual Meeting of Stockholders scheduled to be held on May 15, 2012, or our definitive
Proxy Statement.
WARNING CONCERNING FORWARD LOOKING STATEMENTS
THIS ANNUAL REPORT ON FORM 10-K CONTAINS STATEMENTS WHICH CONSTITUTE FORWARD LOOKING
STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 AND OTHER
SECURITIES LAWS. ALSO, WHENEVER WE USE WORDS SUCH AS "BELIEVE", "EXPECT", "ANTICIPATE", "INTEND", "PLAN",
"ESTIMATE" OR SIMILAR EXPRESSIONS, WE ARE MAKING FORWARD LOOKING STATEMENTS. THESE FORWARD
LOOKING STATEMENTS ARE BASED UPON OUR PRESENT INTENT, BELIEFS OR EXPECTATIONS, BUT FORWARD LOOKING
STATEMENTS ARE NOT GUARANTEED TO OCCUR AND MAY NOT OCCUR. FORWARD LOOKING STATEMENTS IN THIS
REPORT RELATE TO VARIOUS ASPECTS OF OUR BUSINESS, INCLUDING:
•
OUR ABILITY TO OPERATE OUR SENIOR LIVING COMMUNITIES, REHABILITATION HOSPITALS AND
INSTITUTIONAL PHARMACIES PROFITABLY,
•
OUR ABILITY TO MEET OUR DEBT OBLIGATIONS,
•
OUR ABILITY TO COMPLY AND TO REMAIN IN COMPLIANCE WITH APPLICABLE MEDICARE, MEDICAID AND
OTHER RATE SETTING AND REGULATORY REQUIREMENTS,
•
OUR ABILITY TO MANAGE THOSE SENIOR LIVING COMMUNITIES THAT WE MANAGE ON BEHALF OF THIRD
PARTIES,
•
OUR EXPECTATION THAT WE WILL BENEFIT FINANCIALLY BY PARTICIPATING IN AFFILIATES INSURANCE
COMPANY, OR AIC, WITH REIT MANAGEMENT & RESEARCH LLC, OR RMR, AND COMPANIES TO WHICH RMR
PROVIDES MANAGEMENT SERVICES, AND
•
OTHER MATTERS.
OUR ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE CONTAINED IN OR IMPLIED BY OUR FORWARD
LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS. FACTORS THAT COULD HAVE A MATERIAL ADVERSE
EFFECT ON OUR FORWARD LOOKING STATEMENTS AND UPON OUR BUSINESS, RESULTS OF OPERATIONS, FINANCIAL
CONDITION, CASH FLOWS, LIQUIDITY AND PROSPECTS INCLUDE, BUT ARE NOT LIMITED TO:
•
CHANGES IN MEDICARE AND MEDICAID POLICIES WHICH COULD RESULT IN REDUCED RATES OF PAYMENT
OR A FAILURE OF THESE RATES TO COVER OUR COSTS,
•
THE IMPACT OF CHANGES IN THE ECONOMY AND THE CAPITAL MARKETS ON US AND OUR RESIDENTS AND
OTHER CUSTOMERS,
•
COMPETITION WITHIN THE SENIOR LIVING INDUSTRY AND OUR OTHER BUSINESSES,
•
INCREASES IN INSURANCE AND TORT LIABILITY COSTS,
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•
MAINTAINING OUR COMMERCIAL ARRANGEMENTS AND RELATIONSHIPS, INCLUDING WITH SENIOR
HOUSING PROPERTIES TRUST, OR SNH, AND RMR,
•
ACTUAL AND POTENTIAL CONFLICTS OF INTEREST WITH OUR MANAGING DIRECTORS, SNH, RMR AND
THEIR RELATED PERSONS AND ENTITIES, AND
•
COMPLIANCE WITH, AND CHANGES TO FEDERAL, STATE AND LOCAL LAWS AND REGULATIONS THAT
COULD AFFECT OUR SERVICES OR IMPOSE REQUIREMENTS THAT COULD IMPOSE FURTHER COSTS AND
ADMINISTRATIVE BURDENS THAT REDUCE OUR ABILITY TO PROFITABLY OPERATE OUR BUSINESS.
FOR EXAMPLE:
•
THE VARIOUS GOVERNMENTS WHICH PAY US FOR THE GOODS AND SERVICES WE PROVIDE TO OUR
RESIDENTS AND PATIENTS WHO ARE ELIGIBLE FOR MEDICARE AND MEDICAID ARE CURRENTLY
EXPERIENCING SEVERE BUDGET SHORTFALLS AND MAY LOWER THE MEDICARE AND MEDICAID RATES
THEY PAY US. BECAUSE WE OFTEN CANNOT ETHICALLY LOWER THE QUALITY OF THE SERVICES WE
PROVIDE TO MATCH THE AVAILABLE MEDICARE AND MEDICAID RATES, WE MAY EXPERIENCE LOSSES
AND SUCH LOSSES MAY BE MATERIAL,
•
THIS ANNUAL REPORT ON FORM 10-K STATES THAT CERTAIN OF OUR RECENT ACQUISITIONS WERE
FUNDED, IN PART, BY THE BRIDGE LOAN FROM SNH WHICH MATURES ON JULY 1, 2012. THE BRIDGE LOAN
AGREEMENT PROVIDES THAT IF THE BRIDGE LOAN IS NOT REPAID ON OR BEFORE ITS MATURITY DATE,
SNH MAY SATISFY THE BRIDGE LOAN BY ACQUIRING CERTAIN OF OUR COMMUNITIES THAT SECURE
REPAYMENT OF THE BRIDGE LOAN AND LEASING THEM TO US. WE EXPECT TO BE ABLE TO REPAY THE
BRIDGE LOAN BEFORE ITS MATURITY; HOWEVER, OUR ABILITY TO DO SO IS LARGELY DEPENDENT UPON
MARKET CONDITIONS WHICH ARE BEYOND OUR CONTROL. ACCORDINGLY, WE CAN PROVIDE NO
ASSURANCE THAT WE WILL BE ABLE TO REPAY OR REFINANCE THE BRIDGE LOAN OR REGARDING THE
TERMS OF ANY SUCH REFINANCING,
•
THIS ANNUAL REPORT ON FORM 10-K STATES THAT WE ARE CURRENTLY MANAGING OR HAVE AGREED TO
MANAGE TWO COMMUNITIES FOR THE ACCOUNT OF THE CURRENT OWNER PENDING SNH'S ACQUISITION
OF THOSE COMMUNITIES AND THAT WE EXPECT THAT WE MAY ENTER INTO ADDITIONAL MANAGEMENT
ARRANGEMENTS WITH SNH SIMILAR TO THOSE CURRENTLY IN EFFECT FOR US TO MANAGE ON BEHALF OF
SNH ADDITIONAL SENIOR LIVING COMMUNITIES SNH MAY ACQUIRE IN THE FUTURE. HOWEVER, THERE
CAN BE NO ASSURANCE THAT SNH WILL ACQUIRE THOSE OR OTHER COMMUNITIES THAT WE WOULD
MANAGE ON SNH'S ACCOUNT OR THAT WE AND SNH WOULD ENTER INTO ANY SUCH ADDITIONAL
MANAGEMENT ARRANGEMENTS,
•
OUR ABILITY TO OPERATE AND MANAGE NEW SENIOR LIVING COMMUNITIES PROFITABLY DEPENDS UPON
MANY FACTORS, INCLUDING OUR ABILITY TO INTEGRATE NEW COMMUNITIES INTO OUR EXISTING
OPERATIONS AND SOME FACTORS WHICH ARE BEYOND OUR CONTROL SUCH AS THE DEMAND FOR OUR
SERVICES ARISING FROM ECONOMIC CONDITIONS GENERALLY. WE MAY NOT BE ABLE TO SUCCESSFULLY
INTEGRATE NEW COMMUNITIES OR OPERATE AND MANAGE NEW COMMUNITIES PROFITABLY,
•
THIS ANNUAL REPORT ON FORM 10-K STATES THAT WE HAD $28.4 MILLION OF CASH AND CASH
EQUIVALENTS AT DECEMBER 31, 2011, THAT THERE WERE NO AMOUNTS OUTSTANDING UNDER OUR
REVOLVING CREDIT FACILITY AND THAT WE HAVE IN THE PAST SOLD IMPROVEMENTS TO SNH AND
INTEND TO SELL ADDITIONAL IMPROVEMENTS TO SNH FOR INCREASED RENT PURSUANT TO
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OUR LEASES WITH SNH; ALL OF WHICH MAY IMPLY THAT WE HAVE ABUNDANT CASH LIQUIDITY.
HOWEVER, OUR OPERATIONS AND BUSINESS REQUIRE SIGNIFICANT AMOUNTS OF WORKING CASH AND
REQUIRE US TO MAKE SIGNIFICANT CAPITAL EXPENDITURES TO MAINTAIN OUR COMPETITIVENESS.
ACCORDINGLY, WE MAY NOT HAVE SUFFICIENT CASH LIQUIDITY,
•
THIS ANNUAL REPORT ON FORM 10-K STATES THAT SPECIAL COMMITTEES OF EACH OF OUR BOARD OF
DIRECTORS AND SNH'S BOARD OF TRUSTEES COMPOSED SOLELY OF OUR INDEPENDENT DIRECTORS AND
SNH'S INDEPENDENT TRUSTEES WHO ARE NOT ALSO DIRECTORS OR TRUSTEES OF THE OTHER PARTY AND
WHO WERE REPRESENTED BY SEPARATE COUNSEL APPROVED THE MANAGEMENT CONTRACTS BETWEEN
US AND SNH. AN IMPLICATION OF THIS STATEMENT MAY BE THAT THESE TERMS ARE AS FAVORABLE TO
US AS TERMS WE COULD OBTAIN FOR SIMILAR ARRANGEMENTS FROM UNRELATED THIRD PARTIES.
HOWEVER, DESPITE THESE PROCEDURAL SAFEGUARDS, WE COULD STILL BE SUBJECTED TO CLAIMS
CHALLENGING THESE TRANSACTIONS OR OUR ENTRY INTO THESE TRANSACTIONS BECAUSE OF THE
MULTIPLE RELATIONSHIPS AMONG US, SNH AND RMR AND THEIR RELATED PERSONS AND ENTITIES, AND
DEFENDING EVEN MERITLESS CLAIMS COULD BE EXPENSIVE AND DISTRACTING TO MANAGEMENT,
•
OUR RESIDENTS AND PATIENTS WHO PAY FOR OUR SERVICES WITH THEIR PRIVATE RESOURCES MAY
BECOME UNABLE TO AFFORD OUR SERVICES WHICH COULD RESULT IN DECREASED OCCUPANCY AND
REVENUES AT OUR SENIOR LIVING COMMUNITIES AND REHABILITATION HOSPITALS AND INCREASED
RELIANCE ON GOVERNMENT AND OTHER PAYORS,
•
WE INTEND TO OPERATE OUR REHABILITATION HOSPITALS AND PHARMACIES PROFITABLY. HOWEVER, WE
HAVE HISTORICALLY EXPERIENCED LOSSES FROM THESE OPERATIONS AND WE MAY BE UNABLE TO
OPERATE THESE BUSINESSES PROFITABLY,
•
WE MAY BE UNABLE TO REPAY OUR DEBT OBLIGATIONS WHEN THEY BECOME DUE,
•
CONTINUED AVAILABILITY OF BORROWINGS UNDER OUR REVOLVING CREDIT FACILITY IS SUBJECT TO
OUR SATISFYING CERTAIN FINANCIAL COVENANTS AND MEETING OTHER CUSTOMARY CONDITIONS,
•
THIS ANNUAL REPORT ON FORM 10-K STATES THAT WE ARE CURRENTLY NEGOTIATING A NEW
$150.0 MILLION SENIOR SECURED REVOLVING CREDIT FACILITY WITH A GROUP OF POTENTIAL LENDERS,
WHICH WE EXPECT WOULD BE SECURED BY SENIOR LIVING COMMUNITIES WE OWN. THESE
NEGOTIATIONS ARE IN THE EARLY STAGES AND THERE CAN BE NO ASSURANCE WE WILL ENTER INTO THIS
FACILITY OR WHAT THE ULTIMATE TERMS OF ANY SUCH FACILITY MAY PROVIDE, INCLUDING THE
AMOUNT OF BORROWINGS THAT MAY BE AVAILABLE TO US UNDER THE FACILITY,
•
THIS ANNUAL REPORT ON FORM 10-K STATES THAT WE CONTINUE TO MARKET FOR SALE TWO SNFs THAT
WE OWN LOCATED IN MICHIGAN AND THAT WE AND SNH ARE IN THE PROCESS OF SELLING AN ASSISTED
LIVING COMMUNITY IN PENNSYLVANIA THAT WE LEASE FROM SNH. WE AND SNH MAY NOT BE ABLE TO
SELL THESE PROPERTIES ON TERMS ACCEPTABLE TO US OR OTHERWISE, AND
•
THIS ANNUAL REPORT ON FORM 10-K STATES THAT WE BELIEVE THAT OUR RELATIONSHIPS WITH SNH,
RMR, COMMONWEALTH REIT, OR CWH, AND AIC AND THEIR AFFILIATED AND RELATED PERSONS AND
ENTITIES MAY BENEFIT US AND PROVIDE US WITH ADVANTAGES IN OPERATING AND GROWING OUR
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BUSINESS. IN FACT, THE ADVANTAGES WE BELIEVE WE MAY REALIZE FROM THESE RELATIONSHIPS MAY
NOT MATERIALIZE.
THESE RESULTS COULD OCCUR DUE TO MANY DIFFERENT CIRCUMSTANCES, SOME OF WHICH ARE BEYOND OUR
CONTROL, SUCH AS NEW LEGISLATION AFFECTING OUR BUSINESS, CHANGES IN OUR REVENUES OR COSTS, OR
CHANGES IN CAPITAL MARKETS OR THE ECONOMY GENERALLY.
THE INFORMATION CONTAINED ELSEWHERE IN THIS ANNUAL REPORT ON FORM 10-K, INCLUDING UNDER THE
CAPTION "RISK FACTORS", OR INCORPORATED HEREIN IDENTIFIES OTHER IMPORTANT FACTORS THAT COULD CAUSE
DIFFERENCES FROM OUR FORWARD LOOKING STATEMENTS. OUR FILINGS WITH THE SECURITIES AND EXCHANGE
COMMISSION ARE AVAILABLE ON ITS WEBSITE AT WWW.SEC.GOV.
YOU SHOULD NOT PLACE UNDUE RELIANCE UPON OUR FORWARD LOOKING STATEMENTS.
EXCEPT AS REQUIRED BY LAW, WE DO NOT INTEND TO UPDATE OR CHANGE ANY FORWARD LOOKING
STATEMENTS AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE.
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FIVE STAR QUALITY CARE, INC.
2011 ANNUAL REPORT ON FORM 10-K
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Page
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
1
15
28
28
34
34
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Market for Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities
Selected Financial Data
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
Controls and Procedures
Other Information
35
35
36
61
62
62
62
62
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Directors and Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Certain Relationships and Related Transactions and Director Independence
Principal Accountant Fees and Services
63
63
63
63
64
PART IV
Item 15.
Exhibits and Financial Statement Schedules
Signatures
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PART I
Item 1.
Business
GENERAL
We operate and manage senior living communities, including independent living communities, assisted living communities and skilled
nursing facilities, or SNFs. As of December 31, 2011, we operated 245 senior living communities located in 30 states containing 27,159 living
units, including 207 primarily independent and assisted living communities with 23,736 living units and 38 SNFs with 3,423 living units. We
own and operate 31 communities (2,954 living units), we lease and operate 191 communities (20,811 living units) and we manage 23
communities (3,394 living units). Our 245 senior living communities included 8,699 independent living apartments, 13,069 assisted living
suites and 5,391 skilled nursing units. Two SNFs owned and operated by us containing 271 living units and one assisted living community
leased from SNH and operated by us containing 103 living units that we have classified as discontinued operations are excluded from all the
preceding data in this paragraph.
We also lease and operate two rehabilitation hospitals with 321 beds that provide inpatient rehabilitation services to patients at the two
hospitals and at three satellite locations. In addition, we lease and operate 13 outpatient clinics affiliated with these rehabilitation hospitals. We
also own and operate five institutional pharmacies.
We were created by SNH in April 2000 to operate 54 SNFs and two assisted living communities repossessed from former SNH tenants.
As of December 31, 2011, we leased from SNH 188 senior living communities (including one assisted living community we have classified as
discontinued operations) and two rehabilitation hospitals pursuant to four long term leases. For more information about our leases with SNH
see "Properties—Our SNH Leases" of this Annual Report on Form 10-K. We were incorporated in Delaware in April 2000 and reincorporated
in Maryland on September 17, 2001. On December 31, 2001, SNH distributed substantially all of our then outstanding shares of common
stock, $.01 par value, or our common shares, to its shareholders and we became a separate, publicly owned company listed on the American
Stock Exchange (now the NYSE Amex). In February 2011, we transferred the listing of our common shares to the New York Stock Exchange,
or the NYSE.
Our principal executive offices are located at 400 Centre Street, Newton, Massachusetts 02458, and our telephone number is (617) 7968387.
TYPES OF PROPERTIES
Our present business plan contemplates the ownership, leasing and management of independent living communities, assisted living
communities, SNFs, rehabilitation hospitals and institutional pharmacies. Some of our properties combine more than one type of service in a
single building or campus.
Independent Living Communities. Independent living communities provide high levels of privacy to residents and require residents to
be capable of relatively high degrees of independence. An independent living apartment usually bundles several services as part of a regular
monthly charge. For example, the base charge may include one or two meals per day in a central dining room, weekly maid service or services
of a social director. Additional services are generally available from staff employees on a fee for service basis. In some independent living
communities, separate parts of the community are dedicated to assisted living or nursing services. As of December 31, 2011, our business
included 8,699 independent living apartments in 75 communities that we operate or manage.
Assisted Living Communities. Assisted living communities are typically comprised of one bedroom units which include private
bathrooms and efficiency kitchens. Services bundled within one charge usually include three meals per day in a central dining room, daily
housekeeping, laundry, medical
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reminders and 24 hour availability of assistance with the activities of daily living such as dressing and bathing. Professional nursing and
healthcare services are usually available at the community as requested or at regularly scheduled times. As of December 31, 2011, our business
included 13,069 assisted living suites in 185 communities that we operate or manage.
Skilled Nursing Facilities. SNFs generally provide extensive nursing and healthcare services similar to those available in hospitals,
without the high costs associated with operating theaters, emergency rooms or intensive care units. A typical purpose built SNF generally
includes one or two beds per room with a separate bathroom in each room and shared dining facilities. SNFs are staffed by licensed nursing
professionals 24 hours per day. As of December 31, 2011, our business included 5,391 skilled nursing units in 69 communities that we operate
or manage.
Rehabilitation Hospitals. Rehabilitation hospitals, also known as inpatient rehabilitation facilities, or IRFs, provide intensive physical
therapy, occupational therapy and speech language pathology services beyond the capabilities customarily available in SNFs. Patients in IRFs
generally receive a minimum of three hours of daily rehabilitation services. IRFs also provide onsite pharmacy, radiology, laboratory,
telemetry, hemodialysis and orthotics/prosthetics services. Outpatient satellite clinics are often included as part of the services offered by IRFs.
As of December 31, 2011, our two rehabilitation hospitals had 321 beds available for inpatient services and provided rehabilitation services at
the two hospitals and three satellite locations. In addition, we operate 13 outpatient clinics affiliated with our rehabilitation hospitals where
patients discharged from hospitals can continue their therapy programs and receive amputee, brain injury, neurorehabilitation, cardiopulmonary, orthopedic, spinal cord injury and stroke rehabilitation services.
Institutional Pharmacies. Institutional pharmacies provide large quantities of drugs at locations where patients with recurring pharmacy
requirements are concentrated. Our five institutional pharmacies are located in six leased commercial spaces, one space included at a senior
living community we lease from SNH and one owned commercial building containing a total of approximately 67,759 square feet plus parking
areas for our employees and delivery vehicles.
OUR RECENT HISTORY
Senior living
We have grown our business through acquisitions, through initiation of long term leases of independent and assisted living communities
where residents' private resources account for a large majority of revenues and through entering into long term contracts to manage
independent and assisted living communities.
In 2011:
•
We acquired from unrelated parties seven assisted living communities containing 854 living units with one located in Arizona
and the other six located in Indiana, or the Indiana Communities, for a combined purchase price of $148.4 million, excluding
closing costs.
•
We commenced leasing from SNH six senior living communities containing 724 living units with one located in each of Illinois
and Florida and two located in each of North Carolina and Virginia. Our rent payable to SNH for these communities is
$7.5 million per year. We also acquired from an unrelated party 14 acres of vacant land adjacent to the community located in
Illinois for possible expansion for $1.3 million, excluding closing costs.
•
We began managing 22 communities containing 3,327 living units for the account of SNH pursuant to long term contracts with
SNH and one community with 67 living units for the account of the existing owner pending sale of the community to SNH.
These communities are located in nine states in the eastern and southern United States.
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Discontinued Operations
Under our leases with SNH, we may request SNH to sell certain noneconomic properties that we lease pursuant to those leases, which if
sold, would reduce our rent payable to SNH, as determined pursuant to the lease. For more information see "Properties—Our SNH Leases" of
this Annual Report on Form 10-K. During 2010, at our request, SNH agreed to sell seven SNFs and one assisted living community that we
leased from SNH. In August 2010, SNH sold four of those seven SNFs, all four of which were located in Nebraska, to an unrelated third party
for net proceeds of approximately $1.5 million, and our annual rent payable to SNH decreased by approximately $145,000 per year. In May
2011, SNH sold an assisted living community located in Pennsylvania for net proceeds of approximately $796,000, and our annual rent to SNH
decreased by approximately $72,000 per year. Also, in May 2011 SNH sold two SNFs located in Georgia for net proceeds of approximately
$12.8 million, and our annual rent to SNH decreased by approximately $1.3 million per year. In June 2011, SNH sold the remaining of these
seven SNFs, which was located in Georgia, for net proceeds of approximately $5.2 million and our annual rent payable to SNH decreased by
approximately $521,000 per year.
Also in 2011:
We decided to sell two SNFs we own that are located in Michigan with an aggregate of 271 living units. In September 2011, we recorded
a $3.9 million asset impairment charge to reduce the carrying value of these two SNFs to their estimated fair value based upon expected sales
prices less costs to sell. While we continue to market these SNFs, we can provide no assurance that a sale will be completed.
In August 2011, we agreed with SNH that SNH should sell one assisted living community located in Pennsylvania with 103 living units,
that we lease from SNH. We and SNH are in the process of selling this assisted living community and if sold, our annual minimum rent
payable to SNH will decrease by 9.0% of the net proceeds of the sale to SNH, in accordance with the terms of our lease with SNH. While we
market this property all operations have been ceased and the community has been shut down.
Debt Financings and Equity Offering
In 2006, we issued $126.5 million principal amount of Convertible Senior Notes due 2026, or the Notes. The Notes bear interest at 3.75%
per annum, payable semi-annually, and will mature on October 15, 2026. We may prepay the Notes at anytime and the Note holders may
require that we purchase all or a portion of these Notes on each of October 15, 2013, 2016 and 2021. In 2011, we purchased and retired
$623,000 par value of the outstanding Notes and recorded a gain of $1,000, net of related unamortized costs, on early extinguishment of debt.
We funded these purchases principally with available cash. As a result of these purchases and other purchases we made in prior years,
$37.3 million in principal amount of the Notes remain outstanding.
In May 2011, we entered into a bridge loan agreement with SNH, or the Bridge Loan, under which SNH agreed to lend us up to
$80.0 million to fund a part of the purchase price for our acquisitions of the majority of the assets of the Indiana Communities. During 2011,
we completed our acquisitions of the majority of the assets of the Indiana Communities and, in connection with the acquisitions, borrowed
$80.0 million under the Bridge Loan. We subsequently repaid $42.0 million of this advance with proceeds from a public offering of our
common shares, or the Public Offering, and cash generated by operations. As of December 31, 2011, $38.0 million remained outstanding under
the Bridge Loan. No additional amounts are available for borrowing by us under the Bridge Loan. The Bridge Loan is secured by mortgages on
seven of our senior living communities. The Bridge Loan matures on July 1, 2012 and bears interest at a rate equal to the annual rates of
interest applicable to SNH's borrowings under its revolving credit facility, plus 1%, which resulted in an interest rate of 2.9% as of
December 31, 2011.
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Also in 2011, in connection with the acquisition of four senior living communities we assumed one Federal National Mortgage
Association, or FNMA, mortgage note and three Federal Home Loan Mortgage Corporation, or FMCC, mortgage notes totaling approximately
$38.0 million in principal amount. These mortgages contain FNMA and FMCC standard mortgage covenants. We recorded a mortgage
premium in connection with our assumption of these mortgage notes in order to record the mortgage notes at their estimated fair value. We are
amortizing the mortgage premiums as a reduction of interest expense until the maturity of the respective mortgage notes.
In June 2011, we issued 11,500,000 of our common shares in the Public Offering raising net proceeds of approximately $54.0 million. We
used proceeds from the Public Offering to repay amounts outstanding under the Bridge Loan and to fund a portion of the cash purchase price of
the Indiana Communities.
OUR GROWTH STRATEGY
We believe that the aging of the U.S. population will increase demand for senior living communities. Our principal growth strategy is to
profit from this anticipated demand by operating communities that provide high quality services to residents who pay with private resources.
We seek to improve the profitability of our existing operations by increasing our revenues and improving our operating margins. We
attempt to increase revenues by increasing rates and occupancies. We attempt to improve margins by limiting increases in expenses and
otherwise improving operating efficiencies. For example, during the last few years, the senior living industry has generally experienced
declining occupancies as a result of a slowdown in the U.S. economy. During this same period, we have improved operating margins and
profitability by increasing rates and limiting increases in our expenses. To the extent that the U.S. economy and the housing market improve,
we expect that our occupancies may increase and our profitability may grow; however, the condition of the U.S. economy and the housing
market are beyond our control and may not improve.
In addition to managing our existing operations, we currently intend to continue to grow our business by adding to our operations
independent and assisted living communities we operate and manage where residents' private resources account for a large majority of
revenues. We expect some of these increases may be achieved by our entering leases or management agreements and some may be achieved by
our purchasing communities. Since we became a public company in late 2001, we have added 183 primarily independent and assisted living
communities to our business; in the year ended December 31, 2011, these 183 communities realized approximately 85% of their revenues from
residents' private resources, rather than from Medicare and Medicaid. Historically, we have principally expanded our operations by entering
operating leases. Recently, we have started to expand our operations by acquiring senior living communities for our own account and entering
agreements to manage senior living communities which are owned by others. For more information about our operations see "Business—Our
Recent History" of this Annual Report on Form 10-K. In the future, we expect to continue to grow our business by adding communities that we
either own, lease or manage.
OPERATING STRUCTURE
We have four operating divisions. Three of our divisions are each responsible for multiple regions with respect to our independent and
assisted living communities. One of our divisions is responsible for our SNFs and oversees our institutional pharmacies and rehabilitation
hospital businesses. Each division is headed by a divisional vice president with extensive experience in the senior living industry. Our SNF
divisional vice president also has extensive experience in the institutional pharmacy and rehabilitation industries. We have several regional
offices within our divisions. Each regional office is responsible for multiple communities and is headed by a regional director of operations
with extensive experience in the senior living industry. Each regional office is typically supported by a clinical or wellness director, a
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rehabilitation services director, a regional accounts manager, a human resources specialist and a sales and marketing specialist. Regional staffs
are responsible for all of our senior living community operations within a region, including:
•
resident services;
•
Medicare and Medicaid billing;
•
marketing and sales;
•
hiring of community personnel;
•
compliance with applicable legal and regulatory requirements; and
•
supporting our development and acquisition plans within their region.
Our corporate office staff, located in Massachusetts, provides services such as:
•
the establishment of company wide policies and procedures relating to resident care;
•
human resources policies and procedures;
•
information technology;
•
private pay billing for our independent living apartments and assisted living communities;
•
maintenance of licensing and certification;
•
legal services;
•
central purchasing;
•
budgeting and supervision of maintenance and capital expenditures;
•
implementation of our growth strategy; and
•
accounting and finance functions, including operations, budgeting, certain accounts receivable and collections functions,
accounts payable, payroll and financial reporting.
As described in this Annual Report on Form 10-K, we have a business management and shared services agreement, or the Business
Management Agreement, with RMR pursuant to which RMR provides to us certain business management, administrative and information
system services, including internal audit, investor relations and tax services, among other matters.
STAFFING
Independent and Assisted Living Community Staffing. Each of the independent and assisted living communities we operate has an
executive director responsible for the day to day operations of the community, including quality of care, resident services, sales and marketing,
financial performance and staff supervision. The executive director is supported by department heads who oversee the care and service of the
residents, a wellness director who is responsible for coordinating the services necessary to meet the healthcare needs of our residents and a
marketing director who is responsible for selling our services. Other important staff include the dining services coordinator, the activities
coordinator and the property maintenance coordinator.
Skilled Nursing Facility Staffing. Each of our SNFs is managed by a state licensed administrator who is supported by other professional
personnel, including a director of nursing, an activities director, a marketing director, a social services director, a business office manager, and
physical, occupational and speech therapists. Our directors of nursing are state licensed nurses who supervise our registered nurses, licensed
practical nurses and nursing assistants. Staff size and composition vary depending on
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the size and occupancy of each SNF and on the type of care provided by the SNF. Our SNFs also contract with physicians who provide certain
medical services.
Rehabilitation Hospital Staffing. Each of our rehabilitation hospitals is operated under the leadership of a hospital based chief executive
officer with the support of senior staff, including a medical director, chief financial officer, director of patient care services, director of
rehabilitation and director of case management. The hospitals are also staffed with board certified physicians who primarily specialize in
internal medicine, neurology or physiatry, as well as other licensed professionals, including rehabilitation nurses, physical therapists,
occupational therapists, speech and language pathologists, nutrition counselors, neuropsychologists and pharmacists. Each outpatient clinic
associated with our rehabilitation hospitals is managed by an outpatient director who is a registered occupational or physical therapist.
Institutional Pharmacy Staffing. Our institutional pharmacies provide prescriptions, medical supplies, equipment and services only to
operators and residents of senior living communities. Each of our institutional pharmacies is managed by an executive director, who is
responsible for the day to day operations of each institutional pharmacy, including billings, sales and marketing, financial performance,
compliance with regulatory codes regarding the dispensing of controlled substances and staff supervision. Other institutional pharmacy
personnel include licensed dispensing pharmacists, a director of pharmacy consultation, a medical records director, a nurse consultant,
pharmacy technicians and billing personnel.
EMPLOYEES
As of February 15, 2012, we had approximately 25,600 employees, including 16,100 full time equivalents. Approximately 77 of these
employees, including approximately 57 full time equivalents, are represented under one collective bargaining agreement that has a remaining
term of approximately one year. We have no employment agreements with our employees except for two assumed contracts, one with a former
owner operator and one with an employee of an institutional pharmacy. We believe our relations with our union and non-union employees are
good.
GOVERNMENT REGULATION AND REIMBURSEMENT
Our operations must comply with numerous federal, state and local statutes and regulations. Also, the healthcare industry depends
significantly upon federal and state programs for revenues and, as a result, is vulnerable to the budgetary policies of both the federal and state
governments. At some of our senior living communities (principally our SNFs) and at our rehabilitation hospitals and clinics, Medicare and
Medicaid programs provide operating revenues for skilled nursing and rehabilitation services. We derived approximately 31% of our
consolidated revenues from these programs for each of the years ended December 31, 2011, 2010 and 2009.
Independent Living Communities. Government benefits generally are not available for services at independent living communities and
residents use private resources to pay for the resident charges in these communities. However, a number of federal Supplemental Security
Income program benefits pay housing costs for elderly or disabled residents to live in these types of residential communities. The Social
Security Act requires states to certify that they will establish and enforce standards for any category of group living arrangement in which a
significant number of Supplemental Security Income residents reside or are likely to reside. Categories of living arrangements that may be
subject to these state standards include independent living communities and assisted living communities. Because independent living
communities usually offer common dining facilities, in many locations they are required to obtain licenses applicable to food service
establishments in addition to complying with land use and life safety requirements. In many states, state or county health departments, social
service agencies or offices on aging with jurisdiction over group residential communities for seniors license
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independent living communities. To the extent that independent living communities include units which provide assisted living or nursing
services, these units are subject to applicable state licensing regulations, and if the communities receive Medicaid or Medicare funds, to
certification standards. In some states, insurance or consumer protection agencies regulate independent living communities in which residents
pay entrance fees or prepay for services.
Assisted Living Communities. According to the National Center for Assisted Living, or NCAL, a majority of states provide or are
approved to provide Medicaid payments for personal care and medical services to some residents in licensed assisted living communities under
waivers granted by or under Medicaid state plans approved by the Centers for Medicare and Medicaid Services, or CMS, of the United States
Department of Health and Human Services, or HHS. State Medicaid programs control costs for assisted living and other home and community
based services by various means such as restrictive financial and functional eligibility standards, enrollment limits and waiting lists. Because
rates paid to assisted living community operators are generally lower than rates paid to nursing home operators, some states use Medicaid
funding of assisted living as a means of lowering the cost of services for residents who may not need the higher intensity of health related
services provided in SNFs. States that administer Medicaid programs for services in assisted living communities are responsible for monitoring
the services at, and physical conditions of, the participating communities. Different states apply different standards in these matters, but
generally we believe these monitoring processes are similar to the concerned states' inspection processes for SNFs.
As a result of the large number of states using Medicaid to purchase services at assisted living communities and the growth of assisted
living in recent years, states have adopted licensing standards applicable to assisted living communities. According to NCAL, all states regulate
assisted living/residential care communities, though state regulatory models vary; no national consensus on a definition of assisted living exists,
and states do not use any uniform approach to regulate assisted living communities. Most state licensing standards apply to assisted living
communities whether or not they accept Medicaid funding. Also, a few states require certificates of need from state health planning authorities
before new assisted living communities may be developed. Based on our analysis of current economic and regulatory trends, we believe that
assisted living communities that become dependent upon Medicaid or other public payments for a majority of their revenues may decline in
value because Medicaid and other public rates may fail to keep up with increasing costs. We also believe that assisted living communities
located in states that adopt certificate of need requirements or otherwise restrict the development of new assisted living communities may
increase in value because these limitations upon development may help ensure higher occupancy and higher non-governmental rates.
HHS, the Government Accountability Office, or the GAO, and the Senate Special Committee on Aging have studied and reported on the
development of assisted living and its role in the continuum of long term care and as an alternative to SNFs. Since 2003, CMS has commenced
a series of actions to increase its oversight of state quality assurance programs for assisted living facilities and has provided guidance and
technical assistance to states to improve their ability to monitor and improve the quality of services paid for through Medicaid waiver
programs. Based upon our analysis of current economic and regulatory trends, we do not believe that the federal government is likely to have a
material impact upon the assisted living industry's current regulatory environment unless it also undertakes expanded funding obligations.
Although CMS is encouraging state Medicaid programs to expand their use of home and community based services as alternatives to
institutional services, pursuant to provisions of the Deficit Reduction Act of 2005, or the DRA, the Patient Protection and Affordable Care Act,
or PPACA, adopted in March 2010, and other authorities, we do not believe a materially increased financial commitment from the federal
government to fund assisted living is presently likely. We anticipate that states' policies regarding licensing and regulating assisted living
communities will continue to vary.
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Skilled Nursing Facilities—Reimbursement. A majority of all nursing home revenues in the United States comes from publicly funded
programs. According to CMS, Medicaid is the largest source of public funding for nursing homes, followed by Medicare. In 2010 (the most
recent date for which information is publicly available) approximately 32% of nursing home revenues came from Medicaid and 22% from
Medicare. SNFs are among the most highly regulated businesses in the country. The federal and state governments regularly monitor the
quality of care provided at SNFs. State health departments conduct surveys of resident care and inspect the physical condition of nursing home
properties. These periodic inspections and occasional changes in life safety and physical plant requirements sometimes require nursing home
operators to make significant capital improvements. These mandated capital improvements have in the past usually resulted in Medicare and
Medicaid rate adjustments, albeit on the basis of amortization of expenditures over expected useful lives of the improvements. Under the
Medicare prospective payment system, or the PPS, for SNFs, capital costs are part of the prospective rate and are not community specific. The
PPS and other recent legislative and regulatory actions with respect to state Medicaid rates limit the reimbursement levels for some nursing
home services. At the same time, federal and state enforcement has increased oversight of SNFs, making licensing and certification of these
communities more rigorous.
CMS implemented the PPS for SNFs pursuant to the Balanced Budget Act of 1997, or the BBA. Under the PPS, SNFs receive a fixed
payment for each day of care provided to residents who are Medicare beneficiaries. The PPS requires SNFs to assign each resident to a care
group depending on that resident's medical characteristics and service needs. These care groups are known as Resource Utilization Groups, or
RUGs, and CMS establishes a per diem payment rate for each RUG. Medicare PPS payments cover substantially all services provided to
Medicare residents in SNFs, including ancillary services such as rehabilitation therapies. CMS updates PPS payment rates each year by a
market basket update to account for inflation, and periodically implements changes to the RUG categories and payment rates.
Effective October 1, 2010, CMS adopted rules that it estimated would increase aggregate Medicare payment rates for SNFs by
approximately 1.7% overall in federal fiscal year 2011. These rules also implemented a new PPS case mix classification system known as RUG
IV and a new resident assessment instrument, Minimum Data Set 3.0, which SNFs must use to collect clinical data to assign residents to RUG
IV reimbursement categories. RUG IV expanded the number of categories to which residents may be assigned and eliminated the "look back"
period for preadmission services to include only services furnished during the SNF stay. CMS also set limits on payments to SNFs for
concurrent therapies. The net effect of these changes was to increase our SNF Medicare revenue in federal fiscal year 2011.
Effective October 1, 2011, CMS adopted a final rule that updates Medicare PPS rates for SNFs, which CMS estimates will result in a
reduction in aggregate Medicare payment rates for SNFs of approximately 11.1% in federal fiscal year 2012. The rule includes a net reduction
of approximately 12.6% as the result of a recalibration of the SNF case mix indexes under the RUG IV system. The reduction is partly offset by
a net increase of approximately 1.7% as the result of an annual increase of approximately 2.7% to account for inflation, reduced by a
productivity adjustment of 1.0% pursuant to PPACA. The rule also implements changes relating to the payment of group therapy services and
new resident assessment policies. Applying the final rule for the SNF Medicare payment rate and the estimated decrease of 11.1% to our SNF
Medicare revenues in the years ended December 31, 2010 and 2011 would reduce our revenues by approximately $14.9 million and
$16.0 million, respectively. We expect the reduction to our Medicare SNF rates in federal fiscal year 2012 to be material and adverse to our
future financial results of operations.
Under the DRA, the federal government is slowing the growth of Medicare and Medicaid payments for nursing home services by several
methods. The government reduced Medicare bad debt reimbursement from 100% to 70% for uncollected cost sharing payments from Medicare
beneficiaries
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who are not eligible for Medicaid. The government also implemented limits on Medicare payments for outpatient therapies in 2006, with an
exception process under which beneficiaries could request an exception from the cap and be granted the amount of services deemed medically
necessary by Medicare. Subsequent laws have extended the Medicare outpatient therapy cap exception process through February 29, 2012.
This expiration of the Medicare outpatient therapy cap exception process may result in a reduction in our outpatient therapy revenues in 2012.
In addition, the DRA increased the "look-back" period for prohibited asset transfers that disqualify individuals from Medicaid nursing home
benefits from three to five years. The period of Medicaid ineligibility begins on the date of the prohibited transfer or the date an individual has
entered the nursing home and would otherwise be eligible for Medicaid coverage, whichever occurs later, rather than on the date of the
prohibited transfer, effectively extending the Medicaid penalty period and placing added burdens on SNFs to collect charges directly from
residents and their transferees.
The DRA established a five year demonstration project that in 2007 awarded competitive grants to 30 states to provide home and
community based long term care services to qualified individuals relocated from SNFs, providing increased federal medical assistance for each
qualifying beneficiary for a limited time period. PPACA expanded eligibility for this program and extended this program for an additional five
years, and 44 states have received program funds, according to the Kaiser Family Foundation. The DRA also established a post acute care
payment reform demonstration program under which CMS compared and assessed patient care needs, and costs and outcomes of services at
different post acute care sites over three years. In January 2012 CMS issued a report to Congress which stated that CMS successfully used a
new uniform patient assessment tool to measure patient acuity in acute care hospitals and post acute settings, providing the basis for the
potential development of new standardized information reporting requirements and more uniform post acute case mix payment systems. Since
January 2007, states may include home and community based services as optional services under their Medicaid state plans. PPACA expands
the services that states may provide and limits their ability to set caps on enrollment, waiting lists or geographic limitations on home and
community based services.
Skilled Nursing Facilities—Survey and Enforcement. More than 20 years ago, Congress enacted major reforms to federal and state
regulatory systems for SNFs that participate in the Medicare and Medicaid programs, under the Omnibus Reconciliation Act of 1987. Since
then, the GAO reports that, while much progress has been made, substantial problems remain in the effectiveness of federal and state regulatory
activities. Since 1999, the HHS Office of Inspector General, or OIG, issued several reports concerning quality of care in SNFs and the GAO
issued several reports, most recently in 2011, recommending that CMS and states strengthen their compliance and enforcement practices,
including federal oversight of state actions, to make them more timely and effective and to better ensure that SNFs provide adequate care and
states act more consistently. The Senate Special Committee on Aging and other congressional committees have also held hearings on these
issues. As a result, CMS has undertaken an initiative to increase the effectiveness of Medicare and Medicaid nursing home survey and
enforcement activities. CMS is taking steps to focus more survey and enforcement efforts on SNFs with findings of substandard care or repeat
violations of Medicare and Medicaid standards and to identify chain operated communities with patterns of noncompliance. CMS has increased
its oversight of state survey agencies. In addition, CMS adopted regulations expanding federal and state authority to impose civil monetary
penalties in instances of noncompliance. When state agencies or CMS identify deficiencies under state licensing and Medicare and Medicaid
standards, they may impose sanctions and remedies such as denials of payment for new Medicare and Medicaid admissions, civil monetary
penalties, state oversight, temporary management or receivership and loss of Medicare and Medicaid participation or licensure on nursing home
operators. Our communities incur sanctions and penalties from time to time. If we are unable to cure deficiencies that have been identified or
that are identified in the future, or if appeals of proposed sanctions or penalties are not successful, additional sanctions or
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penalties may be imposed, and if imposed, may adversely affect our ability to meet our financial obligations and negatively affect our financial
condition and results of operations.
Rehabilitation Hospital Regulation and Rate Setting. Our two rehabilitation hospitals are subject to federal, state and local regulation
that affects their business activities and determines the rates they receive for services. Governmental and non-governmental agencies
periodically inspect these IRFs to ensure continued compliance with various licensure and accreditation standards. In addition, CMS certifies
these facilities to participate in the Medicare program and these facilities receive a significant portion of their revenues from that program.
CMS has a rule, known as the "60% Rule," that establishes Medicare standards IRFs must meet in order to participate as IRFs in the
Medicare program. As amended by the Medicare, Medicaid and SCHIP Extension Act of 2007, the 60% Rule generally provides that, to be
considered an IRF and receive reimbursement for services under the PPS for IRFs, at least 60% of a facility's total inpatient population must
require intensive rehabilitation services associated with treatment of at least one of 13 designated medical conditions. Under the 60% Rule, to
maintain their revenue levels many rehabilitation hospitals have needed to reduce the number of non-qualifying patients treated and replace
them with qualifying patients, establish other sources of revenues or both. We believe our hospitals have been and are operating in compliance
with this rule and we are taking actions to assure continued compliance; however, we can provide no assurance that we will be able to continue
to comply with this rule, or that CMS will not make a determination that we were non-compliant in a prior year. The Obama Administration
has recently proposed raising the 60% Rule to 75% beginning in federal fiscal year 2013. If Congress enacts such an increase, maintaining our
compliance with the rule will become more difficult.
Medicare reimburses IRFs under a per discharge PPS implemented in 2001 pursuant to the BBA. Under the PPS, CMS classifies patients
into case mix groups based on their clinical characteristics and expected resource needs IRFs must assign each patient to a group, and separate
payment rates are calculated for each group. Payments under the PPS cover substantially all costs of furnishing covered inpatient rehabilitation
services, and capital costs are not facility-specific. Effective on October 1, 2010, CMS adopted rules that it estimated would increase aggregate
Medicare payment rates for IRFs by approximately 2.2% overall in federal fiscal year 2011.
Effective October 1, 2011, CMS adopted a final rule that updates Medicare PPS rates for IRFs, which CMS estimates will result in a net
increase of approximately 2.2% in aggregate Medicare payment rates for IRFs in federal fiscal year 2012. The rule includes a rebased annual
increase of approximately 2.9% to account for inflation, reduced by 0.1% and by a productivity adjustment of 1.0%, both pursuant to PPACA,
and increased by 0.4% due to an update in the outlier threshold for high cost cases to maintain estimated outlier payments at 3% of total
estimated IRF payments. As a result of changes in applicable wage indexes and Low Income Patient, or LIP, percentages contained in the rule,
we estimate that the increase in our hospitals' Medicare payment rates may be approximately 1.0%. The rule also establishes a new quality
reporting program that provides for a 2% reduction in the annual payment update beginning in 2014 for failure to report required quality data to
the Secretary of HHS. Medicare revenues realized at our IRFs in the years ended December 31, 2010 and 2011 were approximately
$60.3 million and $68.6 million, respectively. The calculation of Medicare rate adjustments applicable at our IRFs is complex and will depend
upon patient case mixes. Accordingly, we cannot predict the final impact of the Medicare rate adjustments to our IRF results at this time.
Certificates of Need. Most states limit the number of SNFs and hospitals by requiring developers to obtain certificates of need before
new communities may be built and a few states also limit the number of assisted living facilities by requiring certificates of need. Also, states
such as California and Texas that eliminated certificate of need laws often retain other means of limiting new development, such as the use of
moratoria, licensing laws or limitations upon participation in the state Medicaid
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program. We believe that these governmental limitations may make existing SNFs and hospitals more valuable by limiting competition.
Healthcare Reform. PPACA includes insurance changes, payment systems changes and healthcare delivery systems changes, intended
to expand access to health insurance coverage and reduce the growth of healthcare expenditures while simultaneously maintaining or
improving the quality of healthcare. Beginning in federal fiscal year 2012, PPACA reduces the Medicare SNF and IRF annual adjustments for
inflation by a productivity adjustment that may result in payment rates for a fiscal year being less than for the preceding fiscal year. PPACA
also reduced the Medicare IRF adjustment for inflation by 0.25% for federal fiscal years 2010 and 2011, for discharges on and after April 1,
2010. PPACA reduces current and future IRF Medicare market basket updates by amounts ranging from 0.1% to 0.3% for federal fiscal years
2012 through 2016, and by 0.75% for federal fiscal years 2017 through 2019. We are unable to predict the impact of these reductions on
Medicare rates for SNFs and IRFs, but their impact may be adverse and material to our operations and our future financial results of operations.
PPACA establishes an Independent Payment Advisory Board to submit legislative proposals to Congress and take other actions with a
goal of reducing Medicare spending growth. When and if such spending reductions take effect they may be adverse and material to our
financial results. PPACA includes various other provisions affecting Medicare and Medicaid providers, including expanded public disclosure
requirements for SNFs and other providers, enforcement reforms and increased funding for Medicare and Medicaid program integrity control
initiatives. PPACA also provides for a Medicare post-acute care pilot program, to be established by January 2013, to develop and evaluate
making bundled payments for services provided during an episode of care, to include hospital and physician services and post-acute care such
as SNF and IRF services. The pilot program will be expanded by January 2016 if it meets its goals. PPACA also includes the development of
Medicare value based purchasing plans to include quality measures as a basis for bonuses, a government sponsored long term care insurance
program, and several initiatives to encourage states to develop and expand home and community based services under Medicaid. The Secretary
of HHS announced in October 2011 that HHS is unable to implement the long term care insurance program as prescribed by PPACA.
The U.S. Supreme Court is expected to rule on the constitutionality of PPACA in 2012. The Court has granted certiorari in cases decided
by two U.S. Circuit Courts of Appeal. In March 2012, the Court will hear oral arguments on the constitutionality of the PPACA mandate
requiring individuals to buy health insurance or pay a penalty and the PPACA requirement that states expand their Medicaid programs. The
Court will also hear arguments on whether challenges to the individual mandate may be brought before a penalty is levied, and whether, if the
individual mandate is found to be unconstitutional, it is severable from the remainder of PPACA. Several other cases challenging PPACA are
pending in federal courts.
The U.S. House of Representative has voted to repeal PPACA, and members of Congress have proposed legislation to deny funding to
implement PPACA or parts of PPACA and to make substantial changes to PPACA. Members of Congress and the Obama Administration have
also proposed various reforms to Medicare and Medicaid, such as substantial structural changes to the programs and long-term reductions in
federal funding, reducing Medicare rates of payment to some providers including SNFs, IRFs and pharmaceutical companies, and changing the
formula for federal payments to states for Medicaid programs.
Pursuant to the Budget Control Act of 2011, the federal budget will include automatic reductions in discretionary and mandatory spending
starting in 2013, including reductions of not more than 2% to payments to Medicare providers. Medicaid is exempt from the automatic
reductions, as are certain Medicare benefits. We are unable to predict the financial impact on us of the automatic payment cuts beginning in
2013; however such impact may be adverse and material to our operations and our future financial results of operations.
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We cannot currently estimate the type and magnitude of the potential Medicare and Medicare policy changes, rate reductions or other
changes and the impact on us of the possible failure of these programs to increase rates to match our increasing expenses, but they may be
material to our operations and may affect our future results of operations. Similarly, we are unable to predict the impact on us of the insurance
reforms, payment reforms, and healthcare delivery systems reforms contained in and to be developed pursuant to PPACA. Expanded insurance
availability may provide more paying customers for the services we provide. However, if the changes to be implemented under PPACA result
in reduced payments for our services or the failure of Medicare, Medicaid or insurance payment rates to cover our costs, our future financial
results could be adversely and materially affected.
Other Matters. Federal and state efforts to target false claims, fraud and abuse and violations of anti-kickback, physician referral and
privacy laws by Medicare and Medicaid providers and providers under other public and private programs have increased in recent years, as
have civil monetary penalties, treble damages, repayment requirements and criminal sanctions for noncompliance. The federal False Claims
Act, as amended and expanded by the Fraud Enforcement and Recovery Act of 2009 and PPACA, provides significant civil money penalties
and treble damages for false claims and authorizes individuals to bring claims on behalf of the federal government for false claims. The federal
Civil Monetary Penalties Law authorizes the Secretary of HHS to impose substantial civil penalties, treble damages, and program exclusions
administratively for false claims or violations of the federal Anti-Kickback statute. Governmental authorities are devoting increasing attention
and resources to the prevention, detection, and prosecution of healthcare fraud and abuse. The HHS OIG has guidelines for SNFs and IRFs
intended to assist them in developing voluntary compliance programs to prevent fraud and abuse. CMS contractors are expanding the
retroactive audits of Medicare claims submitted by IRFs, SNFs and other providers, and recouping alleged overpayments for services
determined by auditors not to have been medically necessary or not to meet Medicare coverage criteria as billed. State Medicaid programs and
other third party payers are conducting similar medical necessity and compliance audits.
We must comply with federal and state laws designed to protect the confidentiality and security of individual patient health and financial
information. Under the Health Insurance Portability and Accountability Act of 1996, or HIPAA, and the Health Information Technology for
Economic and Clinical Health Act, our HIPAA covered healthcare facilities must comply with rules adopted by HHS governing the privacy,
use and disclosure of individually identified health information, and security rules for electronic personal health information, with civil
monetary penalties and criminal sanctions for noncompliance.
Any adverse determination concerning any of our licenses or eligibility for Medicare or Medicaid reimbursement or any substantial
penalties, repayments or sanctions, and the increasing costs of required compliance with applicable federal and state laws, may adversely affect
our ability to meet our financial obligations and negatively affect our financial condition and results of operations.
Under the Medicare Prescription Drug, Improvement and Modernization Act of 2003 that took effect in January 2006, Medicare
beneficiaries may receive prescription drug benefits by enrolling in private health plans or managed care organizations, or if they remain in
traditional Medicare, by enrolling in standalone prescription drug plans. As a result of the implementation of this Medicare Part D drug
program in 2006, the government's share of prescription drug expenditures has risen substantially. In 2010, approximately 90% of Medicare
beneficiaries had prescription drug coverage, most through Medicare Part D, according to CMS. Due to Medicare's growing share of total
prescription drug expenditures and increasing budget pressures on state and federal governments, we believe that government actions to control
drug costs are likely to increase, reducing the profitability of providing pharmacy products and services.
Other legislative proposals introduced in Congress, proposed by federal or state agencies or under consideration by some state
governments include the option of block grants for states rather than
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federal matching money for certain state Medicaid services, additional policies encouraging state Medicaid programs to use home and
community based long term care services rather than SNFs, laws authorizing or directing Medicare to negotiate rate reductions for prescription
drugs, additional Medicare and Medicaid enforcement procedures and federal and state cost containment measures, such as freezing Medicare
or Medicaid nursing home and rehabilitation hospital payment rates at their current levels and reducing or eliminating annual Medicare or
Medicaid inflation allowances or gradually reducing rates for SNFs and rehabilitation hospitals.
Some of the states in which we operate either have not raised Medicaid rates by amounts sufficient to offset increased costs or have frozen
or reduced, or are likely to freeze or reduce, Medicaid rates. Also, effective June 30, 2011, Congress ended certain temporary increases in
federal payments to states for Medicaid programs that had been in effect since October 1, 2008. We expect the ending of these temporary
federal payments, combined with the anticipated slow recovery of state revenues, to result in continued difficult state fiscal conditions. As a
result, some state budget deficits likely will increase, and certain states may reduce Medicaid payments to healthcare services providers like us
as part of an effort to balance their budgets.
INSURANCE
Litigation against senior living and healthcare companies has increased during the past few years. As a result, liability insurance costs
have risen. Also, our insurance costs for workers' compensation and employee healthcare have increased. To partially offset these insurance
cost increases, we have taken a number of actions including the following:
•
we have become fully self insured for all health related claims of covered employees;
•
we have increased the deductible or retention amounts for which we are liable under our liability insurance;
•
we have established an offshore captive insurance company which participates in our liability, workers' compensation and
automobile insurance programs. These programs may allow us to reduce our net insurance costs by allowing us to retain the
earnings on our reserves, provided that our claims experience matches that projected by various statutory and actuarial formulas;
•
we have increased the amounts that some of our employees are required to pay for health insurance coverage and as copayments for health services and pharmaceutical prescriptions and decreased the amount of certain healthcare benefits as well as
adding a high deductible health insurance plan as an option for our employees;
•
we have hired professional advisors to help us establish programs to reduce our insured workers' compensation and professional
and general liabilities, including a program to monitor and proactively settle liability claims and to reduce workplace injuries;
•
we have hired insurance and other professionals to help us establish appropriate reserves for our retained liabilities and captive
insurance programs; and
•
in order to obtain more control over our insurance costs, we, RMR and five other companies, including SNH, to which RMR
provides management services, organized and are current shareholders of AIC. In 2010, AIC designed a combination property
insurance program for us and other AIC shareholders in which AIC participated as a reinsurer. This program was modified and
extended in June 2011 for a one year term. We are currently investigating the possibilities to expand our insurance relationships
with AIC to include other types of insurance.
We partially self insure up to certain limits for workers' compensation, professional liability and property coverage. Claims in excess of
these limits are insured up to contractual limits, over which we are self insured. Our current insurance arrangements are generally renewable
annually in June. We do not know if our insurance charges and self insurance reserve requirements will increase, and we cannot
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now predict the amount of any such increase, or to what extent, if at all, we may be able to offset any increase through use of higher
deductibles, retention amounts, self insurance or other means in the future. For more information about our new insurance initiative see
"Management's Discussion and Analysis of Financial Condition and Results of Operations—Related Person Transactions" of this Annual
Report on Form 10-K.
COMPETITION
The senior living services, pharmacy and rehabilitation hospital businesses are highly competitive. We compete with service providers
offering alternate types of services, such as home healthcare services, as well as other companies providing facility based services and
rehabilitation services. We have large lease obligations and limited financeable assets. Many of our competitors have greater financial
resources than we do. We may expand our business with SNH and our relationships with SNH and RMR may provide us with competitive
advantages; however, SNH is not obligated to provide us with opportunities to lease additional properties. Some of our competitors are
operated by not for profit entities which have endowment income and may not have the same financial pressures that we experience. For all of
these reasons and others, we cannot provide any assurance that we will be able to compete successfully for business. For additional information
on competition and the risks associated with our business, please see "Risk Factors" of this Annual Report on Form 10-K.
ENVIRONMENTAL AND CLIMATE CHANGE MATTERS
Under various laws, owners as well as tenants and operators of real estate may be required to investigate and clean up or remove
hazardous substances present at or migrating from properties they own, lease or operate and may be held liable for property damage or personal
injuries that result from hazardous substances. These laws also expose us to the possibility that we may become liable to reimburse
governments for damages and costs they incur in connection with hazardous substances. Under our leases with SNH, we have also agreed to
indemnify SNH for any such liabilities related to the properties we lease from SNH. In addition, some environmental laws create a lien on a
contaminated site in favor of the government for damages and costs it incurs in connection with the contamination, which lien may be senior in
priority to our debt obligations or our leases. We have reviewed environmental surveys of all of our leased and owned communities. Based
upon that review we do not believe that there are environmental conditions at any of our properties that have had or will have a material
adverse effect on us. However, no assurances can be given that conditions are not present at our properties or that costs we may be required to
incur in the future to remediate contamination will not have a material adverse effect on our business or financial condition.
The current political debate about world climate changes has resulted in various existing and proposed treaties, laws and regulations which
are intended to limit carbon emissions. We believe treaties, laws and regulations which may limit carbon emissions may cause energy costs at
our communities to increase. In the long term, we believe any such increased costs will be passed through and paid by our patients, residents
and other customers in higher charges for our services. However, in the short term, these increased costs, if material in amount, could
materially and adversely affect our financial condition and results of operations.
INTERNET WEBSITE
Our internet website address is www.fivestarseniorliving.com. Copies of our governance guidelines, or Governance Guidelines, code of
business conduct and ethics, or Code of Conduct, our policy outlining procedures for handling concerns or complaints about internal
accounting controls or auditing matters and the charters of our audit, quality of care, compensation and nominating and governance committees
are posted on our website and may be obtained free of charge by writing to our Secretary, Five Star Quality Care, Inc., 400 Centre Street,
Newton, Massachusetts, 02458 or at our website. We make available, free of charge, on our website, our Annual Reports on Form 10-K, our
Quarterly
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Reports on Form 10-Q, our Current Reports on Form 8-K and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d)
of the Securities Exchange Act of 1934, as amended, or the Exchange Act, as soon as reasonably practicable after these forms are filed with, or
furnished to, the Securities and Exchange Commission, or the SEC. Any shareholder or other interested party who desires to communicate with
our non-management Directors, individually or as a group, may do so by filling out a report on our website. Our Board of Directors also
provides a process for security holders to send communications to our entire Board of Directors. Information about the process for sending
communications to our Board of Directors can be found on our website. Our website address and website addresses of one or more unrelated
third parties are included several times in this Annual Report on Form 10-K as textual references only and the information in any such website
is not incorporated by reference into this Annual Report on Form 10-K.
Item 1A.
Risk Factors
Our business faces many risks. The risks described below may not be the only risks we face but are the risks we know of that we believe
may be material at this time. Additional risks that we do not yet know of, or that we currently think are immaterial, may also impair our
business operations or financial results. If any of the events or circumstances described in the following risks occurs, our business, financial
condition or results of operations could suffer and the trading price of our securities could decline. Investors and prospective investors should
consider the following risks and the information contained under the heading "Warning Concerning Forward Looking Statements" before
deciding whether to invest in our securities.
RISKS RELATED TO OUR BUSINESS
A small percentage decline in our revenues or increase in our expenses could have a material negative impact upon our operating
results.
For the year ended December 31, 2011, our revenues were $1.28 billion and our operating expenses were $1.26 billion. A small
percentage decline in our revenues or increase in our expenses could have a material negative impact on our operating results because some of
our fixed costs, such as our base rent, would not decrease during times of lower economic activity.
The failure of Medicare and Medicaid rates to match our costs will reduce our income or create losses.
Some of our current operations, especially our SNFs, IRFs and pharmacy operations receive significant revenues from Medicare and
Medicaid. During the years ended December 31, 2010 and 2011, we received approximately 28% and 27%, respectively, of our senior living
revenues, 64% and 68%, respectively, of our hospital revenues and 50% and 55%, respectively, of our pharmacy revenues from these
programs. The Obama Administration and some members of Congress have proposed Medicare and Medicaid policy changes and rate
reductions to take effect during the next several years. PPACA includes provisions that reduce annual Medicare rate increases to account for
inflation affecting IRFs and that may result in future payment rates for a fiscal year being less than payment rates for a preceding fiscal year for
SNFs and IRFs. Effective as of October 1, 2011, CMS reduced aggregate Medicare payment rates for SNFs by an estimated 11.1% for federal
fiscal year 2012. We expect this reduction to be material and adverse to our future financial results of operations.
Pursuant to the Budget Control Act of 2011, the federal budget will include automatic spending reductions starting in 2013, including
reductions of not more than 2% to Medicare providers, but exempting reductions to certain Medicaid and Medicare benefits. We are unable to
predict the financial impact on us of the automatic payments cuts starting in 2013; however such impact may be adverse and material to our
operations and our future financial results of operations.
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Congress extended the process to allow medically necessary exceptions to annual caps on Medicare Part B payments for outpatient
rehabilitation services to individual patients through February 29, 2012. We cannot predict whether the exception process will be extended
beyond that date. Also, our Medicare Part B outpatient therapy revenue rates are tied to the Medicare Physician Fee Schedule that is scheduled
to be reduced by approximately 27% on February 29, 2012, unless Congress extends the moratorium on the scheduled reduction. Failure to
extend the moratorium would result in a similar reduction to our Medicare Part B rates for outpatient therapy services in our clinics and SNFs
which may be materially adverse to our future financial results of operations. Some of the states in which we operate either have not raised
Medicaid rates by amounts sufficient to offset increasing costs, have frozen or reduced Medicaid rates, or are expected to freeze or reduce
Medicaid rates. Many states are experiencing difficult fiscal conditions, increasing the likelihood of Medicaid rate reductions, freezes or
increases that are insufficient to offset increased operating costs. Also, certain temporary increases in federal payments to states for Medicaid
programs ended as of June 30, 2011. The ending of these temporary federal payments, combined with the anticipated slow recovery of state
revenues, has resulted in and is expected to result in continued difficult state fiscal conditions. Some state budget deficits likely will increase,
and it is possible that certain states will reduce Medicaid payments to healthcare service providers like us as part of an effort to balance their
budgets.
We cannot currently estimate the magnitude of the potential Medicare and Medicaid rate reductions, the impact of the failure of these
programs to increase rates to match increasing expenses and the impact on us of potential Medicare and Medicaid policy changes proposed by
members of Congress and the Obama Administration, but they may be material to our operations and may affect our future results of
operations. We cannot now predict whether future Medicare and Medicaid rates will be sufficient to cover our costs. Future Medicare and
Medicaid rate declines or a failure of these rates to cover our costs could result in our experiencing materially lower earnings or losses.
Circumstances that adversely affect the ability of seniors, or their families, to pay for our services could have a material adverse effect
on us.
Our residents paid approximately 73% of our senior living revenues during the year ended December 31, 2011 from their private
resources. We expect to continue to rely on the ability of our residents to pay for our services from their own financial resources. Inflation,
continued high levels of unemployment, market declines affecting the value and liquidity of personal assets, or other circumstances that
adversely affect the ability of the elderly or their families to pay for our services could have a material adverse effect on our business, financial
condition and results of operations.
Seniors' inability to sell real estate may delay their moving into senior living facilities.
Recent and continuing housing price declines and reduced home mortgage financing availability have negatively affected the U.S. housing
market. Many economists now predict a prolonged period with little improvement in housing markets. These current difficulties may have a
negative effect on our revenues or lead to increased reliance on Medicare and Medicaid for our revenues. Specifically, if seniors have a difficult
time selling their homes, fewer seniors may be able to relocate to our senior living communities or finance their stays at our facilities with
private resources.
Our rehabilitation hospitals may be subject to Medicare reclassifications resulting in lower Medicare rates, or to retroactive
repayments.
Medicare pays a significant amount of the revenues at our rehabilitation hospitals. For cost reporting periods starting on and after July 1,
2006, 60% of an IRF's total inpatient population must require intensive rehabilitation services associated with treatment of at least one of 13
designated medical conditions in order for the IRF to participate in the Medicare program. While we believe we are in compliance with the
60% Rule, and we expect to remain in compliance with this rule, we may
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not be able to remain in compliance, or CMS could determine that we were non-compliant in a prior year. Such an event would result in these
hospitals being subject to Medicare reclassification to a different type of provider and our receiving lower Medicare payment rates retroactively
or prospectively. Reductions in our Medicare payments as a result of the reclassification of our rehabilitation hospitals would materially and
adversely affect our financial conditions and results of operations. If Congress enacts the Obama Administration's proposal to raise the 60%
Rule to 75% beginning in federal fiscal year 2013, maintaining our compliance with the rule will become more difficult. Also, retroactive
audits of Medicare claims submitted by IRFs and other providers are expanding, and CMS is recouping amounts paid for services determined
by auditors not to have been medically necessary or not to meet Medicare criteria for coverage as billed. If our hospitals or clinics were
required to make substantial retroactive repayments to Medicare, our financial condition and results of operations may be materially and
adversely affected.
Private third party payers continue to try to reduce healthcare costs.
Private third party payers continue their efforts to control healthcare costs through direct contracts with healthcare providers, increased
utilization review practices and greater enrollment in managed care programs and preferred provider organizations. These third party payers
increasingly demand discounted fee structures and the assumption by healthcare providers of all or a portion of the financial risk. These
continuing efforts of third party payers to limit the amount of payments we receive for healthcare services could adversely affect us.
Reimbursement payments under third party payer programs may not remain at levels comparable to present levels or be sufficient to cover the
costs allocable to patients participating in such programs. Future changes in the reimbursement rates or methods of third party payers, or the
implementation of other measures to reduce payments for our services could result in a substantial reduction in our net operating revenues. At
the same time, as a result of competitive pressures, our ability to maintain operating margins through price increases to private pay patients may
be limited.
Provisions of the Patient Protection and Affordable Care Act could reduce our income and increase our costs.
PPACA contains insurance changes, payment changes and healthcare delivery systems changes that will affect us. PPACA includes
provisions that will take effect in federal fiscal year 2012 that may result in SNF and IRF Medicare payment rates for a fiscal year being less
than for the preceding fiscal year, by using a productivity factor to reduce annual updates for inflation. PPACA also reduced the Medicare IRF
market basket update for inflation by 0.25% for federal fiscal years 2010 and 2011, for discharges on and after April 1, 2010. PPACA reduces
Medicare IRF updates for inflation by amounts ranging from 0.1% to 0.3% for federal fiscal years 2012 through 2016, and by 0.75% for federal
fiscal years 2017 through 2019. We are unable to predict the impact of these reductions on Medicare rates for SNFs and IRFs, but their impact
may be adverse and material to our operations and our future financial results of operations. PPACA also establishes an Independent Payment
Advisory Board to submit legislative proposals to Congress and take other actions with a goal of reducing Medicare spending growth. When
and if such spending reductions take effect they may be adverse and material to our financial results. PPACA includes various other changes
that may affect us, including enforcement reforms and Medicare and Medicaid program integrity control initiatives, initiatives to encourage the
development of home and community based long term care services rather than institutional services under Medicaid, and a Medicare postacute care pilot program to develop and evaluate making a bundled payment for services, including hospital, physician, SNF and IRF services,
provided during an episode of care. We are unable to predict the impact on us of the insurance reforms, payment reforms, and healthcare
delivery systems reforms contained in and to be developed pursuant to PPACA. If the changes to be implemented under PPACA result in
reduced payments for
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our services or the failure of Medicare, Medicaid or insurance payment rates to cover our increasing costs, our future financial results could be
adversely and materially affected.
Increases in our labor costs may have a material adverse effect on us.
Wages and employee benefits were approximately 52% of our 2011 total operating costs. We compete with other operators of senior
living communities and rehabilitation hospitals to attract and retain qualified personnel responsible for the day to day operations of each of our
communities. The market for qualified nurses, therapists and other healthcare professionals is highly competitive. Periodic and geographic area
shortages of nurses or other trained personnel may require us to increase the wages and benefits offered to our employees in order to attract and
retain these personnel or to hire more expensive temporary personnel. Also, we may have to compete with numerous other employers for lesser
skilled workers. Further, when we acquire new facilities, we may be required to pay increased compensation or offer other incentives to retain
key personnel and other employees. Employee benefits costs, including employee health insurance and workers' compensation insurance costs,
have materially increased in recent years. Although we have determined our self insurance reserves with guidance from third party
professionals, our reserves may be inadequate. Increasing employee health and workers' compensation insurance costs and increasing self
insurance reserves for labor related insurance may materially and negatively affect our earnings. No assurance can be given that our labor costs
will not increase or that any increase will be matched by corresponding increases in rates we charge to residents. Any significant failure by us
to control our labor costs or to pass on any increased labor costs to residents through rate increases could have a material adverse effect on our
business, financial condition and results of operations.
Successful union organization of our employees may adversely affect our business performance and results of operations.
From time to time labor unions attempt to organize our employees. Certain of our employees have already chosen union representation. If
federal legislation modifies the labor laws to make it easier for employee groups to unionize, then additional groups of employees may seek
union representation. If more of our employees unionize it could result in business interruptions, work stoppages, the degradation of service
levels at our senior living communities and rehabilitation hospitals due to work rules, or increased operating expenses that may adversely affect
our financial results of operations.
Our business is subject to extensive regulation which increases our costs and may result in losses.
Licensing and Medicare and Medicaid laws require operators of senior living communities, rehabilitation hospitals, clinics, and
pharmacies to comply with extensive standards governing operations and physical environments. Various federal and state laws also prohibit
fraud and abuse by senior living and rehabilitation hospital and clinic operators and pharmacy providers, including civil and criminal laws that
prohibit false claims and that regulate patient referrals in Medicare, Medicaid and other programs. In recent years, federal and state
governments have devoted increased resources to monitoring the quality of care at senior living communities and to anti-fraud investigations in
healthcare generally. CMS contractors are expanding the retroactive audits of Medicare claims submitted by IRFs, SNFs and other providers,
and recouping alleged overpayments for services determined by auditors not to have been medically necessary or not to meet Medicare
coverage criteria as billed. State Medicaid programs and other third party payers are conducting similar medical necessity and compliance
audits. When federal or state agencies identify violations of anti-fraud, false claims, anti-kickback and physician referral laws, they may impose
or seek civil or criminal penalties, treble damages and other governmental sanctions, and may revoke the healthcare facility's license or make
conditional or exclude the healthcare facility from Medicare or Medicaid participation. When federal or state agencies identify quality of care
deficiencies or uncover improper billing, they may
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impose or seek various remedies or sanctions, including denial of new admissions, exclusion from Medicare or Medicaid program
participation, monetary penalties, restitution of overpayments, governmental oversight, temporary management, loss of licensure and criminal
penalties. Certain states and the federal government may determine that citations affecting one facility affect other facilities operated by the
same entity or related entities. Such a determination may affect an operator's ability to maintain or renew other licenses or Medicare or
Medicaid certifications or to secure new licenses or certifications. Our communities incur sanctions and penalties from time to time. As a result
of this extensive regulatory system and increasing enforcement initiatives, we have experienced increased costs for monitoring quality of care
compliance, billing procedures, and compliance with referral laws and other laws that apply to us, and we expect these costs may continue to
increase. Also, we have been subjected to sanctions and penalties in the past but none have been material to us; and if we become subject to
additional regulatory sanctions or repayment obligations at any of our existing facilities, or as a result of purchasing facilities with prior
deficiencies which we are unable to correct or resolve, our business may be adversely affected and we might experience financial losses. Any
adverse determination concerning any of our licenses or eligibility for Medicare or Medicaid reimbursement or any substantial penalties,
repayments, or sanctions, and the increasing costs of required compliance with applicable federal and state laws, may adversely affect our
ability to meet our financial obligations and negatively affect our financial condition and results of operations.
The nature of our business exposes us to litigation risks.
The nature of our business exposes us to litigation, and we are subject to lawsuits in the ordinary course of our business. In several well
publicized instances, private litigation by residents of senior living communities for alleged abuses has resulted in large damage awards against
other operating companies. Today, some lawyers and law firms specialize in bringing litigation against senior living companies. As a result of
this litigation and potential litigation, our cost of liability insurance has increased during the past few years. Medical liability insurance reform
has become a topic of political debate and some states have enacted legislation to limit future liability awards. However, such reforms have not
been generally adopted and we expect our insurance costs may continue to increase. Although our reserves for liability self insurance have been
determined with guidance from third party professionals, our reserves may prove inadequate. Increasing liability insurance costs and increasing
self insurance reserves may materially negatively affect our results of operations, cause us to experience losses or make our financial results
less consistent than they would otherwise be.
Our growth strategy may not succeed.
We have grown our business through acquisitions, through initiation of long term leases of independent and assisted living communities
where residents' private resources account for a large majority of revenues and through entering into long term contracts to manage
independent and assisted living communities. Our business plan includes taking advantage of an increasing demand for senior living facilities
and acquiring additional senior living communities. Our growth strategy involves risks, including the following:
•
we may be unable to locate senior living communities that receive a large percentage of their revenues from private resources;
•
we may be unable to locate senior living communities available for purchase at acceptable prices;
•
we may be unable to access capital to make acquisitions or operate acquired businesses;
•
acquired operations may not perform in accord with our expectations;
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•
we may be required to make significant capital expenditures to improve acquired facilities, including capital expenditures that
may not have been anticipated by us at the time of the acquisition;
•
we may have difficulty retaining key employees and other personnel at acquired facilities;
•
acquired operations may subject us to unanticipated contingent liabilities or regulatory problems;
•
to the extent we incur acquisition debt or leases, our operating leverage and resulting risks of debt defaults may increase; and, to
the extent we issue additional equity to fund our acquisitions, our stockholders' percentage of ownership will be diluted; and
•
combining our present operations with newly acquired operations may disrupt operations or cost more than anticipated.
For these reasons and others:
•
our business plan to grow may not succeed;
•
the benefits which we hope to achieve by growing may not be achieved;
•
we may suffer declines in profitability or suffer recurring losses; and
•
our existing operations may suffer from a lack of management attention or financial resources if such attention and resources are
devoted to a failed growth strategy.
When we acquire or take on new communities, we sometimes see a decline in community occupancy and it may take a period of time for
us to stabilize acquired community operations. Our efforts to restore occupancy or stabilize acquired communities' operations may not be
successful. In addition, rehabilitation hospitals and pharmacies are businesses with which we have limited experience, and our initiatives in
these areas may not be successful.
Our failure or inability to meet certain terms of our Credit Agreement would adversely affect our business.
Our revolving line of credit and security agreement, or our Credit Agreement, includes various conditions to our borrowing and various
financial and other covenants and events of default. We may not be able to satisfy all of these conditions or may default on some of these
covenants for various reasons, including matters which are beyond our control. If we are unable to borrow under our Credit Agreement we may
be unable to meet our business obligations or to grow by buying additional properties, or we may be required to sell some of our properties. If
we default under our Credit Agreement at a time when borrowed amounts are outstanding under this instrument, our lenders may demand
immediate payment. Any default under our Credit Agreement would likely have serious and adverse consequences to us and would likely cause
the market price of our securities to materially decline.
We continue to seek acquisitions and other strategic opportunities that may require a significant amount of management resources and
costs.
We continue to seek acquisitions and other strategic opportunities. Accordingly, we are often engaged in evaluating potential transactions
and other strategic alternatives. In addition, from time to time, we engage in preliminary discussions that may result in one or more
transactions. Although there is uncertainty that any of these discussions will result in definitive agreements or the completion of any
transaction, we may devote a significant amount of our management resources to such transactions, which could negatively impact our existing
and continuing operations. In addition, we may incur significant costs in connection with seeking acquisitions regardless of whether these
acquisitions are completed.
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Failure to comply with laws governing the privacy and security of personal information, including information relating to health, could
materially and adversely affect our financial condition and results of operations.
We are required to comply with federal and state laws governing the privacy, security, use and disclosure of individually identifiable
information, including information relating to health. Under HIPAA, we are required to comply with the HIPAA privacy rule, security
standards, and standards for electronic healthcare transactions. State laws also govern the privacy of individual health information, and rules
regarding state privacy rights may be more stringent than HIPAA. Other federal and state laws govern the privacy of other personal
information. If we fail to comply with applicable federal or state standards, we could be subject to civil sanctions and criminal penalties, which
could materially and adversely affect our financial condition and results of operations.
We rely on information technology in our operations, and any material failure, inadequacy, interruption or security failure of that
technology could harm our business.
We rely on information technology networks and systems, including the Internet, to process, transmit and store electronic information, and
manage or support a variety of business processes, including medical records, financial transactions and records, personal identifying
information, payroll data and workforce scheduling information. We purchase some of our information technology from vendors, on whom our
systems depend. We rely on commercially available systems, software, tools and monitoring to provide security for processing, transmission
and storage of confidential patient, resident and other customer information, such as individually identifiable information, including
information relating to health. Although we have taken steps to protect the security of our information systems and the data maintained in those
systems, it is possible that our safety and security measures will not be able to prevent the systems' improper functioning or damage, or the
improper access or disclosure of personally identifiable information such as in the event of cyber attacks. Security breaches, including physical
or electronic break-ins, computer viruses, attacks by hackers and similar breaches, can create system disruptions, shutdowns or unauthorized
disclosure of confidential information. Any failure to maintain proper function, security and availability of our information systems could
interrupt our operations, damage our reputation, subject us to liability claims or regulatory penalties and could have a material adverse effect on
our business, financial condition and results of operations.
Termination of assisted living resident agreements and resident attrition could adversely affect our revenues and earnings.
State regulations governing assisted living facilities typically require a written resident agreement with each resident. Most of these
regulations also require that each resident have the right to terminate our assisted living resident agreement for any reason on reasonable notice.
Consistent with these regulations, most resident agreements allow residents to terminate their agreements on 30 days' notice. Thus, we cannot
contract with assisted living residents to stay for longer periods of time, unlike typical apartment leasing arrangements that involve lease
agreements with terms of up to a year or longer. If a large number of residents elected to terminate their resident agreements at or around the
same time, our revenues and earnings could be materially and adversely affected. In addition, the advanced ages of our senior living residents
mean that the resident turnover rate in our senior living communities is difficult to predict.
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Our business requires us to make significant capital expenditures to maintain and improve our facilities.
Our communities sometimes require significant expenditures to address ongoing required maintenance and to make them attractive to
residents. Physical characteristics of senior living communities and rehabilitation hospitals are mandated by various governmental authorities;
changes in these regulations may require us to make significant expenditures. In addition, we often are required to make significant capital
expenditures when we acquire new facilities. Our available financial resources may be insufficient to fund these expenditures. In addition to
capital expenditures we are making at some of our senior living communities, we expect to make certain capital expenditures at our
rehabilitation hospitals. SNH has historically provided most of the capital we need to improve the properties we lease from them; however,
whenever SNH provides such capital, our rent increases and we may be unable to pay the increased rent without experiencing losses.
Our business is highly competitive and we may be unable to operate profitably.
We compete with numerous other companies that provide senior living, rehabilitation hospital and pharmacy services, including home
healthcare companies and other real estate based service providers. Although some states require certificates of need to develop new SNFs and
assisted living communities, there are fewer barriers to competition for home healthcare or for independent and assisted living services. Many
of our existing competitors are larger and have greater financial resources than us. Some of our competitors are not for profit entities which
have endowment income and may not have the same financial pressures that we face. We cannot provide any assurances that we will be able to
attract a sufficient number of residents to our communities or that we will be able to attract employees and keep wages and other employee
benefits, insurance costs and other operating expenses at levels which will allow us to compete successfully or to operate profitably.
We are subject to possible conflicts of interest; we have engaged in, and expect to continue to engage in, transactions with parties that
may be considered related parties.
Our business is subject to possible conflicts of interest as follows:
•
as of December 31, 2011, we leased from SNH 188 of our 245 senior living communities (including one that we have classified
as discontinued operations) and our two rehabilitation hospitals for total annual rent of approximately $195.2 million plus
percentage rent based on increases in gross revenues at certain properties;
•
As of December 31, 2011, we managed 22 senior living communities which are owned by SNH, and during 2011, we realized
$835,000 in management fees from SNH plus reimbursement of approximately $19.8 million of operating expenses which we
incurred at these managed communities;
•
we purchase various management services from RMR, the manager of SNH, and we lease our headquarters building from an
affiliate of RMR;
•
our Chief Executive Officer, Bruce J. Mackey Jr., our Chief Financial Officer, Paul V. Hoagland and our General Counsel, Vern
D. Larkin, are also employees of RMR, our Managing Directors, Barry M. Portnoy and Gerard M. Martin, are directors of
RMR, Mr. Barry Portnoy is a managing trustee of SNH and is also the majority beneficial owner and the chairman of RMR; and
•
RMR's simultaneous contractual obligations to us and SNH create potential conflicts of interest, or the appearance of such
conflicts of interest, and under the Business Management Agreement with RMR, in the event of a conflict between SNH and us,
RMR may act on behalf of SNH rather than on our behalf.
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On December 31, 2001, SNH distributed substantially all of its ownership of our common shares to its shareholders. Simultaneously with
the spin off, we entered into agreements with SNH and RMR which, among other things, limit (subject to certain exceptions) ownership of
more than 9.8% of our voting shares, restrict our ability to take any action that could jeopardize the tax status of SNH as a real estate
investment trust, or REIT, and limit our ability to acquire real estate of types which are owned by SNH or other businesses managed by RMR.
As a result of these agreements, our leases and management contracts with SNH, and our business management agreement with RMR, SNH,
RMR and their respective affiliates have significant roles in our business and we do not anticipate any changes to those roles in the future. In
addition, as of December 31, 2011, SNH owned 4.2 million of our common shares, or approximately 8.8% of our outstanding common shares,
and SNH is our largest shareholder.
We believe our affiliations with SNH and RMR have been and will be beneficial to us. Although we do not believe the potential conflicts
have adversely affected, or will adversely affect, our business, not everyone may agree with our position. In the past, in particular following
periods of financial distress or volatility in the market price of a company's securities, stockholder litigation, dissident stockholder director
nominations and dissident stockholder proposals have often been instituted against companies alleging conflicts of interest in business dealings
with directors, affiliated persons and entities. Our relationships with SNH, RMR, Messrs. Portnoy and Martin, and RMR affiliates may
precipitate such activities. These activities, if instituted against us, could result in substantial costs and a diversion of our management's
attention, even if the allegations are not substantiated.
Our leases of certain of our senior living communities are subordinated to mortgage debt of SNH, and a default by SNH could result in
the termination of those leases.
Our leases with SNH for 58 of our senior living communities, which had 2011 revenues totaling $329.3 million, are subordinated to
mortgage financing secured by such communities. As a result, in the event SNH was to default on such mortgage financing, by reason of our
default under our leases or for reasons unrelated to us or beyond our control, and its lender were to foreclose on such properties, our leases
would terminate as a matter of law. While we may be able to enter into new leases with the lenders or the purchaser or purchasers of such
properties, or they may elect to continue our occupancy under the terms of the lease as if there had been no foreclosure, such parties are not
obligated to pursue either such option and, if we are able to retain possession, the terms of our continued occupancy may not be as favorable to
us as those contained in our leases with SNH. If we do not enter into new leases of such communities following a foreclosure, we would lose
the right to continue to operate these facilities and may incur material obligations to residents, employees and other parties as a result of such
loss, each of which could have a material and adverse effect on our results of operations.
Disputes with SNH and RMR and stockholder litigation against us or our Directors and officers may be referred to arbitration
proceedings.
Our contracts with SNH and RMR provide that any dispute arising under those contracts may be referred to binding arbitration. Similarly
our bylaws provide that actions by our stockholders against us or against our Directors and officers, including derivative and class actions, may
be referred to binding arbitration. As a result, we and our stockholders would not be able to pursue litigation for these disputes in courts against
SNH, RMR, or our Directors and officers. In addition, the ability to collect attorneys' fees or other damages may be limited in the arbitration,
which may discourage attorneys from agreeing to represent parties wishing to commence such proceedings.
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Climate change legislation and resulting increased energy costs at our communities could materially and adversely affect our financial
condition and results of operations.
The current political debate about world climate changes has resulted in various existing and proposed treaties, laws and regulations which
are intended to limit carbon emissions. We believe treaties, laws and regulations which may limit carbon emissions may cause energy costs at
our communities to increase. In the longer term, we believe any such increased costs will be passed through and paid by our patients, residents
and other customers in higher charges for our services. However, in the short term, these increased costs, if material in amount, could
materially and adversely affect our financial condition and results of operations.
We may experience losses from our business dealings with Affiliates Insurance Company.
We have invested approximately $5.2 million in AIC, we have purchased substantially all our property insurance in a program designed
and reinsured in part by AIC, and we are currently investigating the possibilities to expand our relationship with AIC to other types of
insurance. We, RMR, SNH and four other companies to which RMR provides management services each own approximately 14.29% of AIC
and we and those other AIC shareholders participate in a combined insurance program designed and reinsured in part by AIC. Our principal
reason for investing in AIC and for purchasing insurance in these programs is to seek to improve our financial results by obtaining improved
insurance coverages at lower costs than may be otherwise available to us or by participating in any profits which we may realize as an owner of
AIC. These beneficial financial results may not occur and we may need to invest additional capital in order to continue to pursue these results.
AIC's business involves the risks typical of an insurance business, including the risk that it may be insufficiently capitalized. Accordingly, our
anticipated financial benefits from our business dealings with AIC may be delayed or not achieved, and we may experience losses from these
dealings.
RISKS RELATED TO OUR ORGANIZATION AND STRUCTURE
Ownership limitations and anti-takeover provisions in our charter, bylaws and certain material agreements, as well as certain
provisions of Maryland law, may prevent our stockholders from receiving a takeover premium or implementing beneficial changes.
Our charter and bylaws contain separate provisions which prohibit any stockholder from owning more than 9.8% and 5% of the number or
value of any class or series of our outstanding shares of stock. These provisions inhibit acquisitions of a significant stake in us and may prevent
a change in our control. Additionally, many provisions contained in our charter and bylaws and under Maryland law may further deter persons
from attempting to acquire control of us and implement changes that may be considered beneficial by some stockholders, including, for
example, provisions relating to:
•
the division of our Directors into three classes, with the term of one class expiring each year and in each case, until a successor
is elected and qualifies, which could delay a change in our control;
•
stockholder voting rights and standards for the election of Directors and other provisions which require larger majorities for
approval of actions which are not approved by our Directors than for actions which are approved by our Directors;
•
the power of our Board of Directors, without a stockholders' vote, to authorize and issue additional shares and create classes of
shares on terms that it determines;
•
required qualifications for an individual to serve as a Director and a requirement that certain of our Directors be "Independent
Directors" and other Directors be "Managing Directors" as defined in our bylaws;
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•
limitations on the ability of, and various requirements that must be satisfied in order for, our stockholders to propose nominees
for election as Directors and propose other business to be considered at a meeting of stockholders;
•
limitations on the ability of our stockholders to remove our Directors;
•
the authority of our Board of Directors, and not our stockholders, to adopt, amend or repeal our bylaws;
•
because of our ownership of AIC, we are an insurance holding company under applicable state law; accordingly, anyone who
intends to solicit proxies for a person to serve as one of our Directors or for another proposal of business not approved by our
Board of Directors may be required to receive pre-clearance from the concerned insurance regulators; and
•
the authority of our Board of Directors to adopt certain amendments to our charter without stockholder approval to increase or
decrease the number of shares of stock or the number of shares of any class or series that we have authority to issue.
The terms of our leases and management contracts with SNH and our business management agreement with RMR provide that our rights
under these agreements may be cancelled by SNH and RMR, respectively, upon the acquisition by any person or group of more than 9.8% of
our voting stock, and upon other change in control events, as defined in those documents including, in certain of the SNH leases, the adoption
of any proposal (other than a precatory proposal) or the election to our Board of Directors of any individual if such proposal or individual was
not approved, nominated or appointed, as the case may be, by vote of a majority of our Directors in office immediately prior to the making of
such proposal or the nomination or appointment of such individual. If the breach of these ownership limitations causes a lease default,
stockholders causing the default may become liable to us or to other stockholders for damages. Additionally, we maintain a rights agreement
whereby, in the event a person or group of persons acquires 10% or more of our outstanding common shares, our stockholders, other than such
person or group, will be entitled to purchase additional shares or other securities or our property at a discount. In addition, a termination of our
business management agreement , or a change in control event of us, including upon, the acquisition by any person or group of more than 9.8%
of our voting stock, is a default under our credit facility unless approved by our lender. Also, certain provisions of Maryland law may have an
anti-takeover effect. For all of these reasons, our stockholders may be unable to realize a change of control premium for securities they own or
otherwise effect a change of our policies or a change of our control.
Our rights and the rights of our stockholders to take action against our Directors and officers are limited.
Our charter limits the liability of our Directors and officers to us and our stockholders for money damages to the maximum extent
permitted under Maryland law. Under current Maryland law, our Directors and officers will not have any liability to us and our stockholders
for money damages other than liability resulting from:
•
actual receipt of an improper benefit or profit in money, property or services; or
•
active and deliberate dishonesty by such director or officer that was established by a final judgment as being material to the
cause of action adjudicated.
Our charter and contractual obligations authorize and may require us to indemnify our present and former Directors and officers for
actions taken by them in those capacities to the maximum extent permitted by Maryland law. However, except with respect to proceedings to
enforce rights to indemnification, we will indemnify any person referenced in the previous sentence in connection with a proceeding initiated
by such person against us only if such proceeding is authorized by our charter or
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bylaws or by our Board of Directors or stockholders. In addition, we may be obligated to pay or reimburse the expenses incurred by our present
and former Directors and officers without requiring a preliminary determination of their ultimate entitlement to indemnification. As a result, we
and our stockholders may have more limited rights against our present and former Directors and officers than might otherwise exist absent the
provisions in our charter and contracts or that might exist with other companies, which could limit your recourse in the event of actions not in
your best interest.
RISKS RELATED TO OUR NOTES AND COMMON SHARES
Any notes we may issue will be effectively subordinated to the debts of our subsidiaries and to our secured debt.
We conduct substantially all of our business through subsidiaries. Consequently, our ability to pay debt service on the outstanding Notes
and any notes we issue in the future will be dependent upon the cash flow of our subsidiaries and payments by those subsidiaries to us as
dividends or otherwise. Our subsidiaries are separate legal entities and have their own liabilities. Certain of our subsidiaries guarantee our
obligations under the Notes and those subsidiaries and additional subsidiaries guarantee our obligations under our Credit Agreement. In
addition, as of December 31, 2011, our subsidiaries which have not guaranteed the Notes had approximately $47.4 million of secured
indebtedness outstanding, and we may incur additional secured indebtedness that would effectively rank senior to the outstanding Notes. The
Notes are unsecured and, as such, effectively subordinated to our secured debt. In addition, non-guarantor subsidiaries have substantial
additional obligations, including trade payables and lease obligations, to which the Notes are and will be effectively subordinated.
Our right to receive assets of any of our subsidiaries upon its liquidation or reorganization will be structurally subordinated to the claims
of our subsidiaries' creditors, except to the extent that we are recognized as a creditor of such subsidiary, in which case our claims would still
be subordinated to any security interests in the assets of such subsidiaries and any indebtedness of our subsidiaries that is senior to that held by
us. In the event of our insolvency, bankruptcy, liquidation, reorganization, dissolution or winding up, we and the subsidiaries that guarantee the
Notes, or any new notes we may issue, may not have sufficient assets to pay amounts due on any or all such notes.
We may be required to prepay our debts upon a change of control.
In certain change of control circumstances, current and future noteholders and some of our lenders may have the right to require us to
purchase the notes which they own or repay our debt owing to them at their principal amount plus accrued interest and a premium.
The Notes may permit redemption before maturity, and our noteholders may be unable to reinvest proceeds at the same or a higher
rate.
The terms of the Notes permit us, and the terms of future notes may permit us, to redeem all or a portion of the Notes after a certain
amount of time, or up to a certain percentage of the outstanding Notes prior to certain dates. Generally, the redemption price will equal the
principal amount being redeemed, plus accrued interest to the redemption date, plus any applicable premium. If a redemption occurs, our
noteholders may be unable to reinvest the money they receive in the redemption at a rate that is equal to or higher than the rate of return on the
applicable notes.
There may be no public market for notes we may issue and one may not develop.
There is currently a limited trading market for the Notes. In addition, any notes we may issue will be a new issue for which no trading
market currently exists. We may not list our notes on any securities exchange or seek approval for price quotations to be made available
through any automated quotation system. There is no assurance that an active trading market for any of our notes will exist in the future.
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Even if a market develops, the liquidity of the trading market for any of our notes and the market price quoted for any such notes may be
adversely affected by changes in the overall market for fixed income securities, by changes in our financial performance or prospects, or by
changes in the prospects for the senior living industry generally. Also, we have purchased and retired $89.2 million face amount of the
outstanding Notes. These purchases reduced the number and amount of outstanding Notes and may decrease the liquidity of the Notes.
Increased leverage may harm our financial condition and results of operations.
Our total consolidated long term debt as of December 31, 2011 was approximately $76.0 million and represented approximately 21% of
our total book capitalization as of that date. In addition to our indebtedness, we have substantial lease and other obligations. The indenture
governing the Notes does not limit the amount of additional indebtedness, including senior or secured indebtedness, which we can create, incur,
assume or guarantee, nor does the indenture limit the amount of indebtedness or other liabilities that our subsidiaries can create, incur, assume
or guarantee.
Our level of indebtedness could have important consequences to our investors, because:
•
it could affect our ability to satisfy our debt obligations;
•
the portion of our cash flows from operations required to make interest and principal payments will not be available for
operations, working capital, capital expenditures, expansion, acquisitions or general corporate or other purposes;
•
it may impair our ability to obtain additional financing in the future;
•
it may limit our flexibility in planning for, or reacting to, changes in our business and industry; and
•
it may make us more vulnerable to downturns in our business, our industry or the economy in general than a company with less
debt leverage.
We do not intend to pay cash dividends on our common shares in the foreseeable future.
We have never declared or paid any cash dividends on our common shares, and we currently do not anticipate paying any cash dividends
in the foreseeable future. Because we do not anticipate paying cash dividends, holders who convert the outstanding Notes into our common
shares will not realize a return on their investment unless the trading price of our common shares appreciates.
The price of our common shares has fluctuated, and a number of factors may cause our common share price to decline.
The market price of our common shares has fluctuated and could fluctuate significantly in the future in response to various factors and
events, including, but not limited to, the risks set out in this Annual Report on Form 10-K, as well as:
•
the liquidity of the market for our common shares;
•
changes in our operating results;
•
changes in analysts' expectations; and
•
general economic and industry trends and conditions.
In addition, the stock market in recent years has experienced broad price and volume fluctuations that often have been unrelated to the
operating performance of particular companies. These market fluctuations may also cause the market price of our common shares to decline.
Stockholders may be unable to resell our common shares at or above the price at which they purchased our common shares.
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Item 1B.
Unresolved Staff Comments
None.
Item 2.
Properties
OUR SENIOR LIVING COMMUNITIES
As of December 31, 2011, we owned or leased and operated 222 senior living communities which we have categorized into two groups as
follows:
Type of community
No. of
communities
Independent and assisted living
communities
SNFs
Totals:
184
38
222
Indep.
living
apts.
6,888
69
6,957
Type of units
Assist.
Skilled
living
nursing
suites
beds
11,428
18
11,446
2,026
3,336
5,362
Total
living
units
20,342
3,423
23,765
Average
occupancy for
the year ended
Dec. 31, 2011
Revenues for
the year ended
Dec. 31, 2011
(in thousands)
86.4% $
82.2%
85.8% $
849,770
216,616
1,066,386
Percent of
revenues
from private
resources
85.0%
24.6%
72.7%
Excluded from the preceding data are 22 independent and assisted living communities containing 1,742 independent living apartments,
1,556 assisted living suites and 29 skilled nursing beds that we manage for the account of SNH, and one assisted living community containing
67 assisted living suites that we manage for the existing owner, pending SNH's acquisition. Also excluded are two SNFs containing 271 living
units that we own and one assisted living community containing 103 living units that we lease from SNH that are being offered for sale and that
we have classified as discontinued operations.
Independent and Assisted Living Communities
As of December 31, 2011, we owned or leased and operated 184 independent and assisted living communities. We leased 149 of these
communities from SNH and four of these communities from HCP, Inc., or HCP. We own the remaining 31 communities. These communities
have 20,342 living units
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and are located in 26 states. The following table provides additional information about these communities and their operations as of
December 31, 2011:
Average
occupancy for
Type of units
Location
No. of
communities
1. Alabama
2. Arizona
3. California
4. Delaware
5. Florida
6. Georgia
7. Illinois
8. Indiana
9. Kansas
10. Kentucky
11. Maryland
12.
Massachusetts
13. Minnesota
14.
Mississippi
15. Missouri
16. Nebraska
17. New
Jersey
18. New
Mexico
19. North
Carolina
20. Ohio
21.
Pennsylvania
22. South
Carolina
23. Tennessee
24. Texas
25. Virginia
26. Wisconsin
Totals:
Indep.
living
apts.
Assist.
living
suites
Skilled
nursing
beds
Total
living
units
8
5
9
6
9
11
2
16
3
9
10
—
471
496
336
1,180
111
112
946
332
491
270
367
390
423
322
718
524
73
577
67
281
661
—
188
59
341
155
40
—
140
200
183
—
367
1,049
978
999
2,053
675
185
1,663
599
955
931
1
1
—
—
124
230
—
—
2
1
2
—
111
31
114
—
108
5
211
1
the year
ended
Dec. 31, 2011
Revenues for
the year ended
Dec. 31, 2011
(in thousands)
Percent of
revenues
from private
resources
92.5% $
79.8%
83.7%
81.7%
89.9%
84.9%
91.7%
89.3%
93.2%
91.1%
91.3%
13,961
42,113
45,094
64,663
75,312
24,596
4,108
51,891
31,352
44,978
49,577
100.0%
78.2%
91.6%
66.1%
75.3%
92.4%
100.0%
84.0%
71.4%
80.8%
99.9%
124
230
78.7%
81.0%
6,891
12,705
100.0%
94.5%
—
—
68
114
111
207
90.5%
94.7%
86.3%
3,676
2,733
9,060
100.0%
100.0%
57.3%
563
60
834
86.1%
36,154
82.1%
114
35
60
209
84.9%
12,993
76.7%
15
1
143
143
1,295
115
—
60
1,438
318
83.2%
89.3%
52,926
18,619
98.1%
83.1%
10
—
1,002
—
1,002
83.3%
35,374
100.0%
18
11
10
12
6
184
101
7
898
284
100
6,888
857
670
636
773
503
11,428
100
—
298
—
74
2,026
1,058
677
1,832
1,057
677
20,342
38,303
23,748
84,973
35,844
28,126
849,770
89.4%
100.0%
82.1%
100.0%
68.0%
85.0%
29
79.1%
96.2%
82.5%
86.7%
92.2%
86.4% $
Table of Contents
Skilled Nursing Facilities
As of December 31, 2011, we operated 38 SNFs that we lease from SNH. These facilities have 3,423 living units and are located in nine
states. The following table provides additional information about these facilities and their operations as of December 31, 2011:
Location
1. Arizona
2.
California
3.
Colorado
4. Iowa
5. Kansas
6.
Missouri
7.
Nebraska
8.
Wisconsin
9.
Wyoming
Totals:
No. of
communities
Indep.
living
apts.
Type of units
Assist.
Skilled
living
nursing
suites
beds
Total
living
units
Average
occupancy for
the year ended
Dec. 31, 2011
Revenues for
the year ended
Dec. 31, 2011
(in thousands)
1
—
18
102
120
85.5% $
4
—
—
373
373
7
6
1
46
19
4
—
—
—
754
413
56
1
—
—
10
—
6
2
38
Percent of
revenues
from private
resources
8,123
18.4%
93.5%
34,525
10.8%
800
432
60
83.6%
85.2%
92.1%
55,704
27,162
3,516
33.0%
17.7%
28.5%
112
112
55.2%
3,850
17.3%
—
613
613
86.0%
32,788
29.1%
—
—
722
722
74.5%
40,664
28.5%
—
69
—
18
191
3,336
191
3,423
10,284
216,616
20.2%
24.6%
75.2%
82.2% $
OUR INPATIENT REHABILITATION HOSPITALS
As of December 31, 2011, we operated two inpatient rehabilitation hospitals that we lease from SNH. These hospitals are located in
Braintree and Woburn, Massachusetts and have 321 beds dedicated to inpatient rehabilitation services to patients at the two hospital locations
and at three satellite locations. In addition, we lease and operate 13 outpatient clinics affiliated with these hospitals. For the year ended
December 31, 2011, the combined revenues of these operations were $105.3 million, of which approximately 65% came from Medicare, 3%
came from Medicaid and the remaining 32% came from health insurance companies or other sources. The average occupancy at these inpatient
facilities for the year ended December 31, 2011 was 55.1%.
OUR SNH LEASES AND MANAGEMENT AGREEMENTS
SNH Leases
The following table provides a summary of our leases (including one assisted living community that we have classified as discontinued
operations) and is followed by a summary of the material terms of our leases with SNH. Because it is a summary, it does not contain all of the
information that may be
30
Table of Contents
important to you. If you would like more information, you should read the leases which are among the exhibits listed in Item 15 of this Annual
Report on Form 10-K and incorporated herein by reference.
Number of
properties
1. Lease No. 1 for SNFs and
independent and assisted
living communities (1)
2. Lease No. 2 for SNFs,
independent and assisted
living communities and
rehabilitation hospitals
3. Lease No. 3 for independent
and assisted living
communities (2)
4. Lease No. 4 for SNFs and
independent and assisted
living communities (3)
Totals
Annual
rent as of
December 31, 2011
89 $
48
28
25
190 $
56.0 million
52.5 million
63.0 million
23.7 million
195.2 million
Initial expiration
date
Renewal terms
December 31, 2024
Two 15-year
renewal
options.
June 30, 2026
Two 10-year
renewal
options.
December 31, 2028
Two 15-year
renewal
options.
April 30, 2017
Two 15-year
renewal
options.
(1)
Lease No. 1 is comprised of four separate leases. Three of these four leases exist to accommodate mortgage financings in
effect at the time SNH acquired the properties; we have agreed with SNH to combine all four of these leases into one
lease as and when these mortgage financings are paid.
(2)
Lease No. 3 exists to accommodate certain mortgage financing by SNH.
(3)
Lease No. 4 is comprised of three separate leases. Two of these three leases exist to accommodate mortgage obligations
in effect at the time SNH acquired the properties; we have agreed with SNH to combine all three of these leases into one
lease when these mortgage financings are paid.
Percentage Rent. Our leases with SNH require us to pay percentage rent at 181 of the 188 senior living communities we lease from
SNH (including the one assisted living community we lease from SNH that has been classified as discontinued operations) equal to 4% of the
amount by which gross revenues, as defined in our leases, of each property exceeds gross revenues in a specific base year. We paid total
percentage rent of $4.9 million in 2011. Different base years apply to those communities that pay percentage rent. The base year is usually the
first full calendar year after each community is leased. We do not pay percentage rent for our rehabilitation hospitals.
Operating Costs. Each lease is a so-called "triple-net" lease which requires us to pay all costs incurred in the operation of the properties,
including the costs of maintenance, personnel, services to residents, insurance and real estate and personal property taxes.
Rent During Renewal Term. For all but seven of the properties we lease from SNH, rent during each applicable renewal term is the
same as the minimum rent and percentage rent payable during the initial term. For the remaining seven properties, rent during the second
renewal term is based on the fair market rental value of such properties.
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Licenses.
properties.
Our leases require us to obtain, maintain and comply with all applicable permits and licenses necessary to operate the leased
Maintenance and Alterations. We are required to operate continuously and maintain, at our expense, the leased properties in good order
and repair, including structural and nonstructural components. We may request SNH to fund amounts needed for repairs and renovations in
return for rent adjustments according to formulas to provide SNH a return on its investment. At the end of each lease term, we are required to
surrender the leased properties in substantially the same condition as existed on the commencement date of the lease, subject to any permitted
alterations and ordinary wear and tear.
Assignment and Subletting. SNH's consent is generally required for any direct or indirect assignment or sublease of any of the
properties. Also, in the event of any assignment or subletting, we remain liable under the applicable lease.
Indemnification and Insurance. With limited exceptions, we are required to indemnify SNH from all liabilities which may arise from
the ownership or operation of the leased properties. We generally are required to maintain insurance against such risks and in such amounts as
SNH shall reasonably require and may be commercially reasonable. Each lease requires that SNH be named as an additional insured under
these insurance policies.
Damage, Destruction, Condemnation and Environmental Matters. If any of the leased properties is damaged by fire or other casualty or
taken for a public use, we are generally obligated to rebuild it unless the community cannot be restored. If the property cannot be restored, SNH
will generally receive all insurance or taking proceeds and we are liable to SNH for the amount of any deductible or deficiency between the
replacement cost and the insurance proceeds, and our rent will be adjusted pro rata. We are also required to remove and dispose of any
hazardous substance at the leased properties in compliance with all applicable environmental laws and regulations.
Events of Default.
Events of default under each lease generally include the following:
•
our failure to pay rent or any money due under the lease when it is due, which failure continues for five business days;
•
our failure to maintain the insurance required under such lease;
•
any person or group acquiring ownership of 9.8% or more of our outstanding voting stock or any change in our control, the
adoption of any shareholder proposal (other than a precatory proposal) or the election to our Board of Directors of any
individual if such proposal or individual was not approved, nominated or appointed, as the case may be, by vote of a majority of
our directors in office immediately prior to the making of such proposal or the nomination or appointment of such individual;
•
the occurrence of certain events with respect to our insolvency or dissolution;
•
our default under indebtedness which gives the holder the right to accelerate;
•
our being declared ineligible to receive reimbursement under Medicare or Medicaid programs for any of the leased properties
which participate in such programs or the revocation of any material license required for our operations; and
•
our failure to perform any terms, covenants or agreements of such lease and the continuance thereof for a specified period of
time after written notice.
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Remedies.
permitted:
Upon the occurrence of any event of default, each lease provides that, among other things, SNH may, to the extent legally
•
accelerate the rents;
•
terminate the leases in whole or in part;
•
enter the property and take possession of any and all our personal property and retain or sell the same at a public or private sale;
•
make any payment or perform any act required to be performed by us under the leases; and
•
rent the property and recover from us the difference between the amount of rent which would have been due under the lease and
the rent received from the re-letting.
We are obligated to reimburse SNH for all costs and expenses incurred in connection with any exercise of the foregoing remedies.
Management.
SNH.
We may not enter into any new management agreement affecting any leased property without the prior written consent of
Lease Subordination. Our leases may be subordinated to any mortgages on properties leased from SNH. As of December 31, 2011,
SNH had mortgages on 58 of our communities to which our leases were subordinated. These 58 communities had 7,316 living units and 2011
revenues totaling $329.3 million. SNH's outstanding borrowing secured by mortgages on these 58 communities totaled $601.3 million as of
December 31, 2011.
Financing Limitations; Security. Our leases subject to mortgage financings of SNH require SNH's consent before we incur debt secured
by our investments in our tenant subsidiaries that lease or operate the properties subject to these leases. Further, our leases subject to mortgage
financings prohibit our tenant subsidiaries from incurring liabilities, other than operating liabilities incurred in the ordinary course of business,
secured by our accounts receivable or purchase money debt. We may pledge interests in our leases only if the pledge is approved by SNH. In
addition, in connection with our leases subject to mortgage financings with SNH, certain of our subsidiaries pledged to the lenders under such
mortgage financings certain tangible and intangible personal property, such as accounts receivable and contract rights, located at, or arising
from the operations of, the properties subject to such leases to secure their obligations under such leases and certain of their obligations relating
to such mortgage financings.
Non-Economic Circumstances. If we determine that continued operations of one or more properties is not economical, we may
negotiate with SNH to close or sell that community, including SNH's ownership in the property. In the event of such a sale, SNH receives the
net proceeds and our rent for the remaining properties in the affected lease is reduced according to formulas contained in the applicable lease.
Our Relationship with SNH. SNH is our largest landlord. We were a 100% owned subsidiary of SNH before December 31, 2001. On
December 31, 2001, SNH distributed substantially all of our then outstanding common shares to its shareholders. Both we and SNH receive
management services from RMR. SNH owns 4,235,000, or 8.8%, of our outstanding common shares as of February 15, 2012. For more
information about our dealings with SNH, and about the risks which may arise as a result of these related person transactions, please see
"Management's Discussion and Analysis of Financial Condition and Results of Operations—Related Person Transactions" of this Annual
Report on Form 10-K.
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Management Contracts
The management contracts for the communities we manage for SNH's account, or the Management Contracts, provide us with a
management fee equal to 3% of the gross revenues realized at the communities, plus reimbursement for our direct costs and expenses related to
the communities and an incentive fee equal to 35% of the annual net operating income of the communities after SNH realizes an annual return
equal to 8% of its invested capital. The Management Contracts have an initial term of 20 years and are subject to automatic renewal for two
consecutive 15 year terms, unless earlier terminated or timely notice of nonrenewal is delivered. The Management Contracts provide that we
and SNH each have the option to terminate the contracts upon the acquisition by a person or group of more than 9.8% of the other's voting
stock and upon other change in control events affecting the other, as defined in those documents, including the adoption of any shareholder
proposal (other than a precatory proposal) or the election to the board of directors of any individual if such proposal or individual was not
approved, nominated or appointed, as the case may be, by vote of a majority of the board of directors in office immediately prior to the making
of such proposal or the nomination or appointment of such individual. As of December 31, 2011, all of our Management Contracts with SNH
have been made subject to a pooling agreement we entered with SNH in connection with the 20 communities SNH agreed to acquire in March
2011 referred to above, except for a community we manage for SNH's account that only includes independent living apartments. Communities
with only independent living apartments will be subject to a separate pooling agreement. Under the pooling agreement currently in effect,
determinations of fees and expenses of the various communities that are subject to the applicable pooled Management Contracts are
aggregated, including determination of SNH's return of its invested capital and our incentive fees. Under the pooling agreement, after
December 31, 2017, SNH has the right, subject to our cure rights, to terminate all, but not less than all, the Management Contracts that are
subject to the pooling agreement if it does not receive its minimum return in each of three consecutive years. In addition, under the pooling
agreement, we have a limited right to require the sale of underperforming communities. Also under the pooling agreement, any nonrenewal
notice given by us with respect to a community that is subject to the pooling agreement would be deemed a nonrenewal with respect to all the
communities (and related Management Contracts) that are the subject of the pooling agreement.
Item 3.
Legal Proceedings
None.
Item 4.
Mine Safety Disclosures
Not applicable.
34
Table of Contents
PART II
Item 5.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common shares were traded on the NYSE Amex (symbol: FVE) through February 3, 2011. Beginning on February 4, 2011, our
common shares are traded on the NYSE (symbol: FVE). The following table sets forth for the periods indicated the high and low sale prices for
our common shares as reported by the NYSE Amex or the NYSE:
High
Low
2010
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
$ 3.88 $ 2.75
3.80
2.81
5.29
2.72
7.43
4.95
2011
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
$ 8.62 $ 5.95
8.95
5.00
6.15
2.42
3.39
2.15
The closing price of our common shares on the NYSE on February 15, 2012 was $3.60 per share.
As of February 15, 2012, there were approximately 2,480 shareholders of record, and we estimate that as of such date there were in excess
of 24,900 beneficial owners of our common shares.
We have never paid or declared any cash dividends on our common shares. At present, we intend to retain our future earnings, if any, to
fund our operations and the growth of our business. Our future decisions concerning the payment of dividends on our common shares will
depend upon our results of operations, financial condition and capital expenditure plans, as well as other factors as our Board of Directors, in
its discretion, may consider relevant.
Item 6.
Selected Financial Data
The following table sets forth selected financial data for the periods and dates indicated. Our comparative results are impacted by
community acquisitions and dispositions during the periods shown. This data should be read in conjunction with, and is qualified in its entirety
by reference to "Management's Discussion and Analysis of Financial Condition and Results of Operations" of this
35
Table of Contents
Annual Report on Form 10-K and the consolidated financial statements and accompanying notes included in this Annual Report on Form 10-K.
2011
Operating data:
Total revenues
Net income from
continuing operations
Net loss from
discontinued
operations
Net income (loss)
Basic net income (loss) per
share:
Income from continuing
operations
Loss from discontinued
operations
Net income (loss)
Diluted net income (loss)
per share:
Income from continuing
operations
Loss from discontinued
operations
Net income (loss)
Balance sheet data (as of
December 31):
Total assets
Total long term
indebtedness
Other long term
obligations
Total shareholders'
equity
Item 7.
Year ended December 31,
2010
2009
2008
(in thousands, except per share data)
2007
$ 1,281,764
$ 1,213,261
$ 1,142,740
$ 1,049,122
$ 931,591
68,277
25,562
40,420
98
25,908
(4,076)
64,201
(2,070)
23,492
(2,090)
38,330
1.62
0.72
1.20
—
0.82
(0.10)
1.52
(0.06)
0.66
(0.06)
1.14
(0.14)
(0.14)
(0.08)
0.74
1.54
0.69
1.10
—
0.74
(0.09)
1.45
(0.05)
0.64
(0.05)
1.05
(0.14)
(0.14)
(0.06)
0.68
(4,594)
(4,496)
(2,582)
23,326
583,477
379,794
413,100
412,638
360,454
75,996
37,905
54,167
152,864
134,323
37,956
39,211
33,590
37,344
27,259
280,194
164,767
139,315
85,339
86,822
Management's Discussion and Analysis of Financial Condition and Results of Operations
GENERAL INDUSTRY TRENDS
The senior living industry generally is experiencing growth as a result of demographic factors. According to census data, the population in
the United States over age 75 is growing much faster than the general population. A large number of independent and assisted living
communities were built in the 1990s. This development activity caused an excess supply of new, high priced communities. Longer than
projected fill up periods resulted in low occupancy, price discounting and financial distress for many independent and assisted living operators.
Development activity was significantly reduced in the early part of the last decade. We believe that the nationwide supply and demand for these
types of facilities is about balanced today. We believe that the aging of the United States population and the almost complete reliance of
independent and assisted living services upon revenues from residents' private resources should mean that these types of facilities can be
profitably operated.
The increasing availability of assisted living facilities in the 1990s caused occupancy at many SNFs to decline. This fact, together with
restrictions on development of new SNFs by most states and assisted living facilities in some states, has generally caused nursing care to be
delivered in older facilities. We believe that many SNFs currently in operation are becoming physically obsolete and that political pressures
from an aging population will eventually cause governmental authorities to permit increased new construction.
36
Table of Contents
Beginning in 2007, problems in certain domestic credit markets presaged a global credit crisis that led to a recession in the United States.
The recession resulted in aggressive government spending in the United States, significant business layoffs, reduced availability of credit on
reasonable terms in most markets, and lower real estate prices. During the past three years, weak economic conditions throughout the country
have negatively affected our occupancy. These conditions have impacted many companies both within and outside of our industry and it is
unclear when current economic conditions, especially the housing market, may materially and sustainably improve. Although many of the
services we provide are needs driven, some of those needs may be deferred during recessions; for example, relocating to a senior living
community may be delayed when sales of houses are delayed. Also, we have experienced some pricing pressures from competition.
Rehabilitation hospitals provide intensive medical services, including physical therapy, occupational therapy and speech language services
beyond the capability customarily available in SNFs. We believe that our experience in providing high quality rehabilitation services at our
IRFs has assisted us to provide increasing amounts of rehabilitation services at our senior living communities.
Institutional pharmacies provide large quantities of drugs at locations where patients with recurring pharmacy requirements are
concentrated. The business rationale for an institutional pharmacy is to deliver drugs and pharmacy services more efficiently and at lower costs
than from expensive retail locations which cater to short term requirements. The aging of the population and recent pharmacological
innovations have created rapidly growing demand for pharmacy drugs and services. The Medicare Part D prescription drug benefit was
implemented in 2006 pursuant to the Medicare Prescription Drug Improvement and Modernization Act of 2003, or MMA, and by December
2010, approximately 90% of Medicare beneficiaries had prescription drug coverage, mostly through Medicare Part D, according to HHS.
Because the MMA has increased Medicare expenditures for prescription drugs, the federal government has sought to implement various cost
control measures and as a result, the profitability of providing pharmacy goods and services has been reduced. We anticipate that this trend will
continue. Because the profits available from individual pharmacy transactions have been, and likely will continue to be reduced, we believe our
institutional pharmacy business will need to expand to maintain or improve its financial results.
OPERATIONS
We earn our senior living revenue primarily by providing housing and services to our senior living residents. During 2011, approximately
27% of our senior living revenues came from the Medicare and Medicaid programs and approximately 73% of our senior living revenues came
from residents' private resources. We bill all private pay residents in advance for the housing and services to be provided in the following
month.
Our material expenses are:
•
Wages and benefits—includes wages for our employees working at our senior living communities and wage related expenses
such as health insurance, workers' compensation insurance and other benefits.
•
Other senior living operating expenses—includes utilities, housekeeping, dietary, maintenance, marketing, insurance and
community level administrative costs at our senior living communities.
•
Rent expense—we lease 187 senior living communities (excluding one senior living community classified as discontinued
operations) and two rehabilitation hospitals from SNH and four senior living communities from HCP.
•
Hospital expenses—includes wages and benefits for our hospital based staff and other operating expenses related to our hospital
business.
37
Table of Contents
•
Institutional pharmacy expenses—includes the cost of drugs dispensed to our patients as well as wages and benefits for our
pharmacies' staff and other operating expenses related to our pharmacy business.
•
General and administrative expenses—principally wage related costs for headquarters and regional staff supporting our
communities, hospitals and pharmacies.
•
Costs incurred on behalf of managed communities—includes wages and benefits for staff and other operating expenses related
to the communities that we manage for the account of SNH or for the account of the current owner, pending SNH's acquisition
of the communities.
•
Depreciation and amortization expense—we incur depreciation expense on buildings and furniture and equipment that we own,
and we incur amortization expense on certain identifiable intangible assets related to our pharmacy acquisitions.
•
Interest and other expenses—primarily includes interest on outstanding debt and amortization of deferred financing costs.
Our reportable segments consist of our senior living community business and our rehabilitation hospital business. In the senior living
community segment we operate for our own account, manage for the account of SNH or for another owner, pending SNH's acquisition,
independent living communities, assisted living communities and SNFs that are subject to centralized oversight and provide housing and
services generally to elderly residents. Our rehabilitation hospital segment provides inpatient rehabilitation services to patients at two hospital
locations and at three satellite locations and outpatient rehabilitation services at 13 affiliated outpatient clinics. We do not consider our
institutional pharmacy operations to be a material, separately reportable segment of our business. Consequently, we report our institutional
pharmacy revenues and expense as separate items within our corporate and other activities. All of our operations and assets are located in the
United States, except for the operations of our captive insurance company, which participates in our workers' compensation, professional
liability and automobile insurance programs and operates in the Cayman Islands. See our consolidated financial statements included in
"Exhibits and Financial Statement Schedules" of this Annual Report on Form 10-K for further financial information on our operating segments.
We use segment operating profit as a means to evaluate our performance and for our business decision making purposes. Segment
operating profit excludes interest, dividend and other income, interest and other expense, and corporate income and expenses.
INVESTMENT ACTIVITIES
In August 2010, we acquired from an unrelated party a continuing care retirement community containing 110 living units located in
Wisconsin for a purchase price of $14.7 million, including assumed net working capital liabilities of $1.5 million.
In 2011, we acquired from unrelated parties seven senior living communities containing 854 living units with one community located in
Arizona and six communities located in Indiana for an aggregate purchase price of $148.4 million, excluding closing costs and including
$38.0 million of assumed mortgage notes and $2.6 million of assumed net working capital liabilities.
During 2011 and 2010, we made capital expenditures for property, plant and equipment, on a net basis after considering the proceeds from
sales of property and equipment to SNH, of $27.6 million and $22.1 million, respectively, and acquisitions of senior living communities, net of
working capital assumed, of $107.8 million and $13.2 million, respectively.
During 2011 and 2010, we received gross proceeds of $10.9 million and $3.1 million, respectively, in connection with the sale of available
for sale securities and recorded a net realized gain of $4.1 million and $933,000, respectively.
38
Table of Contents
Key Statistical Data For the Years Ended December 31, 2011 and 2010
The following tables present a summary of our operations for the years ended December 31, 2011 and 2010:
Senior living communities:
(dollars in thousands, except average daily rate)
Senior living revenue
Management fee revenue
Reimbursed costs incurred on behalf of
managed communities
Total revenue
Senior living wages and benefits
Other senior living operating expenses
Costs incurred on behalf of managed
communities
Rent expense
Depreciation and amortization expense
Interest and other expense
Interest, dividend and other income
Impairment of long lived assets
Senior living income from continuing
operations
$ 1,033,935
—
20,552
1,099,830
(536,386)
(259,655)
—
1,033,935
(513,462)
(244,109)
20,552
65,895
(22,924)
(15,546)
100.0%
6.4%
(4.5)%
(6.4)%
(20,552)
(185,053)
(17,576)
(1,128)
78
(3,500)
—
(178,316)
(12,376)
(199)
114
—
(20,552)
(6,737)
(5,200)
(929)
(36)
(3,500)
(100.0)%
(3.8)%
(42.0)%
(466.8)%
(31.6)%
(100.0)%
(9,529)
(11.1)%
$
Total number of living units (end of
period):
Owned and leased living units
Managed living units
Number of total living units
$
76,058
$
85,587
$ 44,445
898
% Change
$ 1,078,380
898
Total number of communities (end of
period):
Owned and leased communities
Managed communities
Number of total communities
Owned and leased communities:
Occupancy %
Average daily rate
Percent of senior living revenue from
Medicaid
Percent of senior living revenue from
Medicare
Percent of senior living revenue from
private and other sources
For the years ended December 31,
2010
Change
2011
$
4.3%
100.0%
222
23
245
209
—
209
13
23
36
6.2%
100.0%
17.2%
23,765
3,394
27,159
22,176
—
22,176
1,589
3,394
4,983
7.2%
100.0%
22.5%
85.8%
148.47
$
86.2%
147.28
$
n/a
1.19
(0.4)%
0.8%
12.7%
13.3%
n/a
(0.6)%
14.6%
14.4%
n/a
0.2%
72.7%
72.3%
n/a
0.4%
39
Table of Contents
Comparable communities (senior living communities that we have owned or leased and operated continuously since January 1, 2010):
(dollars in thousands, except average daily rate)
Senior living revenue
Senior living wages and benefits
Other senior living operating expenses
No. of communities (end of period)
No. of living units (end of period)
Occupancy %
Average daily rate
Percent of senior living revenue from
Medicaid
Percent of senior living revenue from
Medicare
Percent of senior living revenue from
private and other sources
For the years ended December 31,
2010
Change
2011
$ 17,845
(13,501)
(8,784)
n/a
n/a
n/a
$
3.45
% Change
$ 1,050,202
(526,256)
(252,546)
208
22,066
85.5%
$
150.86
$ 1,032,357
(512,755)
(243,762)
208
22,066
86.2%
$
147.41
1.7%
(2.6)%
(3.6)%
—
—
(0.7)%
2.3%
12.9%
13.4%
n/a
(0.5)%
15.1%
14.4%
n/a
0.7%
72.0%
72.2%
n/a
(0.2)%
Rehabilitation hospitals:
(dollars in thousands)
Rehabilitation hospital revenues
Rehabilitation hospital expenses
Rent expense
Depreciation and amortization expense
Rehabilitation hospital loss from continuing
operations
2011
For the years ended December 31,
2010
Change
% Change
$ 105,320
(95,305)
(10,362)
(180)
$ 100,041
(92,190)
(9,988)
(135)
$ 5,279
(3,115)
(374)
(45)
5.3%
(3.4)%
(3.7)%
(33.3)%
$
$
$ 1,745
76.8%
(527)
40
(2,272)
Table of Contents
Corporate and Other: (1)
(dollars in thousands)
For the years ended December 31,
2010
Change
2011
Institutional pharmacy revenue
Institutional pharmacy expenses
Depreciation and amortization expense
General and administrative expenses (2)
Gain on investments in trading securities
Loss on put right related to auction rate
securities
Equity in income (losses) of Affiliates
Insurance Company
Gain on early extinguishment of debt
Gain on sale of available for sale securities
Interest, dividend and other income
Interest and other expense
Acquisition related costs
Benefit (provision) for income taxes
Corporate and Other loss from continuing
operations
$ 76,614 $ 79,285 $ (2,671)
(74,436)
(77,552)
3,116
(3,371)
(3,523)
152
(57,540)
(55,486)
(2,054)
—
4,856
(4,856)
—
139
1
4,116
1,217
(2,789)
(1,759)
50,554
$
(4,714)
4,714
(1)
592
933
1,702
(2,397)
—
(1,448)
140
(591)
3,183
(485)
(392)
(1,759)
52,002
(7,254) $ (57,753) $ 50,499
% Change
(3.4)%
4.0%
4.3%
(3.7)%
(100.0)%
100.0%
14000.0%
(99.8)%
341.2%
(28.5)%
(16.4)%
(100.0)%
3591.3%
87.4%
(1)
Corporate and Other includes operations that we do not consider a material, separately reportable segment of our business
and income and expenses that are not attributable to a reportable specific segment.
(2)
General and administrative expenses are not attributable to a reportable specific segment and include items such as
corporate payroll and benefits and expenses of our home office activities.
Consolidated:
(dollars in thousands)
Summary of revenue:
Senior living communities
Rehabilitation hospital revenue
Corporate and Other
Total revenue
Summary of income from continuing
operations:
Senior living communities
Rehabilitation hospitals
Corporate and Other
Income from continuing operations
2011
For the years ended December 31,
2010
Change
$ 1,099,830
105,320
76,614
$ 1,281,764
$
$
$ 1,033,935
100,041
79,285
$ 1,213,261
76,058 $
(527)
(7,254)
68,277 $
% Change
$ 65,895
5,279
(2,671)
$ 68,503
6.4%
5.3%
(3.4)%
5.6%
85,587 $ (9,529)
(2,272)
1,745
(57,753)
50,499
25,562 $ 42,715
(11.1)%
76.8%
87.4%
167.1%
Year ended December 31, 2011 Compared to year ended December 31, 2010
Senior living communities:
Our senior living revenue increased by 4.3% for the year ended December 31, 2011 compared to the same period in 2010 primarily
because the number of communities that we owned and leased as of the end of the period increased from 209 to 222 and increased per diem
charges to residents, partially
41
Table of Contents
offset by a decrease in occupancy and the CMS 11.1% reduction in aggregate Medicare payment rates for SNFs. Our senior living revenue at
the communities that we operated continuously since January 1, 2010 through December 31, 2011, or our current year comparable
communities, increased 1.7% due primarily to increased per diem charges to residents, offset by a decrease in occupancy and the CMS 11.1%
reduction in aggregate Medicare payment rates for SNFs.
In 2011, we began to manage 23 communities. For the year ended December 31, 2011, we recorded management fee revenue of
approximately $898,000 and $20.6 million of reimbursed costs incurred at these communities.
Our senior living wages and benefits increased 4.5% for the year ended December 31, 2011 compared to the same period in 2010
primarily because the number of communities that we owned and leased as of the end of the period increased from 209 to 222 and wage
increases and increased employee health insurance costs at our current year comparable communities. Our other senior living operating
expenses, which include utilities, housekeeping, dietary, maintenance, insurance and community level administrative costs, increased by 6.4%
due to an increase in the number of communities that we owned and leased from 209 to 222, plus increased charges from various service
providers, marketing costs and general maintenance expenses. Our senior living wages and benefits at our current year comparable
communities increased by 2.6% due primarily to wage increases and higher employee health insurance costs. Our other senior living operating
expenses at our current year comparable communities increased by 3.6% primarily due to increases in charges from various service providers,
marketing costs and general maintenance expenses. Our senior living rent expense increased by 3.8% compared to the same period in 2010
primarily due to our payment of additional rent for senior living community capital improvements purchased by SNH since January 1, 2010.
Our senior living depreciation and amortization expense increased by 42.0% for the year ended December 31, 2011 compared to the same
period in 2010 primarily due to capital expenditures (net of sales of capital improvements to SNH), including depreciation costs arising from
our purchase of furniture and fixtures for our owned communities.
Interest and other expense increased by 466.8% for the year ended December 31, 2011 compared to the same period in 2010 primarily due
to our assumption of four mortgage notes totaling $39.2 million in connection with our acquisition of four senior living communities during
2011.
During our evaluation of long lived and other intangible assets, we identified and recorded an impairment of long lived assets of
$3.5 million related to several senior living communities.
Rehabilitation hospitals:
Our rehabilitation hospital revenues increased by 5.3% for the year ended December 31, 2011 compared to the same period in 2010
primarily due to an increase in Medicare payment rates during the first three quarters of 2011 and a slight increase in occupancy.
Our rehabilitation hospital expenses increased by 3.4% for the year ended December 31, 2011 compared to the same period in 2010
primarily due to increases in labor and benefits.
Our rehabilitation hospital rent expense increased by 3.7% for the year ended December 31, 2011 compared to the same period in 2010
due to our payment of additional rent for rehabilitation hospital capital improvements purchased by SNH since January 1, 2010.
Corporate and Other:
Institutional pharmacy revenue and institutional pharmacy expenses decreased by 3.4% and 4.0%, respectively, for the year ended
December 31, 2011 compared to the same period in 2010 primarily due to a decline in customer accounts, lower occupancy at senior living
communities served by our
42
Table of Contents
pharmacies and a number of commonly dispensed name brand drugs that became available as lower priced generic drugs.
General and administrative expenses increased by 3.7% for the year ended December 31, 2011 compared to the same period in 2010
primarily due to increased regional support costs resulting from our acquisitions of additional communities during 2011, plus wage increases.
During the year ended December 31, 2011, we recognized a gain of $4.1 million on sales of available for sale securities held by our
captive insurance company and we incurred $1.8 million of acquisition related costs, all of which relate to completed transactions.
During the year ended December 31, 2010, we recognized a gain of $4.9 million on investments in trading securities related to our
holdings of auction rate securities, or ARS, a loss of $4.7 million on the value of our right pursuant to an agreement with UBS AG, or UBS, to
require UBS to acquire our auction rate securities at par value and a gain of $933,000 on a sale of available for sale securities held by our
captive insurance company.
During the year ended December 31, 2011, we purchased and retired $623,000 par value of the then outstanding Notes for $622,000 plus
accrued interest, and recorded a gain of $1,000 net of related unamortized costs on early extinguishment of debt.
During the year ended December 31, 2010, we purchased and retired $11.8 million par value of the then outstanding Notes for
$10.8 million plus accrued interest and prepaid a $4.6 million United States Department of Housing and Urban Development, or HUD, insured
mortgage note. As a result of the purchase and prepayment, we recorded a gain on extinguishment of debt of $592,000, net of related
unamortized costs and prepayment penalties.
Our interest, dividend and other income decreased by 28.5% for the year ended December 31, 2011 compared to the same period in 2010
due to less investable cash and lower yields realized on our investments.
Our interest and other expense increased by 16.4% for the year ended December 31, 2011 compared to the same period in 2010 primarily
due to interest on our outstanding balance on the Bridge Loan, partially offset by our purchase and retirement of $12.4 million par value of the
outstanding Notes since January 1, 2010.
For the year ended December 31, 2011, we recognized a tax benefit from continuing operations of $50.6 million, which includes a
deferred tax benefit of $52.1 million attributable to a reduction of valuation allowance and current tax expense of $1.4 million for state taxes on
operating income that are payable without regard to our tax loss carry forwards. The tax benefit also includes $152,000 related to a non-cash
deferred tax liability arising from the amortization of goodwill for tax purposes but not for book purposes. As of December 31, 2011, our
federal net operating loss carry forward, which will begin to expire in 2025 if unused, was approximately $100.7 million, and our tax credit
carry forward, which will begin to expire in 2022 if unused, was approximately $6.8 million.
Discontinued operations:
Loss from discontinued operations for the year ended December 31, 2011 increased $2.0 million to $4.1 million, compared to a loss of
$2.1 million for the year ended December 31, 2010. The losses in both years are primarily due to losses we incurred at assisted living
communities and SNFs that we have sold or expect to sell. Loss from discontinued operations for the year ended December 31, 2011 includes
an asset impairment charge of $3.9 million to reduce the carrying value of two SNFs to their estimated value based upon expected sales prices
less costs to sell.
43
Table of Contents
Key Statistical Data For the Years Ended December 31, 2010 and 2009:
The following tables present a summary of our operations for the years ended December 31, 2010 and 2009:
Senior living communities:
(dollars in thousands, except average daily rate)
Senior living revenue
Senior living wages and benefits
Other senior living operating expenses
Rent expense
Depreciation and amortization expense
Interest and other expense
Interest, dividend and other income
Senior living income from continuing
operations
Total number of owned and leased
communities (end of period):
Total number of owned and leased living
units (end of period):
Occupancy %
Average daily rate
Percent of senior living revenue from
Medicaid
Percent of senior living revenue from
Medicare
Percent of senior living revenue from
private and other sources
For the year ended December 31,
2009
Change
2010
% Change
$ 1,033,935
(513,462)
(244,109)
(178,316)
(12,376)
(199)
114
$ 967,833
(487,850)
(234,112)
(166,584)
(11,492)
(365)
304
$ 66,102
(25,612)
(9,997)
(11,732)
(884)
166
(190)
6.8%
(5.2)%
(4.3)%
(7.0)%
(7.7)%
45.5%
(62.5)%
$
$
67,734
$ 17,853
26.4%
209
208
1
0.5%
22,176
86.2%
147.28
22,066
86.5%
143.02
$
85,587
$
$
110
n/a
4.26
0.5%
(0.3)%
3.0%
13.3%
13.7%
n/a
(0.4)%
14.4%
14.1%
n/a
0.3%
72.3%
72.2%
n/a
0.1%
Comparable communities (senior living communities that we have owned, leased and operated continuously since January 1, 2009):
(dollars in thousands, except average daily rate)
Senior living revenue
Senior living wages and benefits
Other senior living operating expenses
No. of communities (end of period)
No. of living units (end of period)
Occupancy %
Average daily rate
Percent of senior living revenue from
Medicaid
Percent of senior living revenue from
Medicare
Percent of senior living revenue from
private and other sources
For the year ended December 31,
2009
Change
2010
$ 960,430
(483,982)
(232,534)
197
21,123
86.4%
$ 142.97
13.6%
13.7%
n/a
(0.1)%
14.8%
14.2%
n/a
0.6%
71.6%
72.1%
n/a
(0.5)%
44
$ 28,034
(6,534)
(1,428)
n/a
n/a
n/a
$ 4.56
% Change
$ 988,464
(490,516)
(233,962)
197
21,123
86.1%
$ 147.53
2.9%
(1.4)%
(0.6)%
—
—
(0.3)%
3.2%
Table of Contents
Rehabilitation hospitals:
(dollars in thousands)
Rehabilitation hospital revenues
Rehabilitation hospital expenses
Rent expense
Depreciation and amortization expense
Rehabilitation hospital loss from continuing
operations
2010
For the year ended December 31,
2009
Change
% Change
$ 100,041
(92,190)
(9,988)
(135)
$ 100,460
(90,957)
(10,596)
(102)
$
(419)
(1,233)
608
(33)
(0.4)%
(1.4)%
5.7%
(32.4)%
$
$
$ (1,077)
(90.1)%
(2,272)
(1,195)
Corporate and Other: (1)
(dollars in thousands)
Institutional pharmacy revenue
Institutional pharmacy expenses
Depreciation and amortization expense
General and administrative expenses (2)
Gain on investments in trading securities
Loss on put right related to auction rate
securities
Equity in losses of AIC
Gain on early extinguishment of debt
Gain on sale of available for sale securities
Impairment on investments in available for sale
securities
Interest, dividend and other income
Interest and other expense
Provision for income taxes
Corporate and Other loss from continuing
operations
2010
For the year ended December 31,
2009
Change
$ 79,285 $ 74,447 $
(77,552)
(73,946)
(3,523)
(3,979)
(55,486)
(52,590)
4,856
3,495
% Change
4,838
(3,606)
456
(2,896)
1,361
6.5%
(4.9)%
11.5%
(5.5)%
38.9%
(4,714)
(1)
592
933
(2,759)
(134)
34,579
795
(1,955)
133
(33,987)
138
(70.9)%
99.3%
(98.3)%
17.4%
—
1,702
(2,397)
(1,448)
(2,947)
2,681
(3,565)
(2,196)
2,947
(979)
1,168
748
100.0%
(36.5)%
32.8%
34.1%
$ (57,753) $ (26,119) $ (31,634)
(121.1)%
(1)
Corporate and Other includes operations that we do not consider material, separately reportable segments of our business
and income and expenses that are not attributable to a reportable specific segment.
(2)
General and administrative expenses are not attributable to a reportable specific segment and include items such as
corporate payroll and benefits and expenses of our home office activities.
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Consolidated:
(dollars in thousands)
Summary of revenue:
Senior living communities
Rehabilitation hospital revenue
Corporate and Other
Total revenue
Summary of income from continuing
operations:
Senior living communities
Rehabilitation hospitals
Corporate and Other
Income from continuing operations
For the year ended December 31,
2009
Change
2010
$ 1,033,935
100,041
79,285
$ 1,213,261
$
$
967,833
100,460
74,447
$ 1,142,740
% Change
$
$ 66,102
(419)
4,838
$ 70,521
6.8%
(0.4)%
6.5%
6.2%
85,587 $
(2,272)
(57,753)
25,562 $
67,734 $ 17,853
(1,195)
(1,077)
(26,119)
(31,634)
40,420 $ (14,858)
26.4%
(90.1)%
(121.1)%
(36.8)%
Year ended December 31, 2010 Compared to year ended December 31, 2009
Senior living communities:
Our senior living revenue increased by 6.8% for the year ended December 31, 2010 compared to the same period in 2009 primarily due to
revenues from the 11 communities we began to operate in the fourth quarter of 2009 and the one community we acquired in the third quarter of
2010, plus increased per diem charges to residents, offset by a decrease in occupancy. Our senior living revenue at the communities that we
operated continuously from January 1, 2009 through December 31, 2010, or our prior year comparable communities, increased by 2.9% due
primarily to increased per diem charges to residents, partially offset by a decrease in occupancy.
Our senior living wages and benefits increased by 5.2% for the year ended December 31, 2010 compared to the same period in 2009
primarily due to wages and benefits from the 11 communities we began to operate in the fourth quarter of 2009 and the one community we
acquired in the third quarter of 2010, plus slightly higher than historical workers' compensation expense at our prior year comparable
communities and moderate wage increases, offset by a reduction in our health insurance costs. Our other senior living operating expenses,
which include utilities, housekeeping, dietary, maintenance, insurance and community level administrative costs increased by 4.3% primarily
due to expenses at the 11 communities we began to operate in the fourth quarter of 2009 and the one community we acquired in the third
quarter of 2010, plus increased charges from various service providers. Our senior living wages and benefits at our prior year comparable
communities increased by 1.4% due primarily to moderate wage increases and slightly higher than historical workers' compensation costs,
partially offset by a reduction in our health insurance costs. Our other senior living operating expenses at our prior year comparable
communities increased by 0.6% due primarily to increases in food and other general administrative costs, partially offset by a decrease in
supplies and other purchased service expenses. Our senior living rent expense increased by 7.0% primarily due to the addition of 11
communities that we began to lease in the fourth quarter of 2009 and our payment of additional rent for senior living community capital
improvements purchased by SNH since January 1, 2009.
Our senior living depreciation and amortization expense increased by 7.7% for the year ended December 31, 2010 compared to the same
period in 2009 primarily due to capital expenditures (net of sales of capital improvements to SNH), including depreciation costs arising from
our purchase of furniture and fixtures for our owned communities.
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Interest and other expense decreased by 45.5% for the year ended December 31, 2010 compared to the same period in 2009 primarily due
to our prepayment in July 2010 of a mortgage note insured by HUD.
Our senior living interest, dividend and other income decreased by 62.5% for the year ended December 31, 2010 compared to the same
period in 2009 due to lower yields on our investments.
Rehabilitation hospitals:
Our rehabilitation hospital revenues decreased by 0.4% for the year ended December 31, 2010 compared to the same period in 2009
primarily due to a decrease in occupancy, partially offset by increased third party insurance provider rates.
Our rehabilitation hospital expenses increased by 1.4% for the year ended December 31, 2010 compared to the same period in 2009
primarily due to higher operating and plant expenses and slightly higher than historical workers' compensation costs, partially offset by
decreases in labor and benefit expenses resulting from a decrease in occupancy.
Our rehabilitation hospital rent expense decreased by 5.7% for the year ended December 31, 2010 compared to the same period in 2009
due to rent reductions resulting from the lease Realignment agreement we entered with SNH, or the Lease Realignment Agreement, offset by
our payment of additional rent for rehabilitation hospital capital improvements purchased by SNH since January 1, 2009.
Corporate and Other:
Institutional pharmacy revenue and institutional pharmacy expenses increased by 6.5% and 4.9%, respectively, for the year ended
December 31, 2010 compared to the same period in 2009 primarily due to adding new customers, partially offset by decreased revenues per
prescription due to a higher percentage of our pharmacy sales for 2010 consisting of generic drugs.
Our depreciation and amortization expense decreased by 11.5% for the year ended December 31, 2010 compared to the same period in
2009 primarily attributable to fewer purchases of furniture and fixtures and computers and related software for our institutional pharmacies and
corporate and regional offices.
General and administrative expenses increased by 5.5% for the year ended December 31, 2010 compared to the same period in 2009
primarily due to increased regional support costs, wage increases and expenses associated with the 11 communities we began to operate in the
fourth quarter of 2009 and the one community we acquired in the third quarter of 2010.
During the year ended December 31, 2010, we recognized:
•
a gain of $4.9 million on investments in trading securities principally related to our holdings of ARS;
•
a loss of $4.7 million on the value of a put right related to our holdings of ARS; and
•
a gain of $933,000 on sale of available for sale securities held by our captive insurance company.
During the year ended December 31, 2009, we recognized:
•
an unrealized gain of $3.5 million on investments in trading securities related to our holdings of ARS;
•
an unrealized loss of $2.8 million on the value of a put right related to our holdings of ARS;
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•
an "other than temporary impairment" of $2.9 million on investments in securities held by our captive insurance company due to
several notable bankruptcies and government actions involving the companies that issued the securities we held; and
•
a gain of $795,000 on sale of available for sale securities held by our captive insurance company.
During the year ended December 31, 2010, we purchased and retired $11.8 million par value of the outstanding Notes for $10.8 million
plus accrued interest and prepaid a $4.6 million HUD insured mortgage note. As a result of the purchase and prepayment, we recorded a gain
on extinguishment of debt of $592,000, net of related unamortized costs and prepayment penalties.
During the year ended December 31, 2009, we purchased and retired $76.8 million par value of the outstanding Notes that we had
purchased for $39.9 million, plus accrued interest. As a result of these purchases, we recorded a gain on extinguishment of debt of
$34.6 million, net of related unamortized costs.
Our interest, dividend and other income decreased by 36.5% for the year ended December 31, 2010 compared to the same period in 2009,
primarily due to lower yields realized on our investments.
Our interest and other expense decreased by 32.8% for the year ended December 31, 2010 compared to the same period in 2009, primarily
due to our purchase and retirement of $88.6 million par value of the outstanding Notes since January 1, 2009.
For the year ended December 31, 2010, we recognized tax expense of $1.4 million, which included tax expense of $1.3 million for state
taxes on operating income that were payable without regard to our tax loss carry forwards. Tax expense also included $158,000 related to a
non-cash deferred tax liability arising from the amortization of goodwill for tax purposes but not for book purposes. As of December 31, 2010,
our federal net operating loss carry forward, which will begin to expire in 2025 if unused, was approximately $107.2 million, and our tax credit
carry forward, which will begin to expire in 2022 if unused, was approximately $4.4 million.
Discontinued operations:
Loss from discontinued operations for the years ended December 31, 2010 and 2009 are primarily due to losses we incurred at assisted
living communities, SNFs and pharmacies that we have sold or expect to sell.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2011, we had unrestricted cash and cash equivalents of $28.4 million and $35.0 million available to borrow on our
$35.0 million Credit Agreement.
We believe that a combination of our existing cash, cash equivalents, net cash from operations and our ability to borrow under our Credit
Agreement will provide us with adequate cash flow to fund our debt obligations and run our business, invest in and maintain our properties and
fund future acquisition commitments for the next 12 months and for the foreseeable future thereafter. If, however, our occupancies continue to
decline and we are unable to generate positive cash flow for an extended period, we expect that we would explore alternatives to fund our
operations. Such alternatives may include further reducing our costs, incurring debt under, and perhaps in addition to, our Credit Agreement,
engaging in sale leaseback transactions of our owned communities and issuing new equity or debt securities. In addition, we may from time to
time consider raising additional capital or obtaining additional financing to explore business opportunities, such as acquisitions. As of
December 31, 2011, we have a working capital deficit of $47.8 million, which includes $38.0 million due under the Bridge Loan, which
matures on July 1, 2012. We expect to be able to repay the Bridge Loan prior to its maturity; however, our ability to do so is largely dependent
on market conditions, which are
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beyond our control. The Bridge Loan agreement provides that if the Bridge Loan is not repaid on or before its maturity date, SNH may satisfy
the Bridge Loan by acquiring certain of the communities securing repayment of the Bridge Loan and leasing them to us. We have an effective
shelf registration statement that allows us to issue public securities on an expedited basis, but this registration statement does not assure that
there will be buyers for such securities.
Auction Rate and Available for Sale Securities
Until June 30, 2010, we held investments in trading securities which consisted of ARS that were primarily bonds issued by various entities
to fund student loans pursuant to the Federal Family Education Loan Program. Pursuant to their terms, the ARS were subject to periodic
auctions, which impacted their liquidity and terms. Due to events in the credit markets, auctions for these ARS failed starting in the first quarter
of 2008. In November 2008, we entered into a settlement agreement with UBS related to our investment in ARS and on June 30, 2010, we
exercised our right, or the UBS Put Right, pursuant to this agreement to require UBS to acquire our remaining ARS at par value. UBS settled
and paid to us $41.5 million on July 1, 2010, which was net of our outstanding balance on our UBS secured revolving credit facility of
$6.3 million.
Prior to exercising the UBS Put Right, we measured the fair value of our ARS by reference to a valuation statement provided by UBS that
was calculated with the assistance of a valuation model. This model considered, among other items, the collateral underlying the investments,
the creditworthiness of the counterparty, the timing of expected future cash flows including possible refinancing of the securities and a
determination of the appropriate discount rate. The analysis also included a comparison, when possible, to observable market data of securities
with characteristics similar to our ARS. We reviewed the components of, and calculations made under, UBS's model.
Prior to exercising the UBS Put Right, we valued the UBS Put Right by taking into consideration the fair value of our ARS, the amounts
outstanding on our loan with UBS and a factor representing our credit party risk with UBS. The largest risk associated with the UBS Put Right
was the continued financial solvency of UBS. The value of the UBS Put Right typically fluctuated inversely with the value of the ARS that we
held. We recorded the UBS Put Right at fair value since we expected that the changes in fair value of the UBS Put Right would be largely
offset by the changes in the fair value in the ARS.
We routinely evaluate our available for sale investments to determine if they have been impaired. If the book or carrying value of an
investment is less than its estimated fair value and we expect that situation to continue for a more than a temporary period, we will record an
"other than temporary impairment" loss in our consolidated statement of income. We estimate the fair value of our available for sale
investments by reviewing each security's current market price, the ratings of the security, the financial condition of the issuer, and our intent
and ability to retain the investment during temporary market price fluctuations or until maturity. In evaluating the factors described above, we
presume a decline in value to be an "other than temporary impairment" if the quoted market price of the security is below the security's cost
basis for an extended period. However, this presumption may be overcome if there is persuasive evidence indicating the value decline is
temporary in nature, such as when the operating performance of the obligor is strong or if the market price of the security is historically
volatile. Additionally, there may be instances in which impairment losses are recognized even if the decline in value does not fall within the
criteria described above, such as if we plan to sell the security in the near term and the fair value is below our cost basis. When we believe that
a change in fair value of an available for sale security is temporary, we record a corresponding credit or charge to other comprehensive income
for any unrealized gains and losses. When we determine that an impairment in the fair value of an available for sale security is an "other than
temporary impairment", we record a charge to earnings. We did not record an impairment charge for the year ended December 31, 2011. We
recorded a charge of $2.9 million for an "other than temporary impairment" in the value of our securities held by our captive insurance
company for the year ended December 31, 2009 due to several bankruptcies and government actions involving the companies that issued the
securities we held.
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Assets and Liabilities
Our total current assets at December 31, 2011 were $141.5 million, compared to $136.0 million at December 31, 2010. At December 31,
2011, we had cash and cash equivalents of $28.4 million compared to $20.8 million at December 31, 2010. The increase in cash and cash
equivalents is primarily due to the proceeds from our sale of common shares in the Public Offering and net cash flow generated from our
operations. Our current and long term liabilities were $189.3 million and $114.0 million, respectively, at December 31, 2011 compared to
$137.9 million and $77.1 million, respectively, at December 31, 2010. The increase in current liabilities is primarily the result of our net
borrowings outstanding under the Bridge Loan, the timing of real estate tax payments, and the accrual of bonus and other employee benefit
payments. The increase in long term liabilities is primarily the result of the assumption of the one FNMA and the three FMCC mortgage notes
in connection with the senior living communities we acquired during 2011.
We had cash flows from continuing operations of $44.4 million for the year ended December 31, 2011 compared to $109.8 million for the
year ended December 31, 2010. Cash flows from continuing operations included a deferred tax benefit of $52.1 million attributable to a
reduction of valuation allowance. Acquisitions of property and equipment, including the acquisition of senior living communities, on a net
basis after considering the proceeds from sales of fixed assets to SNH, were $135.4 million and $35.3 million for the years ended December 31,
2011 and 2010, respectively. During 2011 and 2010, we purchased and retired a total of $623,000 and $11.8 million, respectively, par value of
the outstanding Notes for $622,000 and $10.8 million, respectively, plus accrued interest. During 2010, we prepaid HUD insured mortgage
debt of $4.6 million.
Acquisitions and Related Financings
In August 2010, we acquired from an unrelated party a continuing care retirement community, which offers independent, assisted living
and skilled nursing services, containing 110 living units located in Wisconsin for $14.7 million, excluding closing costs. We financed the
acquisition with cash on hand and the assumption of $1.3 million of resident deposits.
In May 2011, we acquired from an unrelated third party an assisted living community containing 116 living units located in Arizona for
$25.6 million, excluding closing costs. We financed the acquisition with cash on hand and by assuming a FNMA mortgage note for
$18.7 million. We have included the results of this community's operations in our consolidated financial statements from the date of
acquisition. We allocated the purchase price of this community to land, building and equipment. This community primarily provides
independent and assisted living services and, as of December 31, 2011, all of the residents pay for their services with private resources.
In May 2011, we agreed to purchase the majority of the assets of the Indiana Communities for an aggregate purchase price, excluding
closing costs, of $122.8 million. The Indiana Communities primarily offer independent and assisted living services, which are currently
primarily paid by residents from their private resources. In June 2011, we completed our acquisitions of the majority of the assets of two of the
Indiana Communities containing 197 living units for an aggregate purchase price, excluding closing costs, of $40.4 million and funded our
acquisitions with proceeds of the Bridge Loan and the assumption of net working capital liabilities of those two Indiana Communities. In July
2011, we completed our acquisition of the majority of the assets of an additional Indiana Community containing 151 living units for a purchase
price, excluding closing costs, of $30.4 million and funded our acquisition with a portion of the proceeds of the Public Offering, by borrowing
an additional $15.0 million under the Bridge Loan and by assuming net working capital liabilities of that Indiana Community. In September
2011, we completed our acquisitions of the majority of the assets of the remaining three Indiana Communities containing 390 living units for
an aggregate purchase price, excluding closing costs, of $52.0 million. We funded these acquisitions with $24.0 million of borrowings
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under the Bridge Loan, by assuming approximately $19.3 million of mortgage notes secured by these three Indiana Communities, by assuming
net working capital liabilities of those three Indiana Communities and with cash on hand, including a portion of the proceeds of the Public
Offering.
Our Leases and Management Agreements with SNH
In 2009, we leased from SNH 11 additional senior living communities with a total of 952 living units. Ten of these communities are
assisted living communities and were added to Lease No. 1, which has a current term expiring in 2024. One of these communities is a
continuing care retirement community and was added to Lease No. 4, which has a current term expiring in 2017. Our rent payable to SNH for
these 11 communities is $10.3 million per year. Percentage rent, based on increases in gross revenues of these communities commenced in
2012.
In March 2011, SNH agreed to acquire 20 senior living communities containing 2,111 living units located in five states in the southeastern
United States. These senior living communities primarily offer independent and assisted living services, which are primarily paid by residents
from their private resources. In May 2011, we entered into long term contracts with SNH to manage 15 of these communities and agreed to
lease the remaining five communities when SNH acquired them. As of December 31, 2011, we leased those five communities containing 651
living units from SNH and managed 13 of the 15 communities containing 1,214 living units for SNH's account. We are currently managing or
have agreed to manage the remaining two communities containing 291 living units for the account of the existing owner, pending SNH's
acquisition of those two communities. SNH's acquisitions of those two remaining communities are subject to conditions and may not occur.
Our minimum rent payable to SNH for the five communities we are leasing is approximately $6.9 million per year. Percentage rent based on
increases in gross revenues at these communities we are leasing, will commence in 2013. We added the five communities we are leasing to our
existing leases with SNH, which have current terms expiring at varying dates ranging from April 2017 to June 2026.
In May 2011, we commenced leasing a senior living community from SNH with 73 living units located in Illinois and we acquired from
an unrelated third party 14 acres of vacant land adjacent to the community for possible expansion for $1.3 million. Our rent payable to SNH for
this community is $608,000 per year. Percentage rent, based on increases in gross revenues at this community, will commence in 2013. We
added this community to our Lease No. 1 with SNH, which has a current term expiring in 2024.
In July 2011, SNH agreed to acquire nine large senior living communities then operated by Vi® as Classic Residence communities and
which were formerly known as Classic Residence by Hyatt® communities. The nine senior living communities include 2,226 living units of
which 1,708 are independent living apartments, 471 are assisted living suites and 47 are suites offering specialized Alzheimer's care. The
communities are located in six states, with four located in Florida and one located in each of Maryland, Nevada, New Jersey, New York and
Texas. In December 2011, SNH completed the acquisition of eight of those communities and we entered into long term management contracts
with SNH to manage those eight communities. The one remaining community that has not yet been acquired by SNH is located in New York.
That acquisition is subject to conditions, including licensing approval. It is currently expected that that acquisition will be completed during
2012 but there can be no assurances that the acquisition will be completed. If SNH completes that acquisition, we expect that we will enter into
a long term management contract with SNH to manage that community on terms substantially consistent with those that we have previously
entered into with SNH.
In December 2011, SNH acquired a senior living community with 57 units located in California and we entered into a long term
management contract with SNH to manage this community on terms substantially consistent with those that we have previously entered into
with SNH for communities that include assisted living units.
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As of December 31, 2011, we leased 187 senior living communities, two rehabilitation hospitals and one assisted living community which
has been classified as discontinued operations from SNH under four leases. Our total annual rent payable to SNH as of December 31, 2011 was
$195.2 million, excluding percentage rent based on increases in gross revenues at certain properties. We paid approximately $4.9 million and
$4.4 million in percentage rent to SNH for the years ended December 31, 2011 and 2010, respectively.
In February 2012, SNH acquired a senior living community with 92 units located in Alabama and we entered into a long term
management contract with SNH to manage this community on terms substantially consistent with those that we have previously entered into
with SNH for communities that include assisted living units.
Upon our request, SNH may purchase capital improvements made at the properties we lease from SNH and increase our rent pursuant to
contractual formulas; however, SNH is not obligated to purchase these improvements from us and we are not obligated to sell them to SNH.
During the year ended December 31, 2011, SNH reimbursed us $33.3 million for capital expenditures made at the properties leased from SNH
and these purchases resulted in our annual rent being increased by approximately $2.7 million.
Our Revenues
Our revenues from services to residents at our senior living communities and patients of our rehabilitation hospitals and clinics and our
pharmacies are our primary source of cash to fund our operating expenses, including rent, principal and interest payments on our debt and our
capital expenditures.
During the past three years, weak economic conditions throughout the country have negatively affected our occupancy. These conditions
have impacted many companies both within and outside of our industry and it is unclear when current economic conditions, especially the
housing market, may materially improve. Although many of the services we provide are needs driven, some of those needs may be deferred
during recessions; for example, relocating to a senior living community may be delayed when sales of houses are delayed.
At some of our senior living communities (principally our SNFs) and at our rehabilitation hospitals and clinics, Medicare and Medicaid
programs provide operating revenues for skilled nursing and rehabilitation services. Medicare and Medicaid revenues were earned primarily at
our SNFs and our two rehabilitation hospitals. We derived 31% of our consolidated revenues from these programs for each of the years ended
December 31, 2011, 2010 and 2009.
Our net Medicare revenues from services to senior living community residents and at our rehabilitation hospitals totaled $224.8 million,
$207.6 million and 197.5 million for the years ended December 31, 2011, 2010 and 2009, respectively. Our net Medicaid revenues from
services to senior living community residents and at our rehabilitation hospitals totaled $137.6 million, $140.3 million and $134.6 million for
the years ended December 31, 2011, 2010 and 2009, respectively. CMS has recently adopted rules that took effect on October 1, 2011 that it
estimates will reduce aggregate Medicare payment rates for SNFs by approximately 11.1% in federal fiscal year 2011. Actions of Congress or
CMS may change these estimates. We expect the reduction to our Medicare SNF rates in federal fiscal year 2012 to be material and adverse to
our future financial results of operations. Some of the states in which we operate either have not raised Medicaid rates by amounts sufficient to
offset increasing costs or have frozen or reduced, or are expected to freeze or reduce, Medicaid rates. Also, certain temporary increases in
federal payments to states for Medicaid programs ended as of June 30, 2011. We expect the ending of these temporary federal payments,
combined with the anticipated slow recovery of state revenues, to result in continued difficult state fiscal conditions. Some state budget deficits
likely will increase, and certain states may reduce Medicaid payments to healthcare services providers like us as
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part of an effort to balance their budgets. We cannot currently estimate the type and magnitude of the potential Medicare and Medicaid policy
changes, rate reductions or other changes and the impact on us of the possible failure of these programs to increase rates to match our expenses,
but they may be material to our operations and may affect our future results of operations. Similarly, we are unable to predict the impact on us
of the insurance reforms, payment reforms, and healthcare delivery systems reforms contained in and to be developed pursuant to PPACA.
Expanded insurance availability may provide more paying customers for the services we provide. However, if the changes to be implemented
under PPACA result in reduced payments for our services, or the failure of Medicare, Medicaid or insurance payment rates to cover our costs,
our future financial results could be adversely and materially affected.
Medicare and Medicaid programs provided approximately 68%, 64% and 64% of our revenues from our rehabilitation hospitals for the
years ended December 31, 2011, 2010 and 2009, respectively. Effective October 1, 2011, CMS adopted an update of approximately 2.2% in
aggregate Medicare payment rates for IRFs in federal fiscal year 2012, including a rebased annual increase of approximately 2.9% to account
for inflation, reduced by a productivity adjustment of 1.0%, both pursuant to PPACA, and increased by 0.4% in estimated outlier payments. As
a result of changes in applicable wage indexes and LIP percentages contained in the rule, we estimate that the increase in our hospitals'
Medicare payment rates may be approximately 1.0%.
CMS has issued the 60% Rule establishing revised Medicare criteria that rehabilitation hospitals must meet in order to participate as IRFs
in the Medicare program. As amended, the rule requires that for cost reporting periods starting on and after July 1, 2006, 60% of a facility's
inpatient population must require intensive rehabilitation services for one of the CMS's designated medical conditions. An IRF that fails to
meet the requirements of this rule is subject to reclassification as a different type of healthcare provider; and the effect of such reclassification
would be to lower Medicare payment rates. We believe our rehabilitation hospitals are operating in compliance with the CMS requirements to
remain IRFs. However, the actual percentage of patients at our IRFs who meet these Medicare requirements may not be or remain as high as
we believe or anticipate or may decline. Our failure to remain in compliance, or a CMS finding of noncompliance, if it occurs, will result in our
receiving lower Medicare rates than we currently receive at our IRFs.
Insurance
Increases over time in the costs of insurance, especially professional liability insurance, workers' compensation and employee health
insurance, have had an adverse impact upon our results of operations. Although we self insure a large portion of these costs, our costs have
increased as a result of the higher costs that we incur to settle claims and to purchase re-insurance for claims in excess of the self insurance
amounts. These increased costs may continue in the future. We, RMR and other companies to which RMR provides management services own
an insurance company, which has designed and reinsured in part a property insurance program under which we and the other owners
participate. For more information about our existing insurance see "Business—Insurance" of this Annual Report on Form 10-K.
Institutional Pharmacies
Between 2003 and 2006, we acquired six institutional pharmacies and one mail order pharmacy located in Wisconsin, Nebraska,
California, South Carolina and Virginia. Our total purchase price for these pharmacies was $15.8 million. Certain of our pharmacy businesses
have been discontinued and either sold or closed, as described below.
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Rehabilitation Hospitals
In October 2006, we began to operate two rehabilitation hospitals located in Braintree and Woburn, Massachusetts that provide extensive
inpatient and outpatient health rehabilitation services. These hospitals are leased from SNH through June 30, 2026.
Discontinued Operations
In 2009, we sold one institutional pharmacy located in California in two separate transactions which resulted in a $1.2 million gain on
sale. We were unable to sell our mail order pharmacy on acceptable terms and we ceased its operations on March 31, 2009.
During 2009, at our request, SNH sold two SNFs that we leased from SNH. In October 2009, SNH sold a SNF located in Iowa to an
unrelated party for net proceeds of approximately $473,000 and our annual rent payable to SNH decreased by approximately $47,300 per year.
In November 2009, SNH sold a SNF located in Missouri to an unrelated party for net proceeds of approximately $1.2 million, and our annual
rent payable to SNH decreased by approximately $124,700 per year.
During 2010, at our request, SNH agreed to sell seven SNFs and one assisted living community that we leased from SNH. In August 2010,
SNH sold four of those seven SNFs, all four of which were located in Nebraska, to an unrelated third party for net proceeds of approximately
$1.5 million, and our annual rent payable to SNH decreased by approximately $145,000 per year. In May 2011, SNH sold an assisted living
community located in Pennsylvania for net proceeds of approximately $796,000, and our annual rent to SNH decreased by approximately
$72,000 per year. Also, in May 2011 SNH sold two SNFs located in Georgia for net proceeds of approximately $12.8 million, and our annual
rent to SNH decreased by approximately $1.3 million per year. In June 2011, SNF sold the remaining of these seven SNFs, which was located
in Georgia, for net proceeds of approximately $5.2 million and our annual rent payable to SNH decreased by approximately $521,000 per year.
In 2011, we decided to sell two SNFs we own that are located in Michigan with an aggregate of 271 living units. In September 2011, we
recorded a $3.9 million asset impairment charge to reduce the carrying value of these two SNFs to their estimated fair value based upon
expected sales prices less costs to sell. While we continue to market these properties, we can provide no assurance that a sale of these SNFs
will be completed.
In August 2011, we agreed with SNH that SNH should sell one assisted living community located in Pennsylvania with 103 living units,
which we lease from SNH. We and SNH are in the process of selling this assisted living community and if sold, our annual minimum rent
payable to SNH will decrease by 9.0% of the net proceeds of the sale to SNH, in accordance with the terms of our lease with SNH.
We have reclassified the consolidated balance sheet and the consolidated statement of income for all periods presented to show the
financial position and results of operations of the communities and pharmacies which have been sold or are expected to be sold as discontinued.
Below is a summary of
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the operating results of these discontinued operations included in the financial statements for the years ended December 31, 2011, 2010 and
2009 (dollars in thousands):
For the years ended December 31,
2011
2010
2009
Revenues
Expenses
Impairment on assets
Benefit for income taxes
Gain on sale
Net loss
$ 31,074 $ 47,725 $ 57,705
(33,951)
(49,795)
(61,021)
(3,938)
—
—
2,739
—
—
—
—
1,226
$ (4,076) $ (2,070) $ (2,090)
Contractual Obligations Table
As of December 31, 2011, our contractual obligations from continuing and discontinued operations were as follows (dollars in thousands):
Total
Contractual Obligations
Long Term Debt Obligations (1)
Projected Interest on Long
Term Debt Obligations (2)
Bridge Loan agreement with
SNH (3)
Operating Lease Obligations (4)
Continuing care contracts (5)
Accrued Self Insurance
Obligations (6)
Total
$
Payment due by period
Less than
1 year
1-3 years
3-5 years
More than
5 years
84,713 $
1,171 $
2,560 $
2,880 $
78,102
52,729
4,193
8,168
7,848
32,520
38,000
2,689,745
2,045
38,000
196,411
—
—
392,230
938
—
390,456
699
—
1,710,648
408
28,496
—
23,010
5,486
—
$ 2,895,728 $ 239,775 $ 426,906 $ 407,369 $ 1,821,678
(1)
Long Term Debt Obligations consist of the amounts due under one FNMA, three FMCC and two HUD insured mortgages as well as the
outstanding Notes.
(2)
Projected Interest on Long Term Debt Obligations consists of the amounts due under one FNMA, three FMCC and two HUD insured
mortgages as well as the projected interest on the outstanding Notes.
(3)
The Bridge Loan matures on July 1, 2012.
(4)
Operating Lease Obligations consist of the annual lease payments to SNH and HCP through the lease terms ending between 2014 and
2028. These amounts do not include percentage rent that may become payable under these leases.
(5)
Non-refundable resident continuing care contracts. See Note 2 to the Notes to our Consolidated Financial Statements included in
Item 15 of this Annual Report on Form 10-K for further information regarding these contracts.
(6)
Accrued Self Insurance Obligations reflected on our balance sheet are insurance reserves related to workers' compensation and
professional liability insurance.
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Debt Financings and Covenants
We have a $35.0 million Credit Agreement that matures on March 18, 2013 when all amounts outstanding under that agreement are due.
Borrowings under our Credit Agreement are available for acquisitions, working capital and general business purposes. Funds available under
our Credit Agreement may be drawn, repaid and redrawn until maturity and no principal payment is due until maturity. We borrow in U.S.
dollars and borrowings under our Credit Agreement bear interest at LIBOR (with a floor of 2% per annum) plus 400 basis points, or 6% as of
December 31, 2011. 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
contains covenants requiring us to maintain certain financial ratios, places limits on our ability to incur or assume debt or create liens with
respect to certain of our properties and has other customary provisions. Our Credit Agreement also provides for acceleration of payment of all
amounts due thereunder or upon the occurrence and continuation of certain events of default. As of December 31, 2011, no amounts were
outstanding under our Credit Agreement. As of December 31, 2011, we believe we were in compliance with all applicable covenants under our
Credit Agreement.
In October 2006, we issued $126.5 million principal amount of the Notes. Our net proceeds from this issuance were approximately
$122.6 million. The Notes bear interest at a rate of 3.75% per annum and are convertible into our common shares at any time. The initial
conversion rate, which is subject to adjustment, is 76.9231 common shares per $1,000 principal amount of the Notes, which represents an
initial conversion price of $13.00 per share. The Notes are guaranteed by certain of our wholly owned subsidiaries. The Notes mature on
October 15, 2026. We may prepay the Notes at any time and the holders may require that we purchase all or a portion of these Notes on each of
October 15 of 2013, 2016 and 2021. If a "fundamental change", as defined in the indenture governing the Notes, occurs, holders of the Notes
may require us to repurchase all or a portion of their Notes for cash at a repurchase price equal to 100% of the principal amount of the Notes to
be repurchased, plus any accrued and unpaid interest and, in certain circumstances, plus a make whole premium as defined in the indenture
governing the Notes. We issued these Notes pursuant to an indenture which contains various customary covenants. As of December 31, 2011,
we believe we were in compliance with all applicable covenants of this indenture.
During the year ended December 31, 2011, we purchased and retired $623,000 par value of the outstanding Notes and recorded a gain of
$1,000, net of related unamortized costs, on early extinguishment of debt. We funded these purchases principally with available cash. As a
result of these purchases and other purchases we made in prior years, $37.3 million in principal amount of the Notes remain outstanding.
On July 1, 2010, we repaid the outstanding balance of and terminated our non-recourse credit facility with UBS.
At December 31, 2011, we had six irrevocable standby letters of credit totaling $736,000. The six letters of credit are security for our lease
obligation to HCP, to an automobile leasing company, and to a mortgagee of our property encumbered by a FNMA insured mortgage. The
letters of credit are renewed annually. The maturity dates for these letters of credit range from April 2012 to September 2012. Our obligations
under these letters of credit are secured by cash.
In July 2010, we prepaid one HUD insured mortgage that was secured by one of our senior living communities. We paid $4.6 million to
retire this note, which consisted of approximately $4.5 million in principal and interest and $134,000 in prepayment penalties.
In May 2011, we entered into the Bridge Loan agreement with which SNH agreed to lend us up to $80.0 million to fund a part of the
purchase price for the acquisitions of the majority of the assets of
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the Indiana Communities described above. As of December 31, 2011, an aggregate principal amount of $38.0 million was outstanding under
the Bridge Loan and no additional amounts remain available for borrowing under the Bridge Loan. The Bridge Loan is secured by mortgages
on seven of our senior living communities. The Bridge Loan matures on July 1, 2012 and bears interest at a rate equal to the annual rates of
interest applicable to SNH's borrowings under its revolving credit facility, plus 1%. As of December 31, 2011, the interest rate was 2.9% under
the Bridge Loan. The Bridge Loan contains various covenants, including restrictions on our ability to incur liens upon or dispose of the
collateral securing the Bridge Loan. The Bridge Loan agreement also contains events of default including non-payment, a change in control of
us and certain events of insolvency, as determined under the Bridge Loan. As of December 31, 2011, we believe we were in compliance with
all applicable covenants in the Bridge Loan.
We are currently negotiating a new $150.0 million senior secured revolving credit facility with a group of potential lenders, which we
expect would be secured by senior living communities we own. These negotiations are in the early stages and there can be no assurance we will
enter into this facility or what the ultimate terms of any such facility may provide, including the amount of borrowings that would be available
to us under the facility.
As of December 31, 2011, two of our communities, which we have classified as discontinued operations, were encumbered by HUD
insured mortgage notes, one of our communities was encumbered by a FNMA mortgage note and three of our communities were encumbered
by FMCC mortgage notes, totaling $47.4 million. These mortgages contain HUD, FNMA and FMCC standard mortgage covenants. The
weighted average interest rate on these notes was 6.69% as of December 31, 2011. Payments of principal and interest are due monthly until
maturities at varying dates ranging from June 2023 to May 2039. As of December 31, 2011, we believe we were in compliance with all
applicable covenants under these mortgages.
Off Balance Sheet Arrangements
As of December 31, 2011, we had no off balance sheet arrangements that have had or are reasonably likely to have a current or future
material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources, except for the pledge of certain of our assets, such as accounts receivable, with a carrying value of
$21.0 million arising from our operation of 56 properties owned by SNH and leased to us which secures SNH's borrowings from its lender,
FNMA.
Related Person Transactions
We have relationships among us, our Directors, our executive officers, SNH, RMR, CWH and AIC and other companies to which RMR
provides management services and others affiliated with or related to them. For example, we have or had relationships with other companies to
which RMR provides management services and which have trustees, directors and officers who are also directors or officers of ours or RMR,
including: SNH, which is our former parent, our largest landlord and our largest stockholder; CWH, which leased to us a regional office space
in Atlanta; and AIC, an Indiana insurance company, of which we, RMR, SNH and four other companies to which RMR provides management
services each currently own 14.29%, and with respect to which we and the other shareholders of AIC have property insurance in place
providing $500.0 million of coverage pursuant to an insurance program arranged by AIC and with respect to which AIC is a reinsurer of certain
coverage amounts. Also, as a further example, RMR assists us with various aspects of our business pursuant to a business management
agreement. For further information about these and other such relationships and related person transactions and about the risks which may arise
as a result of those and other related person transactions and relationships, please see Note 15 to the Notes to our Consolidated Financial
Statements included in Item 15 of this Annual Report on Form 10-K, which is
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incorporated herein by reference. In addition, for more information about these transactions and relationships, please see elsewhere in this
report, including "Warning Concerning Forward Looking Statements" and the "Risk Factors" section for a description of risks which may arise
from these transactions and relationships. Descriptions of our agreements with SNH, RMR, CWH and AIC in this Annual Report on Form 10K are summaries and are qualified in their entirety by the terms of the agreements which are among the exhibits listed in Item 15 of this Annual
Report on Form 10-K and incorporated herein by reference. In addition, copies of certain of those agreements are filed with the SEC and may
be obtained from the SEC's website at www.sec.gov.
We believe that our agreements with SNH, RMR, CWH and AIC are on commercially reasonable terms. We also believe that our
relationships with SNH, RMR, CWH, AIC and their affiliated and related persons and entities benefit us, and, in fact, provide us with
competitive advantages in operating and growing our business.
Critical Accounting Policies
Our critical accounting policies concern revenue recognition, our assessments of the net realizable value of our accounts receivable,
reserves related to our self insurance programs and our valuations of our goodwill, other intangibles and long lived assets.
Our revenue recognition policies involve judgments about Medicare and Medicaid rate calculations. These judgments are based
principally upon our experience with these programs and our knowledge of current rules and regulations applicable to these programs. We
recognize revenues when services are provided and these amounts are reported at their estimated net realizable amounts. Some Medicare and
Medicaid revenues are subject to audit and retroactive adjustment and sometimes retroactive legislative changes.
Our policies for valuing accounts receivable involve significant judgments based upon our experience, including consideration of the age
of the receivables, the terms of the agreements with our residents, their third party payers or other obligors, the residents or payers stated intent
to pay, the residents or payers financial capacity and other factors which may include litigation or rate and payment appeal proceedings.
Determining reserves for the casualty, liability, workers' compensation and healthcare losses and costs that we have incurred as of the end
of a reporting period involves significant judgments based upon our experience and our expectations of future events, including projected
settlements for pending claims, known incidents which we expect may result in claims, estimates of incurred but not yet reported claims,
expected changes in premiums for insurance provided by insurers whose policies provide for retroactive adjustments, estimated litigation costs
and other factors. Since these reserves are based on estimates, the actual expenses we incur may differ from the amount reserved. We regularly
adjust these estimates to reflect changes in the foregoing factors, our actual claims experience, recommendations from our professional
consultants, changes in market conditions and other factors; it is possible that such adjustments may be material.
We review goodwill annually during our fourth quarter, or more frequently, if events or changes in circumstances exist, for impairment. If
our review indicates that the carrying amount of goodwill exceeds its fair value, we reduce the carrying amount to fair value. We evaluate
goodwill for impairment at the reporting unit level, and our reporting units are equivalent to our operating segments. All of our goodwill is
located in our senior living reporting unit. We evaluated goodwill for impairment by comparing the fair value of the senior living reporting
unit, as determined by discounted cash flows and market approaches such as capitalization rates and earnings multiples, with its carrying value.
The key assumptions used in the discounted cash flow analysis include expected future revenue growth, gross margins and our weighted
average cost of capital. The key assumption in the market approach is the selection of guideline companies and the determination of earnings
multiples. If the
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carrying value of the reporting unit exceeds our estimate of its fair value, we compare the implied fair value of the reporting unit's goodwill
with its carrying amount to measure the amount of impairment loss. Our estimates of discounted cash flows as reflected in our baseline forecast
may differ from actual cash flows due to, among other things, changes in economic conditions that adversely affect occupancy rates, reductions
in government or third party reimbursement rates, changes to our business model or changes in operating performance affecting our gross
margins. As a result of our annual goodwill impairment review, we believe that our goodwill was not impaired as of December 31, 2011.
As of our evaluation date, the fair value of the senior living reporting unit exceeds its carrying value by approximately 15%. As of
December 31, 2011, our carrying amount of goodwill was $11.0 million. The key variables that affect the cash flows of our senior living
reporting unit are estimated revenue growth rates, estimated operating expenses excluding interest and taxes, estimated capital expenditures,
growth rate assumptions and the weighted average cost of our capital. We select the revenue growth rate based on our view of the growth
prospects of the senior living reporting unit considering expected occupancy rates and private pay and government and third party
reimbursement rates. Estimated operating expenses and capital expenditures consider our historical and expected future operating experience.
These assumptions are subject to uncertainty, including our ability to increase a reporting unit's revenue and improve its profitability. For the
senior living reporting unit, relatively small declines in the future performance and cash flows or small changes in other key assumptions may
result in a goodwill impairment charges. Future events that could have a negative effect on the fair value of the senior living reporting unit
include, but are not limited to:
•
Decreases in revenues due to decreases in the occupancy rates and our daily rates,
•
Decreases in revenues and profitability at our senior living communities due to the inability of residents who pay for our
services with their private resources to afford our services,
•
Future Medicare and Medicaid rate reductions and other changes from the PPACA which impact our daily rates,
•
Decreases in the reporting unit's gross margins and profitability due to increased labor or other costs, or our inability to
successfully stabilize an acquired community's operations,
•
Increases in the weighted average cost of our capital including the market risk component, and
•
Changes in the structure of our business as a result of changes in relationships with our related parties.
Changes in one or more of these factors could result in an impairment charge.
We review the carrying value of intangibles and long lived assets 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 through an evaluation of recent financial performance, recent sales of similar assets, market conditions and
projected undiscounted cash flows that our asset or asset groups are expected to generate. This process requires that estimates be made and if
we misjudge or estimate incorrectly this could have a material effect on our financial statements. As a result of our evaluation, we reduced the
value of our long lived assets by $3.5 million reported on our balance sheet as of December 31, 2011 related to several of our senior living
communities.
Some of our judgments and estimates are based upon published industry statistics and in some cases third party professionals. Any
misjudgments or incorrect estimates affecting our critical accounting policy could have a material effect on our financial statements.
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In the future we may need to revise the judgments, estimates and assessments we use to formulate our critical accounting policies to
incorporate information which is not now known. We cannot predict the effect changes to the premises underlying our critical accounting
policies may have on our future results of operations, although such changes could be material and adverse.
Recently Announced Accounting Pronouncements
In May 2011, the Financial Accounting Standards Board, or FASB, issued an accounting standards update requiring additional disclosures
regarding fair value measurements. The update clarifies the application of existing fair value measurement requirements. The update also
requires reporting entities to disclose additional information regarding fair value measurements categorized within Level 3 of the fair value
hierarchy. The update is effective for interim and annual reporting periods beginning after December 15, 2011.
In June 2011, FASB issued an accounting standards update requiring additional disclosure regarding comprehensive income. The update
requires reporting entities to present items of net income, items of other comprehensive income and total comprehensive income in one
continuous statement of comprehensive income or in two separate consecutive statements. The update also requires reporting entities to present
the components of other comprehensive income in their interim and annual financial statements. The update is effective for interim and annual
reporting periods beginning after December 15, 2011.
In July 2011, FASB issued an accounting standards update requiring healthcare entities to change the presentation of their statements of
operations by reclassifying any provision for bad debts associated with patient service revenue from an operating expense to a deduction from
patient service revenue. The update also requires enhanced disclosure about policies for recognizing revenue and assessing bad debts. The
update is effective for interim and annual reporting periods beginning after December 15, 2011.
The adoption of these updates did not, and is not expected to, cause any material changes to the disclosures in or the presentation of, our
consolidated financial statements.
Inflation and Deflation
Inflation in the past several years in the United States has been modest. Future inflation might have either positive or negative impacts on
our business. Rising price levels may allow us to increase occupancy charges to residents, but may also cause our operating costs, including our
percentage rent, to increase. Also, our ability to realize rate increases paid by Medicare and Medicaid programs may be limited despite
inflation.
Deflation would likely have a negative impact upon us. A large component of our expenses consists of our fixed minimum rental
obligations. Accordingly, we believe that a general decline in price levels which could cause our charges to residents to decline would likely
not be fully offset by a decline in our expenses.
Seasonality
Our senior living business is subject to modest effects of seasonality. During the calendar fourth quarter holiday periods, nursing home
and assisted living residents are sometimes discharged to join family celebrations and relocations and admission decisions are often deferred.
The first quarter of each calendar year usually coincides with increased illness among nursing home and assisted living residents which can
result in increased costs or discharges to hospitals. As a result of these factors, nursing home and assisted living operations sometimes produce
greater earnings in the second and third quarters of a calendar year and lesser earnings in the first and fourth quarters. We do not believe
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that this seasonality will cause fluctuations in our revenues or operating cash flow to such an extent that we will have difficulty paying our
expenses, including rent, which do not fluctuate seasonally.
Impact of Climate Change
The current political debate about climate change has resulted in various treaties, laws and regulations which are intended to limit carbon
emissions. We believe these laws being enacted or proposed may cause energy costs at our communities to increase. In the longer term, we
believe any such increased costs will be passed through and paid by our patients, residents and other customers in higher charges for our
services. However, in the short term, these increased costs, if material in amount, could materially and adversely affect our financial condition
and results of operations.
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
We are exposed to risks associated with market changes in interest rates. We manage our exposure to this market risk by monitoring
available financing alternatives. Our strategy to manage exposure to changes in interest rates has not materially changed from December 31,
2010. Other than as described below, we do not foresee any significant changes in our exposure to fluctuations in interest rates or in how we
manage this exposure in the near future.
Changes in market interest rates affect the fair value of our fixed rate debt; increases in market interest rates decrease the fair value of our
fixed rate debt, while decreases in market interest rates increase the fair value of our fixed rate debt. For example based upon discounted cash
flow analysis, if prevailing interest rates were to increase by 10% of current interest rates and other credit market considerations remained
unchanged, the aggregate market value of our $47.4 million aggregate principal amount of outstanding mortgage debt and $37.3 million
aggregate principal amount of the outstanding Notes on December 31, 2011 would decline by approximately $3.7 million; and, similarly, if
prevailing interest rates were to decline by 10% of current interest rates and other credit market considerations remained unchanged, the
aggregate market value of our $47.4 million aggregate principal amount of outstanding mortgage debt and $37.3 million aggregate principal
amount of the outstanding Notes on December 31, 2011 would increase by approximately $4.0 million.
Our Credit Agreement bears interest at floating rates and matures on March 18, 2013. As of December 31, 2011, no amounts were
outstanding under our Credit Agreement. We borrow in U.S. dollars and borrowings under our Credit Agreement bear interest at LIBOR (with
a floor of 2% per annum) plus 400 basis points. Accordingly, we are vulnerable to changes in U.S. dollar based short term interest rates,
specifically LIBOR. A change in interest rates would not affect the value of our Credit Agreement but could affect our operating results. For
example, if the maximum amount of $35.0 million were drawn under our Credit Agreement and interest rates above the floor or minimum rate
decreased or increased by 1% per annum, our annual interest expense would decrease or increase by $350,000, or $0.01 per share, based on our
outstanding common shares. If interest rates were to change gradually over time, the impact would occur over time.
The Bridge Loan bears interest at floating rates and matures on July 1, 2012. As of December 31, 2011, $38.0 million aggregate principal
amount was outstanding under the Bridge Loan. We borrow in U.S. dollars and borrowings under the Bridge Loan bear interest at a rate equal
to the annual rates of interest applicable to SNH's borrowings under its revolving credit facility, plus 1%. As of December 31, 2011, the interest
rate was 2.9% under the Bridge Loan. Accordingly, we are vulnerable to changes in U.S. dollar based short term interest rates, specifically
LIBOR. A change in interest rates would not affect the value of the Bridge Loan but could affect our operating results. For example, if the
$38.0 million aggregate principal amount outstanding under our Bridge Loan remains outstanding and interest rates decreased or increased by
1% per annum, our annual interest expense would decrease or
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increase by $380,000, or $0.01 per share, based on our currently outstanding common shares. If interest rates were to change gradually over
time, the impact would occur over time.
Our exposure to fluctuations in interest rates may increase in the future if we incur additional debt to fund acquisitions or otherwise.
Item 8.
Financial Statements and Supplementary Data
The information required by this Item is included in Item 15 of this Annual Report on Form 10-K.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A.
Controls and Procedures
As of the end of the period covered by this report, our management carried out an evaluation, under the supervision and with the
participation of our President and Chief Executive Officer and our Treasurer and Chief Financial Officer of the effectiveness of our disclosure
controls and procedures pursuant to Exchange Act Rules 13a-15 and 15d-15. Based upon that evaluation, our President and Chief Executive
Officer and our Treasurer and Chief Financial Officer concluded that our disclosure controls and procedures are effective.
There have been no changes in our internal control over financial reporting during the quarter ended December 31, 2011 that have
materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management Report on Assessment of Internal Control Over Financial Reporting
We are responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control system is
designed to provide reasonable assurance to our management and Board of Directors regarding the preparation and fair presentation of
published financial statements. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those
systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2011. In making this
assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control—
Integrated Framework . Based on our assessment, we believe that, as of December 31, 2011, our internal control over financial reporting is
effective.
Ernst & Young LLP, the independent registered public accounting firm that audited our 2011 consolidated financial statements included in
this Annual Report on Form 10-K, has issued an attestation report on our internal control over financial reporting. The report appears elsewhere
herein.
Item 9B.
Other Information
(a) Vern D. Larkin, our Vice President, General Counsel and Secretary, has been appointed as our Director of Internal Audit, effective
March 1, 2012, and he will cease serving as our Vice President, General Counsel and Secretary, and resign from those offices, on or about that
same date.
(b) On February 14, 2012, our Board of Directors adopted amended and restated bylaws of the Company, effective that same day. The
amended and restated bylaws now provide that in an uncontested election for Directors, a plurality of all the votes cast at a meeting of
stockholders duly called and at which a quorum is present shall be sufficient to elect a Director. Prior to this amendment, the bylaws required a
majority of all the votes cast at a meeting of stockholders duly called and at which a quorum is present to elect a Director in an uncontested
election.
A copy of the amended and restated bylaws is attached as Exhibit 3.3 and which amended and restated bylaws are incorporated herein by
reference. In addition, a marked copy of the Company's amended and restated bylaws indicating changes made to the Company's bylaws as
they existed immediately prior to the adoption of those amended and restated bylaws is attached as Exhibit 3.4.
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PART III
Item 10.
Directors and Executive Officers and Corporate Governance
We have a Code of Business Conduct and Ethics that applies to all our representatives, including our officers, Directors and employees
and employees of RMR. Our Code of Business Conduct and Ethics is posted on our website, www.fivestarseniorliving.com. A printed copy of
our Code of Business Conduct and Ethics is also available free of charge to any person who requests a copy by writing to our Secretary, Five
Star Quality Care, Inc., 400 Centre Street, Newton, MA 02458. We intend to disclose any amendments or waivers to our Code of Business
Conduct and Ethics applicable to our principal executive officer, principal financial officer, principal accounting officer or controller (or any
person performing similar functions) on our website.
The remainder of the information required by Item 10 is incorporated by reference to our definitive Proxy Statement.
Item 11.
Executive Compensation
The information required by Item 11 is incorporated by reference to our definitive Proxy Statement.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Equity Compensation Plan Information
We may grant options and common shares to our officers, Directors, employees and other individuals who render services to us, under our
equity compensation plan, as amended, or the Share Award Plan. In addition, each of our Directors received 7,500 shares in 2011 under the
Share Award Plan as part of his or her annual compensation for serving as a Director. The terms of grants made under the Share Award Plan
are determined by the Board of Directors, or a committee thereof, at the time of the grant. The following table is as of December 31, 2011.
Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights
(a)
Equity compensation plans
approved by security
holders—Share Award
Plan
Equity compensation plans
not approved by security
holders
Total
(1)
Weighted-average
exercise price of
outstanding options,
warrants and rights
(b)
Number of securities
remaining available for future
issuance under equity
compensation plans (excluding
securities reflected in
column (a))
(c)
None
None
1,128,320(1)
None
None
None
None
None
1,128,320
Pursuant to the terms of the Share Award Plan, in no event shall the number of common shares issued under the Share
Award Plan exceed 3,000,000.
The remainder of the information required by Item 12 is incorporated by reference to our definitive Proxy Statement.
Item 13.
Certain Relationships and Related Transactions and Director Independence
The information required by Item 13 is incorporated by reference to our definitive Proxy Statement.
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Item 14.
Principal Accountant Fees and Schedules
The information required by Item 14 is incorporated by reference to our definitive Proxy Statement.
Item 15.
(a)
Exhibits and Financial Statement Schedules
Index to Financial Statements
Page
Consolidated Financial Statements of Five Star Quality Care, Inc.
Reports of Independent Registered Public Accounting Firm
F-1 / F-2
Consolidated Balance Sheets at December 31, 2011 and 2010
F-3
Consolidated Statements of Income for the years ended December 31, 2011, 2010 and
2009
F-4
Consolidated Statements of Shareholders' Equity for the years ended December 31,
2011, 2010 and 2009
F-5
Consolidated Statements of Cash Flows for the years ended December 31, 2011, 2010
and 2009
F-6
Notes to Consolidated Financial Statements
F-7
All other schedules for which provision is made in the applicable accounting regulations of the SEC are not required under the related
instructions, or are inapplicable, and therefore have been omitted.
(b)
Exhibits
Exhibit No.
Description
3.1 Composite Copy of Articles of Amendment and Restatement of the Company, dated as
of December 5, 2001, as amended to date. (Incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2011.)
3.2 Articles Supplementary, as corrected by Certificate of Correction, dated as of March 19,
2004. (Incorporated by reference to the Company's Form 8-A dated March 19, 2004 and
the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2004,
respectively.)
3.3 Amended and Restated Bylaws of the Company, adopted February 14, 2012. (Filed
herewith.)
3.4 Amended and Restated Bylaws of the Company, adopted February 14, 2012 (marked
copy). (Filed herewith.)
4.1 Form of Common Share Certificate. (Incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2008.)
4.2 Rights Agreement, dated as of March 10, 2004, between the Company and EquiServe
Trust Company, N.A. (Incorporated by reference to the Company's Current Report on
Form 8-K dated March 10, 2004.)
4.3 Appointment of Successor Rights Agent, dated as of December 13, 2004, between the
Company and Wells Fargo Bank, National Association. (Incorporated by reference to the
Company's Current Report on Form 8-K dated December 13, 2004.)
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Exhibit No.
Description
4.4 Indenture related to 3.75% Convertible Senior Notes due 2026, dated as of October 18,
2006, among the Company, each of the guarantors named therein and U.S. Bank National
Association, as Trustee. (Incorporated by reference to the Company's Current Report on
Form 8-K dated October 24, 2006.)
10.1 2001 Stock Option and Stock Incentive Plan of the Company, as amended.(+)
(Incorporated by reference to the Company's Current Report on Form 8-K dated May 25,
2006.)
10.2 Form of Restricted Share Agreement.(+) (Incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30, 2010.)
10.3 Representative form of Indemnification Agreement.(+) (Filed herewith.)
10.4 Summary of Director Compensation.(+) (Incorporated by reference to the Company's
Current Report on Form 8-K dated May 13, 2011.)
10.5 Credit and Security Agreement, dated as of March 18, 2010, among the Company, each
of the Guarantors party thereto, Jefferies Finance LLC, as Arranger, Administrative
Agent and Collateral Agent, and Jefferies Group Inc., as Issuing Bank. (Incorporated by
reference to the Company's Current Report on Form 8-K dated March 24, 2010.)
10.6 Transaction Agreement, dated December 7, 2001, among Senior Housing Properties
Trust, certain subsidiaries of Senior Housing Properties Trust, the Company, certain
subsidiaries of the Company, FSQ, Inc., Hospitality Properties Trust, HRPT Properties
Trust (now known as CommonWealth REIT) and Reit Management & Research LLC.
(Incorporated by reference to Senior Housing Properties Trust's Current Report on
Form 8-K dated December 13, 2001.)
10.7 Amended and Restated Master Lease Agreement (Lease No. 1), dated as of August 4,
2009, among certain affiliates of Senior Housing Properties Trust, as Landlord, and Five
Star Quality Care Trust, as Tenant. (Incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2009.)
10.8 Partial Termination of and First Amendment to Amended and Restated Master Lease
Agreement (Lease No. 1), dated as of October 1, 2009, among certain subsidiaries of
Senior Housing Properties Trust, as Landlord, and Five Star Quality Care Trust, as
Tenant. (Incorporated by reference to the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 2009.)
10.9 Second Amendment to Amended and Restated Master Lease Agreement (Lease No. 1),
dated as of November 17, 2009, among certain subsidiaries of Senior Housing Properties
Trust, as Landlord, and Five Star Quality Care Trust, as Tenant. (Incorporated by
reference to the Company's Annual Report on Form 10-K for the year ended
December 31, 2009.)
10.10 Third Amendment to Amended and Restated Master Lease Agreement (Lease No. 1),
dated as of December 10, 2009, among certain subsidiaries of Senior Housing Properties
Trust, as Landlord, and Five Star Quality Care Trust, as Tenant. (Incorporated by
reference to the Company's Annual Report on Form 10-K for the year ended
December 31, 2009.)
10.11 Partial Termination of and Fourth Amendment to Amended and Restated Master Lease
Agreement (Lease No. 1), dated as of August 1, 2010, among certain subsidiaries of
Senior Housing Properties Trust, as Landlord, and Five Star Quality Care Trust, as
Tenant. (Incorporated by reference to the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 2010.)
65
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Exhibit No.
Description
10.12 Fifth Amendment to Amended and Restated Master Lease Agreement (Lease No. 1),
dated as of May 1, 2011, by and among certain subsidiaries of Senior Housing Properties
Trust, as Landlord, and Five Star Quality Care Trust, as Tenant. (Incorporated by
reference to the Company's Current Report on Form 8-K dated June 8, 2011.)
10.13 Partial Termination of and Sixth Amendment to Amended and Restated Master Lease
Agreement (Lease No. 1), dated as of June 1, 2011, by and among certain subsidiaries of
Senior Housing Properties Trust, as Landlord, and Five Star Quality Care Trust, as
Tenant. (Incorporated by reference to the Company's Current Report on Form 8-K dated
June 8, 2011.)
10.14 Seventh Amendment to Amended and Restated Master Lease Agreement (Lease No. 1),
dated as of June 20, 2011, among certain subsidiaries of Senior Housing Properties Trust,
as Landlord, and Five Star Quality Care Trust, as Tenant. (Incorporated by reference to
the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2011.)
10.15 Amended and Restated Guaranty Agreement (Lease No. 1), dated as of August 4, 2009,
made by the Company, as Guarantor, for the benefit of certain subsidiaries of Senior
Housing Properties Trust, relating to the Amended and Restated Master Lease
Agreement (Lease No. 1), dated as of August 4, 2009, among certain affiliates of Senior
Housing Properties Trust, as Landlord, and Five Star Quality Care Trust, as Tenant.
(Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2009.)
10.16 Amended and Restated Master Lease Agreement (Lease No. 2), dated as of August 4,
2009, among certain affiliates of Senior Housing Properties Trust, as Landlord, and
certain affiliates of the Company, as Tenant. (Incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2009.)
10.17 Partial Termination of and First Amendment to Amended and Restated Master Lease
Agreement (Lease No. 2), dated as of November 1, 2009, among certain subsidiaries of
Senior Housing Properties Trust, as Landlord, and certain subsidiaries of the Company,
as Tenant. (Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 2009.)
10.18 Partial Termination of and Second Amendment to Amended and Restated Master Lease
Agreement (Lease No. 2), dated as of August 1, 2010, among certain subsidiaries of
Senior Housing Properties Trust, as Landlord, and certain subsidiaries of the Company,
as Tenant. (Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 2010.)
10.19 Third Amendment to Amended and Restated Master Lease Agreement (Lease No. 2),
dated as of June 20, 2011, among certain subsidiaries of Senior Housing Properties Trust,
as Landlord, and certain subsidiaries of the Company, as Tenant. (Incorporated by
reference to the Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 2011.)
10.20 Fourth Amendment to Amended and Restated Master Lease Agreement (Lease No. 2),
dated as of July 22, 2011, by and among certain subsidiaries of Senior Housing
Properties Trust, as Landlord, and certain subsidiaries of the Company, as Tenant.
(Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2011.)
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Exhibit No.
Description
10.21 Amended and Restated Guaranty Agreement (Lease No. 2), dated as of August 4, 2009,
made by the Company, as Guarantor, for the benefit of certain subsidiaries of Senior
Housing Properties Trust, relating to the Amended and Restated Master Lease
Agreement (Lease No. 2), dated as of August 4, 2009, among certain affiliates of Senior
Housing Properties Trust, as Landlord, and certain affiliates of the Company, as Tenant.
(Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2009.)
10.22 Amended and Restated Master Lease Agreement (Lease No. 4), dated as of August 4,
2009, among certain affiliates of Senior Housing Properties Trust, as Landlord, and
certain affiliates of the Company, as Tenant. (Incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2009.)
10.23 First Amendment to Amended and Restated Master Lease Agreement (Lease No. 4),
dated as of October 1, 2009, among certain subsidiaries of Senior Housing Properties
Trust, as Landlord, and certain subsidiaries of the Company, as Tenant. (Incorporated by
reference to the Company's Annual Report on Form 10-K for the year ended
December 31, 2009.)
10.24 Partial Termination of and Second Amendment to Amended and Restated Master Lease
Agreement (Lease No. 4), dated as of May 1, 2011, by and among certain subsidiaries of
Senior Housing Properties Trust, as Landlord, and certain subsidiaries of the Company,
as Tenant. (Incorporated by reference to the Company's Current Report on Form 8-K
dated June 8, 2011.)
10.25 Third Amendment to Amended and Restated Master Lease Agreement (Lease No. 4),
dated as of June 20, 2011, among certain subsidiaries of Senior Housing Properties Trust,
as Landlord, and certain subsidiaries of the Company, as Tenant. (Incorporated by
reference to the Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 2011.)
10.26 Amended and Restated Guaranty Agreement (Lease No. 4), dated as of August 4, 2009,
made by the Company, as Guarantor, for the benefit of certain affiliates of Senior
Housing Properties Trust, relating to the Amended and Restated Master Lease
Agreement (Lease No. 4), dated as of August 4, 2009, among certain affiliates of Senior
Housing Properties Trust, as Landlord, and certain affiliates of the Company, as Tenant.
(Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2009.)
10.27 Amended and Restated Master Lease Agreement, dated as of August 4, 2009, among
SNH Financing LLC, SNH FM Financing Trust and Ellicott City Land I, LLC, as
Landlord, and FVE FM Financing, Inc., as Tenant. (Incorporated by reference to the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2009.)
10.28 Amendment No. 1 to Amended and Restated Master Lease Agreement, dated as of
August 4, 2009, among SNH Financing LLC, SNH FM Financing Trust and Ellicott City
Land I, LLC, as Landlord, and FVE FM Financing, Inc., as Tenant. (Incorporated by
reference to the Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 2009.)
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Exhibit No.
Description
10.29 Amended and Restated Guaranty Agreement, dated as of August 4, 2009, made by the
Company, as Guarantor, for the benefit of SNH Financing LLC, SNH FM Financing
Trust and Ellicott City Land I, LLC, relating to the Amended and Restated Master Lease
Agreement, dated as of August 4, 2009, among SNH Financing LLC, SNH FM
Financing Trust and Ellicott City Land I, LLC, as Landlord, and FVE FM
Financing, Inc., as Tenant. (Incorporated by reference to the Company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 2009.)
10.30 Representative form of Subordination, Assignment and Security Agreement.
(Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2009.)
10.31 Lease Realignment Agreement, dated as of August 4, 2009, among Senior Housing
Properties Trust and certain of its subsidiaries and the Company and certain of its
subsidiaries. (Incorporated by reference to the Company's Quarterly Report on Form 10Q for the quarter ended June 30, 2009.)
10.32 Purchase and Sale Agreement, dated as of March 18, 2011, among Residential Care I,
L.L.C., Residential Care III, Inc., Clearwater Garden Homes, L.L.C., Rosewalk Garden
Homes, L.L.C. and American Senior Home Care, L.L.C., as Sellers, and the Company, as
Buyer (with respect to the Clearwater Commons community and the Rosewalk Commons
and Garden Homes community). (Incorporated by reference to the Company's Current
Report on Form 8-K dated May 13, 2011.)
10.33 First Amendment to Purchase and Sale Agreement, dated as of April 27, 2011, among
Residential Care I, L.L.C., Residential Care III, Inc., Clearwater Garden Homes, L.L.C.,
Rosewalk Garden Homes, L.L.C. and American Senior Home Care, L.L.C., as Sellers,
and the Company, as Buyer (with respect to the Clearwater Commons community and
the Rosewalk Commons and Garden Homes community). (Incorporated by reference to
the Company's Current Report on Form 8-K dated May 13, 2011.)
10.34 Second Amendment to Purchase and Sale Agreement, dated as of May 9, 2011, among
Residential Care I, L.L.C., Residential Care III, Inc., Clearwater Garden Homes, L.L.C.,
Rosewalk Garden Homes, L.L.C. and American Senior Home Care, L.L.C., as Sellers,
and the Company, as Buyer (with respect to the Clearwater Commons community and
the Rosewalk Commons and Garden Homes community). (Incorporated by reference to
the Company's Current Report on Form 8-K dated May 13, 2011.)
10.35 Third Amendment to Purchase and Sale Agreement, dated as of May 11, 2011, among
Residential Care I, L.L.C., Residential Care III, Inc., Clearwater Garden Homes, L.L.C.,
Rosewalk Garden Homes, L.L.C. and American Senior Home Care, L.L.C., as Sellers,
and the Company, as Buyer (with respect to the Clearwater Commons community and
the Rosewalk Commons and Garden Homes community). (Incorporated by reference to
the Company's Current Report on Form 8-K dated May 13, 2011.)
10.36 Fourth Amendment to Purchase and Sale Agreement, dated as of May 12, 2011, among
Residential Care I, L.L.C., Residential Care III, Inc., Clearwater Garden Homes, L.L.C.,
Rosewalk Garden Homes, L.L.C. and American Senior Home Care, L.L.C., as Sellers,
and the Company, as Buyer (with respect to the Clearwater Commons community and
the Rosewalk Commons and Garden Homes community). (Incorporated by reference to
the Company's Current Report on Form 8-K dated May 13, 2011.)
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Exhibit No.
Description
10.37 Purchase and Sale Agreement, dated as of March 18, 2011, among Residential Care II,
L.L.C., Residential Care IV, L.L.C., Residential Care VI, L.L.C., E&F
Realty Co., L.L.P., American Senior Home Care, L.L.C. and American Senior Home
Care of Ft. Wayne, L.L.C., as Sellers, and the Company, as Buyer (with respect to the
Forest Creek Commons community, the Covington Commons community and the
Northwoods Commons community). (Incorporated by reference to the Company's
Current Report on Form 8-K dated May 13, 2011.)
10.38 First Amendment to Purchase and Sale Agreement, dated as of April 27, 2011, among
Residential Care II, L.L.C., Residential Care IV, L.L.C., Residential Care VI, L.L.C.,
E&F Realty Co., L.L.P., American Senior Home Care, L.L.C. and American Senior
Home Care of Ft. Wayne, L.L.C., as Sellers, and the Company, as Buyer (with respect to
the Forest Creek Commons community, the Covington Commons community and the
Northwoods Commons community). (Incorporated by reference to the Company's
Current Report on Form 8-K dated May 13, 2011.)
10.39 Second Amendment to Purchase and Sale Agreement, dated as of May 9, 2011, among
Residential Care II, L.L.C., Residential Care IV, L.L.C., Residential Care VI, L.L.C.,
E&F Realty Co., L.L.P., American Senior Home Care, L.L.C. and American Senior
Home Care of Ft. Wayne, L.L.C., as Sellers, and the Company, as Buyer (with respect to
the Forest Creek Commons community, the Covington Commons community and the
Northwoods Commons community). (Incorporated by reference to the Company's
Current Report on Form 8-K dated May 13, 2011.)
10.40 Third Amendment to Purchase and Sale Agreement, dated as of May 11, 2011, among
Residential Care II, L.L.C., Residential Care IV, L.L.C., Residential Care VI, L.L.C.,
E&F Realty Co., L.L.P., American Senior Home Care, L.L.C. and American Senior
Home Care of Ft. Wayne, L.L.C., as Sellers, and the Company, as Buyer (with respect to
the Forest Creek Commons community, the Covington Commons community and the
Northwoods Commons community). (Incorporated by reference to the Company's
Current Report on Form 8-K dated May 13, 2011.)
10.41 Fourth Amendment to Purchase and Sale Agreement, dated as of May 12, 2011, among
Residential Care II, L.L.C., Residential Care IV, L.L.C., Residential Care VI, L.L.C.,
E&F Realty Co., L.L.P., American Senior Home Care, L.L.C. and American Senior
Home Care of Ft. Wayne, L.L.C., as Sellers, and the Company, as Buyer (with respect to
the Forest Creek Commons community, the Covington Commons community and the
Northwoods Commons community). (Incorporated by reference to the Company's
Current Report on Form 8-K dated May 13, 2011.)
10.42 Fifth Amendment to Purchase and Sale Agreement, dated as of July 1, 2011, among
Residential Care II, L.L.C., Residential Care IV, L.L.C., Residential Care VI, L.L.C.,
E&F Realty Co., L.L.P., American Senior Home Care, L.L.C. and American Senior
Home Care of Ft. Wayne, L.L.C., as Sellers, and the Company, as Buyer (with respect to
the Forest Creek Commons community, the Covington Commons community and the
Northwoods Commons community). (Incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2011.)
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Exhibit No.
Description
10.43 Sixth Amendment to Purchase and Sale Agreement, dated as of August 1, 2011, among
Residential Care II, L.L.C., Residential Care IV, L.L.C., Residential Care VI, L.L.C.,
E&F Realty Co., L.L.P., American Senior Home Care, L.L.C. and American Senior
Home Care of Ft. Wayne, L.L.C., as Sellers, and the Company, as Buyer (with respect to
the Forest Creek Commons community, the Covington Commons community and the
Northwoods Commons community). (Incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30, 2011.)
10.44 Seventh Amendment to Purchase and Sale Agreement, dated as of September 1, 2011,
among Residential Care II, L.L.C., Residential Care IV, L.L.C., Residential Care VI,
L.L.C., E&F Realty Co., L.L.P., American Senior Home Care, L.L.C. and American
Senior Home Care of Ft. Wayne, L.L.C., as Sellers, and the Company, as Buyer (with
respect to the Forest Creek Commons community, the Covington Commons community
and the Northwoods Commons community). (Incorporated by reference to the
Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2011.)
10.45 Purchase and Sale Agreement, dated as of March 18, 2011, among Residential Care VII,
L.L.C. and Riverwalk Garden Homes, L.L.C., as Sellers, and the Company, as Buyer
(with respect to the Riverwalk Commons and Garden Homes community). (Incorporated
by reference to the Company's Current Report on Form 8-K dated May 13, 2011.)
10.46 First Amendment to Purchase and Sale Agreement, dated as of April 27, 2011, among
Residential Care VII, L.L.C. and Riverwalk Garden Homes, L.L.C., as Sellers, and the
Company, as Buyer (with respect to the Riverwalk Commons and Garden Homes
community). (Incorporated by reference to the Company's Current Report on Form 8-K
dated May 13, 2011.)
10.47 Second Amendment to Purchase and Sale Agreement, dated as of May 9, 2011, among
Residential Care VII, L.L.C. and Riverwalk Garden Homes, L.L.C., as Sellers, and the
Company, as Buyer (with respect to the Riverwalk Commons and Garden Homes
community). (Incorporated by reference to the Company's Current Report on Form 8-K
dated May 13, 2011.)
10.48 Third Amendment to Purchase and Sale Agreement, dated as of May 11, 2011, among
Residential Care VII, L.L.C. and Riverwalk Garden Homes, L.L.C., as Sellers, and the
Company, as Buyer (with respect to the Riverwalk Commons and Garden Homes
community). (Incorporated by reference to the Company's Current Report on Form 8-K
dated May 13, 2011.)
10.49 Fourth Amendment to Purchase and Sale Agreement, dated as of May 12, 2011, among
Residential Care VII, L.L.C. and Riverwalk Garden Homes, L.L.C., as Sellers, and the
Company, as Buyer (with respect to the Riverwalk Commons and Garden Homes
community). (Incorporated by reference to the Company's Current Report on Form 8-K
dated May 13, 2011.)
10.50 Registration Rights Agreement, dated as of August 4, 2009, between the Company and
Senior Housing Properties Trust. (Incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2009.)
10.51 Amended and Restated Shareholders Agreement, dated as of December 16, 2009, among
Affiliates Insurance Company, the Company, Government Properties Income Trust,
Hospitality Properties Trust, HRPT Properties Trust, Senior Housing Properties Trust,
TravelCenters of America LLC and Reit Management & Research LLC. (Incorporated
by reference to the Company's Annual Report on Form 10-K for the year ended
December 31, 2009.)
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Exhibit No.
Description
10.52 Amended and Restated Business Management and Shared Services Agreement, dated as
of January 4, 2010, between the Company and Reit Management & Research LLC.(+)
(Incorporated by reference to the Company's Current Report on Form 8-K dated
January 8, 2010.)
10.53 First Amendment to Amended and Restated Business Management and Shared Services
Agreement, dated as of May 12, 2011, between the Company and Reit Management &
Research LLC.(+) (Incorporated by reference to the Company's Current Report on
Form 8-K dated May 13, 2011.)
10.54 $80,000,000 Bridge Loan Agreement, dated as of May 12, 2011, between Senior
Housing Properties Trust, as Lender, and the Company, together with certain affiliates
thereof, collectively as Borrower. (Incorporated by reference to the Company's Current
Report on Form 8-K dated May 13, 2011.)
10.55 Representative Form of Management Contract for assisted living communities, dated as
of May 12, 2011, between FVE Managers, Inc., as Manager, and SNH SE Burlington
Tenant LLC, as Owner. (Incorporated by reference to the Company's Current Report on
Form 8-K dated May 13, 2011.)
10.56 Pooling Agreement, dated as of May 12, 2011, between FVE Managers, Inc. and certain
subsidiaries of Senior Housing Properties Trust. (Incorporated by reference to the
Company's Current Report on Form 8-K dated May 13, 2011.)
10.57 Representative Form of Accession Agreement, dated as of December 1, 2011, by SNH
CALI Tenant LLC in favor of FVE Managers, Inc. (Filed herewith.)
10.58 Separation Agreement, dated as of December 14, 2010, between the Company and
Maryann Hughes.(+) (Incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended December 31, 2010.)
10.59 Consulting and Cooperation Agreement, dated August 19, 2011, between Travis K.
Smith and the Company. (+) (Incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 2011.)
10.60 Letter agreement, dated November 18, 2011, between the Company and Rosemary
Esposito. (+) (Incorporated by reference to the Company's Current Report on Form 8-K
dated November 22, 2011.)
12.1 Computation of Ratio of Earnings to Fixed Charges. (Filed herewith.)
21.1 Subsidiaries of the Company. (Filed herewith.)
23.1 Consent of Ernst & Young LLP. (Filed herewith.)
31.1 Rule 13a-14(a) Certification of Chief Executive Officer. (Filed herewith.)
31.2 Rule 13a-14(a) Certification of Chief Financial Officer. (Filed herewith.)
32.1 Section 1350 Certification of Chief Executive Officer and Chief Financial Officer.
(Furnished herewith.)
99.1 Reimbursement Agreement, dated as of October 17, 2008, among the Company, Reit
Management & Research LLC and TravelCenters of America LLC. (Incorporated by
reference to the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2008.)
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Exhibit No.
Description
99.2 Lease Agreement, dated as of November 19, 2004, among certain affiliates of Senior
Housing Properties Trust, as Landlord, and certain affiliates of the Company, as Tenant
(with respect to 4 properties). (Incorporated by reference to the Company's Registration
Statement on Form S-1, File No. 333-119955, as amended on November 29, 2004.)
99.3 Guaranty Agreement, dated as of November 19, 2004, made by the Company in favor of
the Beneficiaries named therein (with respect to 4 properties). (Incorporated by reference
to the Company's Registration Statement on Form S-1, File No. 333-119955, as amended
on November 29, 2004.)
99.4 Lease Agreement, dated as of November 19, 2004, among certain affiliates of Senior
Housing Properties Trust, as Landlord, and certain affiliates of the Company, as Tenant
(with respect to 16 properties). (Incorporated by reference to the Company's Registration
Statement on Form S-1, File No. 333-119955, as amended on November 29, 2004.)
99.5 Guaranty Agreement, dated as of November 19, 2004, made by the Company in favor of
the Beneficiaries named therein (with respect to 16 properties). (Incorporated by
reference to the Company's Registration Statement on Form S-1, File No. 333-119955, as
amended on November 29, 2004.)
99.6 Amended and Restated Security Agreement (Lease No. 1), dated as of August 4, 2009,
among Five Star Quality Care Trust, as Tenant, and the Landlord under the Amended and
Restated Master Lease Agreement (Lease No. 1), dated as of August 4, 2009, among
certain affiliates of Senior Housing Properties Trust, as Landlord, and Five Star Quality
Care Trust, as Tenant. (Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2009.)
99.7 Amended and Restated Subtenant Guaranty Agreement (Lease No. 1), dated as of
August 4, 2009, made by certain subsidiaries of the Company, each a Subtenant
Guarantor, for the benefit of the Landlord under the Amended and Restated Master Lease
Agreement (Lease No. 1), dated as of August 4, 2009, among certain affiliates of Senior
Housing Properties Trust, as Landlord, and Five Star Quality Care Trust, as Tenant.
(Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2009.)
99.8 Amended and Restated Subtenant Security Agreement (Lease No. 1), dated as of
August 4, 2009, made by certain affiliates of the Company, as Subtenants, and the
Landlord under the Amended and Restated Master Lease Agreement (Lease No. 1), dated
as of August 4, 2009, among certain affiliates of Senior Housing Properties Trust, as
Landlord, and Five Star Quality Care Trust, as Tenant. (Incorporated by reference to the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2009.)
99.9 Confirmation of Guarantees and Confirmation of and Amendment to Security
Agreements, dated as of October 1, 2009, among the Company, certain subsidiaries of
the Company, and certain subsidiaries of Senior Housing Properties Trust. (Incorporated
by reference to the Company's Annual Report on Form 10-K for the year ended
December 31, 2009.)
99.10 Confirmation of and Joinder to Guarantees and Confirmation of and Joinder and
Amendment to Security Agreements, dated as of November 17, 2009, among the
Company, certain subsidiaries of the Company, and certain subsidiaries of Senior
Housing Properties Trust. (Incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended December 31, 2009.)
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Exhibit No.
Description
99.11 Confirmation of Guarantees and Confirmation of and Amendment to Security
Agreements, dated as of December 10, 2009, among the Company, certain subsidiaries of
the Company, and certain subsidiaries of Senior Housing Properties Trust. (Incorporated
by reference to the Company's Annual Report on Form 10-K for the year ended
December 31, 2009.)
99.12 Confirmation of Guarantees and Confirmation of and Amendment to Security
Agreements, dated as of August 1, 2010, among the Company, certain subsidiaries of the
Company, and certain subsidiaries of Senior Housing Properties Trust. (Incorporated by
reference to the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2010.)
99.13 Amended and Restated Security Agreement (Lease No. 2), dated as of August 4, 2009,
made by certain subsidiaries of the Company, as Tenant, and the Landlord under the
Amended and Restated Master Lease Agreement (Lease No. 2), dated as of August 4,
2009, among certain affiliates of Senior Housing Properties Trust, as Landlord, and
certain affiliates of the Company, as Tenant. (Incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2009.)
99.14 Amended and Restated Subtenant Guaranty Agreement (Lease No. 2), dated as of
August 4, 2009, made by certain subsidiaries of the Company, each a Subtenant
Guarantor, for the benefit of the Landlord under the Amended and Restated Master Lease
Agreement (Lease No. 2), dated as of August 4, 2009, among certain affiliates of Senior
Housing Properties Trust, as Landlord, and certain affiliates of the Company, as Tenant.
(Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2009.)
99.15 Amended and Restated Subtenant Security Agreement (Lease No. 2), dated as of
August 4, 2009, made by certain subsidiaries of the Company, as Subtenants, and the
Landlord under the Amended and Restated Master Lease Agreement (Lease No. 2), dated
as of August 4, 2009, among certain affiliates of Senior Housing Properties Trust, as
Landlord, and certain affiliates of the Company, as Tenant. (Incorporated by reference to
the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2009.)
99.16 Confirmation of Guarantees and Confirmation of and Amendment to Security
Agreements, dated as of November 1, 2009, among the Company, certain subsidiaries of
the Company, and certain subsidiaries of Senior Housing Properties Trust. (Incorporated
by reference to the Company's Annual Report on Form 10-K for the year ended
December 31, 2009.)
99.17 Confirmation of Guarantees and Confirmation of and Amendment to Security
Agreements, dated as of August 1, 2010, among the Company, certain subsidiaries of the
Company, and certain subsidiaries of Senior Housing Properties Trust. (Incorporated by
reference to the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2010.)
99.18 Amended and Restated Security Agreement (Lease No. 4), dated as of August 4, 2009,
made by certain subsidiaries of the Company, as Tenant, and the Landlord under the
Amended and Restated Master Lease Agreement (Lease No. 4), dated as of August 4,
2009, among certain affiliates of Senior Housing Properties Trust, as Landlord, and
certain affiliates of the Company, as Tenant. (Incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2009.)
73
Table of Contents
Exhibit No.
Description
99.19 Amended and Restated Subtenant Guaranty Agreement (Lease No. 4), dated as of
August 4, 2009, made by certain subsidiaries of the Company, each a Subtenant
Guarantor, for the benefit of the Landlord under the Amended and Restated Master Lease
Agreement (Lease No. 4), dated as of August 4, 2009, among certain affiliates of Senior
Housing Properties Trust, as Landlord, and certain affiliates of the Company, as Tenant.
(Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2009.)
99.20 Amended and Restated Subtenant Security Agreement (Lease No. 4), dated as of
August 4, 2009, made by certain subsidiaries of the Company, as Subtenants, and the
Landlord under the Amended and Restated Master Lease Agreement (Lease No. 4), dated
as of August 4, 2009, among certain affiliates of Senior Housing Properties Trust, as
Landlord, and certain affiliates of the Company, as Tenant. (Incorporated by reference to
the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2009.)
99.21 Confirmation of Guarantees and Confirmation of and Amendment to Security
Agreements, dated as of October 1, 2009, among the Company, certain subsidiaries of
the Company, and certain subsidiaries of Senior Housing Properties Trust. (Incorporated
by reference to the Company's Annual Report on Form 10-K for the year ended
December 31, 2009.)
99.22 Amendment to Subtenant Security Agreement, dated as of August 1, 2010, among certain
subsidiaries of Senior Housing Properties Trust and certain subsidiaries of the Company.
(Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 2010.)
99.23 Master Lease Agreement, dated as of September 1, 2008, among certain affiliates of
Senior Housing Properties Trust, as Landlord, and Five Star Quality Care-RMI, LLC, as
Tenant. (Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 2008.)
99.24 Guaranty Agreement, dated as of September 1, 2008, made by the Company for the
benefit of certain subsidiaries of Senior Housing Properties Trust. (Incorporated by
reference to the Company's Annual Report on Form 10-K for the year ended
December 31, 2008.)
99.25 Lease Agreement, dated as of May 12, 2011, between 400 Centre Street LLC and the
Company. (Incorporated by reference to the Company's Current Report on Form 8-K
dated May 13, 2011.)
99.26 Confirmation of and Joinder to Guarantees and Confirmation of and Joinder and
Amendment to Security Agreements, dated as of May 1, 2011, by and among certain
subsidiaries of Senior Housing Properties Trust, the Company and certain subsidiaries of
the Company. (Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2011.)
99.27 Confirmation of Guarantees and Confirmation of and Amendment to Security
Agreements, dated as of June 1, 2011, among certain subsidiaries of Senior Housing
Properties Trust, the Company and certain subsidiaries of the Company. (Incorporated by
reference to the Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 2011.)
99.28 Amendment to and Confirmation of Guarantees and Security Agreements, dated as of
June 20, 2011, among certain subsidiaries of Senior Housing Properties Trust, the
Company and certain subsidiaries of the Company. (Incorporated by reference to the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2011.)
74
Table of Contents
Exhibit No.
Description
99.29 Joinder and Amendment to and Confirmation of Guarantees and Security Agreements,
dated as of June 20, 2011, among certain subsidiaries of Senior Housing Properties Trust,
the Company and certain subsidiaries of the Company. (Incorporated by reference to the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2011.)
99.30 Lease Agreement, dated as of June 20, 2011, between SNH/LTA SE Home Place New
Bern LLC, as Landlord, and FVE SE Home Place New Bern LLC, as Tenant.
(Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2011.)
99.31 Guaranty Agreement, dated as of June 20, 2011, from the Company in favor of
SNH/LTA SE Home Place New Bern LLC. (Incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2011.)
99.32 Lease Agreement, dated as of June 20, 2011, between SNH/LTA SE McCarthy New
Bern LLC, as Landlord, and FVE SE McCarthy New Bern LLC, as Tenant. (Incorporated
by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 2011.)
99.33 Guaranty Agreement, dated as of June 20, 2011, from the Company in favor of
SNH/LTA SE McCarthy New Bern LLC. (Incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2011.)
99.34 Lease Agreement, dated as of June 23, 2011, between SNH/LTA SE Wilson LLC, as
Landlord, and FVE SE Wilson LLC, as Tenant. (Incorporated by reference to the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2011.)
99.35 Guaranty Agreement, dated as of June 23, 2011, from the Company in favor of
SNH/LTA SE Wilson LLC. (Incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2011.)
99.36 Confirmation of Guarantees and Confirmation of and Amendment to Security
Agreements, dated as of May 1, 2011, among certain subsidiaries of Senior Housing
Properties Trust, the Company and certain subsidiaries of the Company. (Incorporated by
reference to the Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 2011.)
99.37 Joinder and Amendment to and Confirmation of Guarantees and Security Agreements,
dated as of June 20, 2011, among certain subsidiaries of Senior Housing Properties Trust,
the Company and certain subsidiaries of the Company. (Incorporated by reference to the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2011.)
99.38 Joinder to and Confirmation of Guarantees and Joinder and Amendment to and
Confirmation of Security Documents, dated as of July 22, 2011, by and among certain
subsidiaries of Senior Housing Properties Trust, the Company and certain subsidiaries of
the Company. (Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2011.)
99.39 Representative Form of Management Contract for independent living communities, dated
as of December 15, 2011, between FVE IL Managers, Inc., as Manager, and SNH IL
Properties Trust, as Owner. (Filed herewith.)
75
Table of Contents
Exhibit No.
Description
101.1 The following materials from the Company's Annual Report on Form 10-K for the year
ended December 31, 2011 formatted in XBRL (eXtensible Business Reporting
Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of
Income, (iii) the Consolidated Statements of Cash Flows, and (iv) related notes to these
financial statements, tagged as blocks of text. (Furnished herewith.)
(+)
Management contract or compensatory plan or arrangement.
76
Table of Contents
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Five Star Quality Care, Inc.
We have audited the accompanying consolidated balance sheets of Five Star Quality Care, Inc. as of December 31, 2011 and 2010, and the
related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31,
2011. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Five
Star Quality Care, Inc. at December 31, 2011 and 2010, and the consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2011, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Five Star
Quality Care, Inc.'s internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control—
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 17,
2012 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Boston, Massachusetts
February 17, 2012
F-1
Table of Contents
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Five Star Quality Care, Inc.
We have audited Five Star Quality Care, Inc.'s internal control over financial reporting as of December 31, 2011, based on criteria
established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(the COSO criteria). Five Star Quality Care, Inc.'s management is responsible for maintaining effective internal control over financial
reporting, and for its assessment of the effectiveness of internal control over financial reporting included in Item 9A of Five Star Quality
Care Inc.'s Annual Report on Form 10-K. Our responsibility is to express an opinion on the company's internal control over financial reporting
based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial
reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the
assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of
management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of
any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Five Star Quality Care, Inc. maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2011, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Five Star Quality Care, Inc. as of December 31, 2011 and 2010, and the related consolidated statements of
income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2011 of Five Star Quality Care, Inc.
and our report dated February 17, 2012 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Boston, Massachusetts
February 17, 2012
F-2
Table of Contents
FIVE STAR QUALITY CARE, INC.
CONSOLIDATED BALANCE SHEET
(in thousands, except share data)
December 31,
2011
2010
ASSETS
Current assets:
Cash and cash equivalents
Accounts receivable, net of allowance of $4,703 and $5,224 at December 31, 2011 and 2010,
respectively
Prepaid expenses
Investments in available for sale securities, of which $5,905 and $1,022 are restricted as of
December 31, 2011 and 2010, respectively.
Restricted cash
Other current assets
Assets of discontinued operations
Total current assets
$
Property and equipment, net
Equity investment in Affiliates Insurance Company
Restricted cash
Restricted investments in available for sale securities
Goodwill and other intangible assets
Other long term assets
$
28,374
$
20,770
64,265
11,302
64,806
10,126
9,114
4,838
14,948
8,675
141,516
13,854
6,594
6,958
12,857
135,965
353,065
5,291
4,092
13,115
15,270
51,128
583,477
201,223
5,076
14,535
3,259
15,722
4,014
379,794
$
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable
Accrued expenses
Accrued compensation and benefits
Due to related persons
Mortgage notes payable
Bridge loan from Senior Housing Properties Trust (or SNH)
Accrued real estate taxes
Security deposit liability
Other current liabilities
Liabilities of discontinued operations, of which $7,690 and $7,824 relate to mortgage notes
payable at December 31, 2011 and 2010, respectively.
Total current liabilities
$
Long term liabilities:
Mortgage notes payable
Convertible senior notes
Continuing care contracts
Accrued self insurance obligations
Other long term liabilities
Total long term liabilities
Commitments and contingencies
Shareholders' equity:
Common stock, par value $.01: 47,899,312 and 36,019,864 shares issued and outstanding at
December 31, 2011 and 2010, respectively
Additional paid in capital
Accumulated deficit
Cumulative other comprehensive income
Total shareholders' equity
$
See accompanying notes.
F-3
23,899
21,705
39,704
18,659
1,027
38,000
11,505
10,606
15,745
$
20,356
21,449
37,783
17,841
—
—
9,258
10,783
11,563
8,481
189,331
8,878
137,911
38,714
37,282
2,045
28,496
7,415
113,952
—
—
37,905
2,247
27,928
9,036
77,116
—
479
352,819
(74,582)
1,478
280,194
583,477
360
297,714
(138,783)
5,476
164,767
379,794
$
Table of Contents
FIVE STAR QUALITY CARE, INC.
CONSOLIDATED STATEMENT OF INCOME
(in thousands, except per share data)
For the year ended December 31,
2011
2010
2009
Revenues:
Senior living revenue
Rehabilitation hospital revenue
Institutional pharmacy revenue
Management fee revenue
Reimbursed costs incurred on behalf of managed
communities
Total revenues
Operating expenses:
Senior living wages and benefits
Other senior living operating expenses
Costs incurred on behalf of managed communities
Rehabilitation hospital expenses
Institutional pharmacy expenses
Rent expense
General and administrative
Depreciation and amortization
Total operating expenses
Operating income
Interest, dividend and other income
Interest and other expense
Acquisition related costs
Gain on investments in trading securities
Loss on UBS put right related to auction rate securities
Equity in income (losses) of Affiliates Insurance
Company
Gain on early extinguishment of debt
Gain on sale of available for sale securities
Impairment of long lived assets
Impairment of investments in available for sale
securities
Income from continuing operations before income taxes
Benefit (provision) for income taxes
Income from continuing operations
Loss from discontinued operations
Net income
Weighted average shares outstanding—basic
$1,078,380
105,320
76,614
898
$1,033,935
100,041
79,285
—
$ 967,833
100,460
74,447
—
20,552
1,281,764
—
1,213,261
—
1,142,740
536,386
259,655
20,552
95,305
74,436
195,415
57,540
21,127
1,260,416
513,462
244,109
—
92,190
77,552
188,304
55,486
16,034
1,187,137
487,850
234,112
—
90,957
73,946
177,180
52,590
15,573
1,132,208
21,348
1,295
(3,917)
(1,759)
—
—
Diluted income per share from:
Continuing operations
Discontinued operations
Net income per share—diluted
10,532
2,985
(3,930)
—
3,495
(2,759)
(1)
592
933
—
(134)
34,579
795
—
—
17,723
50,554
68,277
(4,076)
64,201 $
42,161
—
27,010
(1,448)
25,562
(2,070)
23,492 $
35,736
(2,947)
42,616
(2,196)
40,420
(2,090)
38,330
33,558
45,034
39,207
38,775
139
1
4,116
(3,500
$
Weighted average shares outstanding—diluted
Basic income per share from:
Continuing operations
Discontinued operations
Net income per share—basic
26,124
1,816
(2,596)
—
4,856
(4,714)
$
$
$
$
1.62 $
(0.10)
1.52 $
0.72 $
(0.06)
0.66 $
1.20
(0.06)
1.14
1.54 $
(0.09)
1.45 $
0.69 $
(0.05)
0.64 $
1.10
(0.05)
1.05
See accompanying notes.
F-4
Table of Contents
FIVE STAR QUALITY CARE, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(in thousands, except share data)
Number of
Shares
Balance at
December 31,
2008
Comprehensive
income:
Net income
Unrealized
gain on
investments
in available
for sale
securities
Realized gain
on sale of
available
for sale
securities
Other than
temporary
impairment
on
investments
Total
comprehensive
income
Grants under
share award
plan and
share based
compensation
Issuance of
common
shares to
SNH
Balance at
December 31,
2009
Comprehensive
income:
Net income
Unrealized
gain on
investments
in available
for sale
securities
Realized gain
on sale of
available
for sale
securities
Total
Common
Stock
32,205,604 $
Additional
Paid in
Capital
Accumulated
Deficit
Cumulative
Other
Comprehensive
Income
322 $ 287,204 $ (200,605) $
Total
(1,582) $ 85,339
—
—
—
38,330
—
38,330
—
—
—
—
4,010
4,010
—
—
—
—
—
—
—
—
2,947
2,947
—
—
—
38,330
6,162
44,492
263,210
2
522
—
—
524
3,200,000
32
8,928
—
—
8,960
35,668,814
356
296,654
4,580
139,315
—
—
—
23,492
—
23,492
—
—
—
—
1,828
1,828
—
—
—
—
(162,275)
(795)
(933)
(795)
(933)
comprehensive
income
Grants under
share award
plan and
share based
compensation
Unrealized gain
on equity
investment in
Affiliates
Insurance
Company
Balance at
December 31,
2010
Comprehensive
income:
Net income
Unrealized
gain on
investments
in available
for sale
securities
Realized gain
on sale of
available
for sale
securities
Total
comprehensive
income
Grants under
share award
plan and
share based
compensation
Issuance of
stock,
pursuant to
equity
offering
Unrealized gain
on equity
investment in
Affiliates
Insurance
Company
Balance at
December 31,
2011
—
—
—
23,492
895
24,387
351,050
4
1,060
—
—
1,064
—
—
—
—
1
1
36,019,864
360
297,714
5,476
164,767
—
—
—
64,201
—
64,201
—
—
—
—
42
42
—
—
—
—
(4,116)
—
—
—
64,201
(4,074)
379,448
4
1,267
—
—
1,271
11,500,000
115
53,838
—
—
53,953
—
—
—
—
76
76
1,478
$ 280,194
47,899,312 $
(138,783)
479 $ 352,819 $
(74,582) $
See accompanying notes.
F-5
(4,116)
60,127
Table of Contents
FIVE STAR QUALITY CARE, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
For the year ended December 31,
2011
2010
2009
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization
Gain on early extinguishment of debt
Loss from discontinued operations
Gain on investments in trading securities
Loss on UBS put right related to auction rate securities
Gain on sale of available for sale securities
Impairment of long lived assets
Impairment of investments in available for sale securities
Equity in (income) losses of Affiliates Insurance Company
Stock-based compensation
Deferred income taxes
Provision for losses on receivables
Changes in assets and liabilities:
Accounts receivable
Prepaid expenses and other assets
Investment securities
Accounts payable and accrued expenses
Accrued compensation and benefits
Due to related persons
Other current and long term liabilities
Cash provided by operating activities
Net cash used in discontinued operations
$
64,201
$
23,492
$
38,330
21,127
(1)
4,076
—
—
(4,116)
3,500
—
(139)
1,271
(54,699)
7,149
16,033
(592)
2,070
(4,856)
4,714
(933)
—
—
1
1,064
—
6,559
15,573
(34,579)
2,090
(3,495)
2,759
(795)
—
2,947
134
524
—
7,054
(6,568)
(1,127)
—
3,633
1,921
818
3,368
44,414
(156)
(9,947)
2,669
74,425
(7,088)
1,664
230
274
109,779
(1,823)
(2,323)
(5,549)
—
2,532
121
2,193
1,320
28,836
(1,393)
(2,570)
(60,926)
(107,765)
(206)
—
33,269
10,896
(127,302)
(4,230)
(53,997)
(13,232)
(1,105)
(76)
31,894
3,081
(37,665)
(5,750)
(61,986)
(750)
—
(5,134)
45,192
3,719
(24,709)
Cash flows from financing activities:
Net proceeds from the issuance of common stock
Proceeds from borrowings on credit facilities
Repayments of borrowings on credit facilities
Proceeds from borrowings on a bridge loan from SNH
Repayments of borrowings on a bridge loan from SNH
Purchase and retirement of convertible senior notes
Repayments of mortgage notes payable
Proceeds from issuance of common shares to SNH
Cash provided by (used in) financing activities
53,953
12,000
(12,000)
80,000
(42,000)
(622)
(683)
—
90,648
—
10,649
(49,790)
—
—
(10,780)
(4,617)
—
(54,538)
—
59,055
(41,789)
—
—
(39,932)
(149)
8,960
(13,855)
Change in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
$
7,604
20,770
28,374
$
15,753
5,017
20,770
Supplemental cash flow information:
Cash paid for interest
Cash paid for income taxes
$
$
3,540
1,336
$
$
2,419
1,056
$
$
3,746
2,622
Non-cash activities:
Real estate acquisition
Assumption of mortgage note payable
$
$
(40,289)
40,289
$
$
—
—
$
$
—
—
Cash flows from investing activities:
Payments from restricted cash and investment accounts, net
Acquisition of property and equipment
Acquisition of senior living communities, net of working capital liabilities assumed
Purchase of available for sale securities
Investment in Affiliates Insurance Company
Proceeds from disposition of property and equipment
Proceeds from sale of available for sale securities
Cash used in investing activities
See accompanying notes.
F-6
(11,121)
16,138
$
5,017
Table of Contents
FIVE STAR QUALITY CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
1. Organization and Business
We were organized in 2000 as a wholly owned subsidiary of Senior Housing Properties Trust, or SNH. On December 31, 2001, SNH
distributed substantially all of our shares of common stock, $.01 par value, or common shares, to its shareholders. Concurrent with our spin off,
we entered into agreements with SNH and others to establish our initial capitalization and other matters.
We operate senior living communities, including independent living communities, assisted living communities and skilled nursing
facilities, or SNFs. As of December 31, 2011, we operated 245 senior living communities located in 30 states containing 27,159 living units,
including 207 primarily independent and assisted living communities with 23,736 living units and 38 SNFs with 3,423 living units. We own
and operate 31 communities (2,954 living units), we lease and operate 191 communities (20,811 living units) and we manage 23 communities
(3,394 living units). Our 245 senior living communities included 8,699 independent living apartments, 13,069 assisted living suites and 5,391
skilled nursing units. Two SNFs owned and operated by us containing 271 living units and one assisted living community leased from SNH
and operated by us containing 103 living units that we have classified as discontinued operations are excluded from all the preceding data in
this paragraph.
We also lease and operate two rehabilitation hospitals with 321 beds that provide inpatient rehabilitation services to patients at the two
hospitals and at three satellite locations. In addition, we lease and operate 13 outpatient clinics affiliated with these rehabilitation hospitals. We
also own and operate five institutional pharmacies.
2. Summary of Significant Accounting Policies
Basis of Presentation. The accompanying consolidated financial statements include our accounts and those of all of our subsidiaries. All
intercompany transactions have been eliminated.
Use of Estimates. Preparation of these financial statements in conformity with accounting principles generally accepted in the United
States requires us to make estimates and assumptions that may affect the amounts reported in these financial statements and related notes. Some
significant estimates include the fair value of our investments in securities that are not actively traded on a major exchange, our self insurance
reserves, the allowance for doubtful accounts, goodwill and long lived assets and contractual allowances.
We are required to estimate income taxes payable in each of the jurisdictions in which we operate. The process involves estimating actual
current tax expense along with assessing temporary differences resulting from differing treatment of items for financial statement and tax
purposes. These timing differences result in deferred tax assets and liabilities, which are included in our consolidated balance sheet. We are
required to record a valuation allowance to reduce deferred tax assets if we are not able to conclude that it is more likely than not these assets
will be realized.
Our actual results could differ from our estimates. We periodically review estimates and assumptions and we reflect the effects of changes,
if any, in the consolidated financial statements in the period that they are determined.
Earnings Per Share. We calculate basic earnings per common share, or EPS, by dividing net income or loss (and income from
continuing operations and loss from discontinued operations) by the weighted average number of common shares outstanding during the year.
We calculate diluted EPS by
F-7
Table of Contents
FIVE STAR QUALITY CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)
2. Summary of Significant Accounting Policies (Continued)
adjusting the weighted average outstanding shares, assuming conversion of all potentially dilutive share securities. Unvested shares issued
under our share award plan are deemed participating securities because they participate equally in earnings with all of our other common
shares.
Cash and Cash Equivalents. Cash and cash equivalents, consisting of money market funds with original maturities of three months or
less at the date of purchase, are carried at cost plus accrued interest, which approximates market.
Equity Method Investments. We and the other six current shareholders each currently own approximately 14.29% of Affiliates Insurance
Company, or AIC's, outstanding equity. Although we own less than 20% of AIC, we use the equity method to account for this investment
because we believe that we have significant influence over AIC because all of our Directors are also directors of AIC. Under the equity
method, we record our percentage share of net earnings from AIC in our consolidated statement of income. If we determine there is an "other
than temporary impairment" in the fair value of this investment, we would record a charge to earnings. In evaluating the fair value of this
investment, we have considered, among other things, the assets and liabilities held by AIC, AIC's overall financial condition and earning
trends, and the financial condition and prospects for the insurance industry generally. As of December 31, 2011, we have invested $5,209 in
AIC. We may invest additional amounts in AIC in the future if the expansion of this insurance business requires additional capital, but we are
not obligated to do so.
Investment Securities. Investment securities that are held principally for resale in the near term are classified as "trading" and are carried
at fair value with changes in fair value recorded in earnings. We did not hold any trading securities at December 31, 2011 or 2010. In 2010 and
2009, our investments in these trading securities generated interest income of $566 and $1,142, respectively, that is included in interest,
dividend and other income.
Securities not classified as "trading" are classified as "available for sale" and carried at fair value, with unrealized gains and losses
reported as a separate component of shareholders' equity and "other than temporary impairment" losses recorded in our consolidated statement
of income. Realized gains and losses on all available for sale securities are recognized based on specific identification. Our available for sale
investments at December 31, 2011 and 2010 consisted primarily of preferred securities. Restricted investments are kept as security for
obligations arising from our self insurance programs. At December 31, 2011, these investments had a fair value of $22,229 and an unrealized
holding gain of $1,401. At December 31, 2010, these investments had a fair value of $17,113 and an unrealized holding gain of $5,475.
In 2011 and 2010, our available for sale securities generated interest and dividend income of $1,122 and $1,078, respectively, which is
included in interest, dividend and other income.
F-8
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FIVE STAR QUALITY CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)
2. Summary of Significant Accounting Policies (Continued)
The following table summarizes the fair value and gross unrealized losses related to our "available for sale" securities, aggregated by
investment category and length of time that individual securities have been in a continuous unrealized loss position for the years ending:
Less than 12 months
Unrealized
Fair Value
Loss
Investments
$
6,414 $
185 $
Less than 12 months
Unrealized
Fair Value
Loss
Investments
$
1,361 $
December 31, 2011
Greater than 12 months
Unrealized
Fair Value
Loss
— $
— $
December 31, 2010
Greater than 12 months
Unrealized
Fair Value
Loss
40 $
— $
Total
Unrealized
Fair Value
Loss
6,414 $
185
Total
Unrealized
Fair Value
Loss
— $
1,361 $
40
We routinely evaluate our available for sale investments to determine if they have been impaired. If the book or carrying value of an
investment is less than its estimated fair value and we expect that situation to continue for more than a temporary period, we will record an
"other than temporary impairment" loss in our consolidated statement of income. We estimate the fair value of our available for sale
investments by reviewing each security's current market price, the ratings of the security, the financial condition of the issuer and our intent and
ability to retain the investment during temporary market price fluctuations or until maturity. In evaluating the factors described above, we
presume a decline in value to be an "other than temporary impairment" if the quoted market price of the security is below the security's cost
basis for an extended period. However, this presumption may be overcome if there is persuasive evidence indicating the value decline is
temporary in nature, such as when the operating performance of the obligor is strong or if the market price of the security is historically
volatile. Additionally, there may be instances in which impairment losses are recognized even if the decline in value does not fall within the
criteria described above, such as if we plan to sell the security in the near term and the fair value is below our cost basis. When we believe that
a change in fair value of an available for sale security is temporary, we record a corresponding credit or charge to other comprehensive income
for any unrealized gains and losses. When we determine that an impairment in the fair value of an available for sale security is an "other than
temporary impairment", we record a charge to earnings. We did not record such an impairment charge for the year ended December 31, 2011.
We recorded a charge of $2,947 for an "other than temporary impairment" in the value of our securities held by our captive insurance company
for the year ended December 31, 2009.
Restricted Cash. Restricted cash as of December 31, 2011 and 2010 includes cash that we deposited as security for obligations arising
from our self insurance programs and other amounts for
F-9
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FIVE STAR QUALITY CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)
2. Summary of Significant Accounting Policies (Continued)
which we are required to establish escrows, including: real estate taxes and capital expenditures as required by our mortgages, and certain
resident security deposits.
Current
Insurance reserves
Real estate taxes and capital expenditures as required
by our mortgages
Resident security deposits
Total
2011
Long term
Current
2010
Long term
$ 1,842 $
4,092 $ 4,555 $
14,535
2,335
661
$ 4,838 $
—
1,152
—
887
4,092 $ 6,594 $
—
—
14,535
Accounts Receivable and Allowance for Doubtful Accounts. We record accounts receivable at their estimated net realizable value.
Included in accounts receivable as of December 31, 2011 and 2010 are amounts due from the Medicare program of $22,805 and $22,627,
respectively, and amounts due from various state Medicaid programs of $14,368 and $17,272, respectively.
We estimate allowances for uncollectible amounts and contractual allowances based upon factors which include, but are not limited to: the
age of the receivable and the terms of the agreements; the residents', patients' or third party payers' stated intent to pay; the payers' financial
capacity to pay; and other factors which may include likelihood and cost of litigation. Accounts receivable allowances are estimates. We
periodically review and revise these estimates based on new information and these revisions may be material. During 2011, 2010 and 2009, we
recorded, with a corresponding charge to expense, an allowance for doubtful accounts of $7,149, $6,559 and $7,054, respectively, and wrote
off accounts receivable of $7,670, $7,321 and $7,360, respectively.
Deferred Finance Costs. We capitalize issuance costs related to borrowings and amortize the deferred costs over the terms of the
respective loans. Our unamortized balance of deferred finance costs was $2,552 and $2,513 at December 31, 2011 and 2010, respectively.
Accumulated amortization related to deferred finance costs was $1,852 and $1,237 at December 31, 2011 and 2010, respectively. At
December 31, 2011, the weighted average amortization period remaining is approximately 12 years. The amortization expenses to be incurred
during the next five years as of December 31, 2011 is $564 in 2012, $222 in 2013 and $125 in each of 2014, 2015 and 2016.
Property and Equipment. Property and equipment is stated at cost, except for property and equipment acquired in connection with the
acquisitions described in Note 12 which was recorded at estimated fair market value. We record depreciation on property and equipment on a
straight line basis over estimated useful lives of up to 40 years for buildings, up to 15 years for building improvements and up to seven years
for personal property. We regularly evaluate whether events or changes in circumstances have occurred that could indicate impairment in the
value of our long lived assets. 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
through an evaluation of recent financial performance, recent sales of similar assets, market conditions and projected cash flows of properties
using standard industry valuation techniques. As a result of our evaluation, we reduced the value of our property and
F-10
Table of Contents
FIVE STAR QUALITY CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)
2. Summary of Significant Accounting Policies (Continued)
equipment by $3,500 reported on our balance sheet as of December 31, 2011 related to several of our senior living communities.
Goodwill and Other Intangible Assets. Goodwill represents the costs of business acquisitions in excess of the fair value of identifiable
net assets acquired. We review goodwill annually during the fourth quarter, or more frequently, if events or changes in circumstances exist, for
impairment. If our review indicates that the carrying amount of goodwill exceeds its fair value, we reduce the carrying amount of goodwill to
fair value. We evaluate goodwill for impairment at the reporting unit level, which we determined to be the segments we operate, by comparing
the fair value of the reporting unit as determined by its discounted cash flows and market approaches, such as capitalization rates and earnings
multiples, with its carrying value. The key assumptions used in the discounted cash flow analysis include future revenue growth, gross margins
and our weighted average cost of capital. We select a growth rate based on our view of the growth prospect of each of our reporting units. If the
carrying value of the reporting unit exceeds its fair value, we compare the implied fair value of the reporting unit's goodwill with its carrying
amount to measure the amount of the potential impairment loss.
At acquisition, we estimate and record the fair value of purchased intangible assets primarily using discounted cash flow analysis of
anticipated cash flows reflecting incremental revenues and/or cost savings resulting from the acquired intangible asset, reflecting market
participant assumptions. Amortization of intangible assets with finite lives is recognized over their estimated useful lives using a method of
amortization that reflects the pattern in which the economic benefits of the intangible assets are consumed or otherwise realized.
Long lived assets and other intangible assets are periodically reviewed for impairment whenever circumstances and situations change such
that there is an indication that the carrying amounts may not be recoverable. If the carrying value of the asset held for use exceeds the sum of
the undiscounted expected future cash flows, the carrying value of the asset is generally written down to fair value.
Self Insurance. We self insure up to certain limits for workers' compensation, professional liability claims, automobile claims and
property losses. Claims in excess of these limits are insured up to contractual limits, over which we are self insured. We fully self insure all
health related claims for our covered employees. Determining reserves for the casualty, liability, workers' compensation and healthcare losses
and costs that we have incurred as of the end of a reporting period involves significant judgments based upon our experience and our
expectations of future events, including projected settlements for pending claims, known incidents which we expect may result in claims,
estimates of incurred but not yet reported claims, expected changes in premiums for insurance provided by insurers whose policies provide for
retroactive adjustments, estimated litigation costs and other factors. Since these reserves are based on estimates, the actual expenses we incur
may differ from the amount reserved. We regularly adjust these estimates to reflect changes in the foregoing factors, our actual claims
experience, recommendations from our professional consultants, changes in market conditions and other factors; it is possible that such
adjustments may be material.
Continuing Care Contracts. Residents at one of our communities may enter into continuing care contracts with us. We offer two forms
of continuing care contracts to new residents at this community. One form of contract provides that 10% of the resident admission fee becomes
non-refundable upon
F-11
Table of Contents
FIVE STAR QUALITY CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)
2. Summary of Significant Accounting Policies (Continued)
occupancy, and the remaining 90% becomes non-refundable at the rate of 1.5% per month of the original amount over the subsequent
60 months. The second form of contract provides that 30% of the resident admission fee is non-refundable upon occupancy and 70% is
refundable. Three other forms of continuing care contracts are in effect for existing residents but are not offered to new residents. One historical
form of contract provides that the resident admission fee is 10% non-refundable upon occupancy and 90% refundable. A second historical form
of contract provides that the resident admission fee is 100% refundable. A third historical form of contract provides that the resident admission
fee is 1% refundable and 99% non-refundable upon admission. In each case, we amortize the non-refundable part of these fees into revenue
over the actuarially determined remaining life of the resident, which is the expected period of occupancy by the resident. We pay refunds of our
admission fees when residents relocate from our communities. We report the refundable amount of these admission fees as current liabilities
and the non-refundable amount as deferred revenue, a portion of which is classified as a current liability. The balance of refundable admission
fees as of December 31, 2011 and 2010 were $5,082 and $6,006, respectively.
Leases. On the inception date of a lease and upon any relevant amendments to such lease, we test the classification of such lease as
either a capital lease or an operating lease. None of our leases have met any of the criteria to be classified as a capital lease under the Leases
Topic of the Financial Accounting Standards Board, or the FASB, Accounting Standards Codification™ , or the Codification, and, therefore,
we have accounted for all of our leases as operating leases.
Taxes. The Income Taxes Topic of the Codification prescribes how we should recognize, measure and present in our financial
statements uncertain tax positions that have been taken or are expected to be taken in a tax return. We can recognize a tax benefit only if it is
"more likely than not" that a particular tax position will be sustained upon examination or audit. To the extent the "more likely than not"
standard has been satisfied, the benefit associated with a tax position is measured as the largest amount that has a greater than 50% likelihood
of being realized upon settlement. At December 31, 2011, our tax returns filed for the 2003 through 2011 tax years are subject to examination
by taxing authorities. We classify interest and penalties related to uncertain tax positions, if any, in our financial statements as a component of
general and administrative expenses.
We pay franchise taxes in certain states in which we have operations. We have included franchise taxes in general and administrative and
other senior living operating expenses in our consolidated statement of income.
Fair Value of Financial Instruments. Our financial instruments are limited to cash and cash equivalents, accounts receivable, available
for sale securities, accounts payable, mortgage notes payable, Bridge Loan with SNH and our Convertible Senior Notes due 2026, or the Notes.
Except for the Notes, the fair value of these financial instruments was not materially different from their carrying values at December 31, 2011
and 2010. We estimate the fair values using market quotes when available, discounted cash flow analysis and current prevailing interest rates.
Revenue Recognition. We derive our revenues primarily from services to residents and patients at our senior living communities,
rehabilitation hospitals and institutional pharmacies and we record revenues when services are provided. We expect payment from governments
or other third party payers for some of our services. We derived approximately 27%, 28% and 28% of our senior living revenues in
F-12
Table of Contents
FIVE STAR QUALITY CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)
2. Summary of Significant Accounting Policies (Continued)
2011, 2010 and 2009, respectively, from payments under Medicare and Medicaid programs. For the years ended December 31, 2011, 2010 and
2009, we received approximately 68%, 64% and 64%, respectively, of our rehabilitation hospital revenues and 55%, 50% and 50%,
respectively, of our institutional pharmacy revenues from these programs. Revenues under some of these programs are subject to audit and
retroactive adjustment.
Medicare revenues from our senior living communities totaled $156,198, $147,300 and $135,660 during 2011, 2010 and 2009,
respectively. Medicaid revenues from senior living communities totaled $134,900, $136,879 and $131,901 during 2011, 2010 and 2009,
respectively. Medicaid and Medicare revenues from our rehabilitation hospitals were $71,244, $63,685 and $64,506 for the years ended
December 31, 2011, 2010 and 2009, respectively. Medicaid and Medicare revenues from our institutional pharmacies were $41,788, $39,284,
and $37,127 for the years ended December 31, 2011, 2010 and 2009, respectively.
Reclassifications. We have made reclassifications to the prior years' financial statements and notes to conform to the current year's
presentation. These reclassifications had no effect on net income or shareholders' equity.
Recently Issued Accounting Pronouncements. In May 2011, the FASB issued an accounting standards update requiring additional
disclosures regarding fair value measurements. The update clarifies the application of existing fair value measurement requirements. The
update also requires reporting entities to disclose additional information regarding fair value measurements categorized within Level 3 of the
fair value hierarchy. The update is effective for interim and annual reporting periods beginning after December 15, 2011.
In June 2011, the FASB issued an accounting standards update requiring additional disclosure regarding comprehensive income. The
update requires reporting entities to present items of net income, items of other comprehensive income and total comprehensive income in one
continuous statement of comprehensive income or in two separate consecutive statements. The update also requires reporting entities to present
the components of other comprehensive income in their interim and annual financial statements. The update is effective for interim and annual
reporting periods beginning after December 15, 2011.
In July 2011, the FASB issued an accounting standards update requiring healthcare entities to change the presentation of their statements
of operations by reclassifying any provision for bad debts associated with patient service revenue from an operating expense to a deduction
from patient service revenue. The update also requires enhanced disclosure about policies for recognizing revenue and assessing bad debts. The
update is effective for interim and annual reporting periods beginning after December 15, 2011.
The adoption of these updates is not expected to cause any material changes to the disclosures in, or the presentation of, our condensed
consolidated financial statements.
F-13
Table of Contents
FIVE STAR QUALITY CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)
3. Property and Equipment
Property and equipment, at cost, consists of the following:
December 31,
2011
Land
Buildings and improvements
Furniture, fixtures and equipment
$
Accumulated depreciation
$
December 31,
2010
21,849 $
287,585
99,303
408,737
(55,672)
353,065 $
14,254
155,552
71,225
241,031
(39,808)
201,223
As of December 31, 2011 and 2010, we had assets of $7,076 and $7,752, respectively, included in our property and equipment that we
intend to sell to SNH for increased rent pursuant to the terms of our leases with SNH; however, we are not obligated to make these sales and
SNH is not obligated to purchase the property and equipment.
4. Financial Data by Segment
Our reportable segments consist of our senior living community business and our rehabilitation hospital business. In the senior living
community segment we operate for our own account, manage for the account of SNH and another owner, independent living communities,
assisted living communities and SNFs that are subject to centralized oversight and provide housing and services generally to elderly residents.
Our rehabilitation hospital segment provides inpatient rehabilitation services to patients at two hospital locations and at three satellite locations
and outpatient rehabilitation services at 13 affiliated outpatient clinics. We do not consider our institutional pharmacy operations to be a
material, separately reportable segment of our business. Consequently, we report our institutional pharmacy revenues and expenses as separate
items within our corporate and other activities. All of our operations and assets are located in the United States, except for the operations of our
captive insurance company, which participates in our workers' compensation, professional liability and automobile insurance programs and
which operates in the Cayman Islands.
We use segment operating profit as a means to evaluate our performance and for our business decision making purposes. Segment
operating profit excludes interest, dividend and other income, interest and other expense, and corporate income and expenses.
F-14
Table of Contents
FIVE STAR QUALITY CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)
4. Financial Data by Segment (Continued)
Our revenues by segment and a reconciliation of segment operating profit (loss) to income (loss) from continuing operations for the years
ended December 31, 2011, 2010 and 2009 are as follows:
Senior Living
Communities
Year ended December 31, 2011
Revenues
Management fee revenue
Reimbursed costs incurred on
behalf of managed communities
Total segment revenues
Segment expenses:
Operating expenses
Costs incurred on behalf of
managed communities
Rent expense
Depreciation and amortization
Total segment expenses
Segment operating profit (loss)
General and administrative expenses
$ 1,078,380
898
Rehabilitation
Hospitals
$
$
Total
76,614
—
$ 1,260,314
898
20,552
1,099,830
—
105,320
—
76,614
20,552
1,281,764
796,041
95,305
74,436
965,782
—
10,362
180
105,847
(527)
—
—
3,371
77,807
(1,193)
—
80,608
78
(1,128)
—
—
—
—
(527)
—
—
—
—
—
(57,540)
(58,733)
1,217
(2,789)
(1,759)
139
1
(57,540)
21,348
1,295
(3,917)
(1,759)
139
1
—
(3,500)
—
—
—
—
4,116
—
50,554
4,116
(3,500)
50,554
20,552
185,053
17,576
1,019,222
80,608
(2)
105,320
—
Corporate
and Other (1)
20,552
195,415
21,127
1,202,876
78,888
Operating income (loss)
Interest, dividend and other income
Interest and other expense
Acquisition related costs
Equity in income of AIC
Gain on early extinguishment of debt
Gain on sale of available for sale
securities
Impairment of long lived assets
Benefit for income taxes
Income (loss) from continuing
operations
$
76,058
$
Total Assets as of December 31, 2011
$
491,304
$
15,655
$
76,518
$
583,477
Long lived assets as of December 31,
2011
$
404,880
$
1,536
$
35,545
$
441,961
F-15
(527) $
(7,254) $
68,277
Table of Contents
FIVE STAR QUALITY CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)
4. Financial Data by Segment (Continued)
Senior Living
Communities
Year ended December 31, 2010
Revenues
Segment expenses:
Operating expenses
Rent expense
Depreciation and amortization
Total segment expenses
Segment operating profit (loss)
General and administrative expenses
$ 1,033,935
Rehabilitation
Hospitals
$
757,571
178,316
12,376
948,263
85,672
(2)
—
85,672
114
(199)
Operating income (loss)
Interest, dividend and other income
Interest and other expense
Gain on investments in trading
securities
Loss on UBS put right related to
auction rate securities
Equity in losses of AIC
Gain on early extinguishment of debt
Gain on sale of available for sale
securities
Provision for income taxes
Income (loss) from continuing
operations
Total Assets as of December 31, 2010
$
$
85,587
291,420
$
$
Long lived assets as of December 31,
2010
$
207,851
$
100,041
Corporate
and Other (1)
$
79,285
Total
$ 1,213,261
92,190
9,988
135
102,313
(2,272)
77,552
—
3,523
81,075
(1,790)
927,313
188,304
16,034
1,131,651
81,610
—
(2,272)
—
—
(55,486)
(57,276)
1,702
(2,397)
(55,486)
26,124
1,816
(2,596)
—
—
4,856
4,856
—
—
—
—
—
—
(4,714)
(1)
592
(4,714)
(1)
592
—
—
—
—
933
(1,448)
933
(1,448)
F-16
(2,272) $
15,197 $
821
$
(57,753) $
73,177 $
25,562
379,794
35,157
243,829
$
Table of Contents
FIVE STAR QUALITY CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)
4. Financial Data by Segment (Continued)
Senior Living
Communities
Year ended December 31, 2009
Revenues
Segment expenses:
Operating expenses
Rent expense
Depreciation and amortization
Total segment expenses
Segment operating profit (loss)
General and administrative expenses
$
$
721,962
166,584
11,492
900,038
67,795
(2)
Operating income (loss)
Interest, dividend and other income
Interest and other expense
Gain on investments in trading
securities
Loss on UBS put right related to
auction rate securities
Equity in losses of AIC
Gain on early extinguishment of debt
Gain on sale of available for sale
securities
Impairment of investments in
available for sale securities
Provision for income taxes
Income (loss) from continuing
operations
967,833
Rehabilitation
Hospitals
—
67,795
304
(365)
$
100,460
Corporate
and Other (1)
$
74,447
Total
$ 1,142,740
90,957
10,596
102
101,655
(1,195)
73,946
—
3,979
77,925
(3,478)
886,865
177,180
15,573
1,079,618
63,122
—
(1,195)
—
—
(52,590)
(56,068)
2,681
(3,565)
(52,590)
10,532
2,985
(3,930)
—
—
3,495
3,495
—
—
—
—
—
—
(2,759)
(134)
34,579
(2,759)
(134)
34,579
—
—
795
795
—
—
—
—
(2,947)
(2,196)
(2,947)
(2,196)
67,734
$
(1,195) $
(26,119) $
40,420
(1)
Corporate and Other includes operations that we do not consider a material, separately reportable segment of our business
and income and expenses that are not attributable to a reportable specific segment.
(2)
General and administrative expenses are not attributable to a reportable specific segment and include items such as
corporate payroll and benefits and expenses of our home office activities.
F-17
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FIVE STAR QUALITY CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)
5. Goodwill, Other Intangible and Long Lived Assets
The changes in the carrying amount of goodwill and other intangible assets for the years ended December 31, 2011 and 2010 are as
follows:
Balance as of January 1, 2010
Senior Living
Corporate and
Communities (1)
Other (2)
$
11,793
$
4,389
Total
$ 16,182
Amortization of intangibles
Balance as of December 31, 2010
(98)
11,695
(362)
4,027
Amortization of intangibles
Balance as of December 31, 2011
(91)
11,604 $
(361)
(452)
3,666 $ 15,270
$
(460)
15,722
(1)
Goodwill and other intangible assets in our Senior Living Communities segment relate to management agreements
and trademarks we acquired in connection with one of the leases we initiated with SNH in 2009 and goodwill of
$11,626 we recorded in connection with our senior living community acquisitions in previous years.
(2)
Intangible assets in our Corporate and Other segment relate to customer agreements we acquired in connection
with our pharmacy acquisitions.
Goodwill. We review goodwill annually during our fourth quarter, or more frequently, if events or changes in circumstances exist, for
impairment. If our review indicates that the carrying amount of goodwill exceeds its fair value, we reduce the carrying amount to fair value. We
evaluate goodwill for impairment at the reporting unit level, and our reporting units are equivalent to our operating segments. All of our
goodwill is located in our senior living reporting unit. We evaluated goodwill for impairment by comparing the fair value of the senior living
reporting unit, as determined by discounted cash flows and market approaches such as capitalization rates and earnings multiples, with its
carrying value. The key assumptions used in the discounted cash flow analysis include expected future revenue growth, gross margins and our
weighted average cost of capital. The key assumption in the market approach is the selection of guideline companies and the determination of
earnings multiples. If the carrying value of the reporting unit exceeds our estimate of its fair value, we compare the implied fair value of the
reporting unit's goodwill with its carrying amount to measure the amount of impairment loss. Our estimates of discounted cash flows as
reflected in our baseline forecast may differ from actual cash flows due to, among other things, changes in economic conditions that adversely
affect occupancy rates, reductions in government or third party reimbursement rates, changes to our business model or changes in operating
performance affecting our gross margins. As a result of our annual goodwill impairment review, we believe that our goodwill was not impaired
as of December 31, 2011.
As of our evaluation date, the fair value of the senior living reporting unit exceeds its carrying value by approximately 15%. As of
December 31, 2011, our carrying amount of goodwill was $10,988. The key variables that affect the cash flows of our senior living reporting
unit are estimated revenue growth rates, estimated operating expenses excluding interest and taxes, estimated capital expenditures, growth rate
assumptions and the weighted average cost of our capital. We select the revenue growth rate based on our view of the growth prospects of the
senior living reporting unit considering expected
F-18
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FIVE STAR QUALITY CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)
5. Goodwill, Other Intangible and Long Lived Assets (Continued)
occupancy rates and private pay and government and third party reimbursement rates. Estimated operating expenses and capital expenditures
consider our historical and expected future operating experience. These assumptions are subject to uncertainty, including our ability to increase
a reporting unit's revenue and improve its profitability. For the senior living reporting unit, relatively small declines in the future performance
and cash flows or small changes in other key assumptions may result in a goodwill impairment charges. Future events that could have a
negative effect on the fair value of the senior living reporting unit include, but are not limited to:
•
Decreases in revenues due to decreases in the occupancy rates and our daily rates,
•
Decreases in revenues and profitability at our senior living communities due to the inability of residents who pay for our
services with their private resources to afford our services,
•
Future Medicare and Medicaid rate reductions and other changes from the Patient Protection and Affordable Care Act which
impact our daily rates,
•
Decreases in the reporting unit's gross margins and profitability due to increased labor or other costs, or our inability to
successfully stabilize an acquired community's operations,
•
Increases in the weighted average cost of our capital including the market risk component, and
•
Changes in the structure of our business as a result of changes in relationships with our related parties.
Changes in one or more of these factors could result in an impairment charge.
Intangible and other long lived assets. We amortize intangible assets using the straight line method over the useful lives of the assets
commencing on the date of acquisition. Total amortization expense for amortizable intangible assets for the years ended December 31, 2011,
2010 and 2009 was $452, $460 and $405, respectively. At December 31, 2011, the weighted average amortization period remaining for those
intangible assets is approximately 11 years. Amortization expense is estimated to be approximately $453 in each of 2012, 2013, 2014, $381 in
2015, and $357 in 2016.
F-19
Table of Contents
FIVE STAR QUALITY CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)
6. Income Taxes
2011
Current deferred tax assets:
Continuing care contracts
Allowance for doubtful accounts
Insurance reserves
Deferred gains on sale lease back transactions
Other
Total current deferred tax assets before valuation
allowance
Valuation allowance:
Total current deferred tax assets before valuation
allowance
Non-current deferred tax assets:
Continuing care contracts
Deferred gains on sale lease back transactions
Insurance reserves
Tax credits
Tax loss carry forwards
Impairment of securities
Other
Total non-current deferred tax assets before valuation
allowance
Valuation allowance:
Total non-current deferred tax assets
Non-current deferred tax liabilities:
Depreciable assets
Lease expense
Goodwill
Other
Total non-current deferred tax liabilities
Net deferred tax asset (liability)
$
1,185
1,867
954
1,171
904
2010
$
1,373
2,087
756
1,158
1,293
6,081
(153)
6,667
(5,899)
5,928
768
436
935
3,022
6,820
40,607
1,675
6,864
505
1,056
2,543
4,351
43,228
3,340
4,281
60,359
(1,521)
58,838
59,304
(52,472)
6,832
(9,647)
(773)
(109)
(181)
(10,710)
$ 54,056 $
(7,059)
(1,073)
133
(245)
(8,244)
(644)
We recorded an income tax benefit of $56,696 in the consolidated statement of income for the year ended December 31, 2011, which was
attributable to the partial reduction of our previously deferred income tax valuation allowance. As prescribed by FASB ASC 740, Accounting
for Income Taxes, during the fourth quarter of 2011 we evaluated the positive and negative evidence as to the realizability of our net deferred
tax assets, which are comprised principally of net operating loss carry forwards. Based on our recent earnings history and expectations of
operating performance over the next five years, we have determined that it is more likely than not that we will realize the benefit of our
deferred tax assets including our net operating loss carry forwards.
As of December 31, 2011, our federal net operating loss carry forward, which begins to expire in 2025 if unused, was approximately
$100,710, and our tax credit carry forward, which begins to expire in
F-20
Table of Contents
FIVE STAR QUALITY CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)
6. Income Taxes (Continued)
2022 if unused, was approximately $6,820. Our net operating loss carry forwards and tax credit carry forwards are subject to audit and
adjustments by the Internal Revenue Service.
For the year ended December 31, 2011, we recognized a tax benefit from continuing operations of $50,554, which includes a deferred tax
benefit of $52,111 attributable to a reduction of valuation allowance and current tax expense of $1,405 for state taxes on operating income that
are payable without regard to our tax loss carry forwards. Tax benefit also includes $152 related to a non-cash deferred tax liability arising from
the amortization of goodwill for tax purposes but not for book purposes. We also recognized a tax benefit from discontinued operations of
$2,739 attributable to a reduction of valuation allowance.
The principal reasons for the difference between our effective tax (benefit) rate on continuing operations and the U.S. Federal statutory
income tax (benefit) rate are as follows:
2011
Taxes at statutory U.S. federal income tax
rate
State and local income taxes, net of federal
tax benefit
Tax credits
Alternative Minimum Tax
Change in valuation allowance
Other differences, net
Effective tax rate
For the years ended
December 31,
2010
2009
35.0%
35.0%
35.0%
10.9%
(15.1)%
1.2%
(321.1)%
4.5%
(284.6)%
8.7%
(7.5)%
1.5%
(33.5)%
1.3%
5.5%
8.5%
(3.2)%
2.1%
(38.8)%
1.6%
5.2%
We recorded a large tax benefit in 2011 reflecting the release of valuation allowance, which results in a large negative effective tax rate.
Our effective tax rate on continuing operations exclusive of the release of valuation allowance is 34.5%.
7. Earnings Per Share
We computed basic EPS for the years ended December 31, 2011, 2010 and 2009 using the weighted average number of shares outstanding
during the periods. Diluted EPS for the years ended December 31, 2011, 2010 and 2009 reflects additional common shares, related to the
Notes, that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income applicable
to common shareholders that would result from their assumed issuance. The weighted average shares outstanding used to calculate basic and
diluted EPS include 582 and 512 unvested common shares as of December 31, 2011 and 2010, respectively, issued to our officers and others
under our equity compensation plan, or the Share Award Plan. Unvested shares issued under our Share Award Plan are deemed participating
securities because they participate equally in earnings with all of our other common shares.
F-21
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FIVE STAR QUALITY CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)
7. Earnings Per Share (Continued)
The following table provides a reconciliation of income from continuing operations and loss from discontinued operations and the number
of common shares used in the computations of diluted EPS:
2011
Income
(loss)
Income
from
continuing
operations $ 68,277
Effect of
the
Notes
962
Diluted
income
from
continuing
operations $ 69,239
Diluted loss
from
discontinued
operations $ (4,076)
Shares
42,161 $
2,873
45,034 $
Per
Share
Year Ended December 31,
2010
Income
Per
Share
(loss)
Shares
1.62 $ 25,562
1,652
1.54 $ 27,214
45,034 $ (0.09) $ (2,070)
35,736 $
3,471
39,207 $
2009
Income
(loss)
0.72 $ 40,420
2,198
0.69 $ 42,618
39,207 $ (0.05) $ (2,090)
F-22
Shares
33,558 $
Per
Share
1.20
5,217
38,775 $
1.10
38,775 $ (0.05)
Table of Contents
FIVE STAR QUALITY CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)
8. Fair Values of Assets and Liabilities
The table below presents the assets and liabilities measured at fair value at December 31, 2011, categorized by the level of inputs used in
the valuation of each asset.
Description
Long lived assets held for sale (1)
Long lived assets of discontinued
operations (2)
Cash equivalents (3)
Available for sale securities: (4)
Equity securities
Financial services industry
REIT industry
Other
Total equity securities
Debt securities
International bond fund
Industrial bonds
Government bonds
Financial bonds
Other
Total debt securities
Total available for sale
securities
Total
Total
$
7,076 $
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
Significant Other
Observable
Inputs
(Level 2)
— $
7,076
8,037
19,745
—
19,745
8,037
—
3,752
472
789
5,013
3,752
472
789
5,013
—
—
—
—
2,246
7,467
5,524
1,104
875
17,216
2,246
7,467
5,524
1,104
875
17,216
—
—
—
—
—
—
22,229
$ 57,087 $
22,229
41,974 $
—
15,113
(1)
Long lived assets held for sale consist of property and equipment we intend to sell to SNH for increased rent
pursuant to the terms of our leases with SNH; however, we are not obligated to make these sales and SNH is not
obligated to purchase the property and equipment. We have either recently acquired the assets or the assets are
part of active construction projects and we expect that any sale of these assets to SNH would be for an amount
equal to their recorded cost. Accordingly, the cost of these assets approximates their fair value.
(2)
In September 2011, we recorded a $3,938 asset impairment charge to reduce the carrying value of two SNFs we
own that we have classified as discontinued operations to their estimated fair value based upon expected sales
prices less costs to sell.
(3)
Cash equivalents, consisting of money market funds held principally for obligations arising from our self
insurance programs.
(4)
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 $9,114 and $13,115, respectively, at December 31,
2011. Our investments in available for sale securities had amortized costs of $20,827 and $11,638 as of
December 31, 2011 and 2010, respectively, had unrealized gains of $1,586 and $5,515 as of December 31, 2011
and 2010, respectively, and had unrealized losses of $185 and $40 as of December 31, 2011 and 2010,
respectively. At December 31, 2011, 10 of the securities we hold are in a loss position that has ranged from one to
eight months. Since these securities have not been in a loss period for an extended period of time, we do not
believe these securities are impaired. During the years ended December 31, 2011 and 2010, we received gross
proceeds of $10,896 and $3,081, respectively, in connection with the sales of available for sale securities and
recorded gross realized gains totaling $4,118 and $940, respectively, and gross realized losses totaling $2 and $7,
respectively.
F-23
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FIVE STAR QUALITY CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)
8. Fair Values of Assets and Liabilities (Continued)
During the year ended December 31, 2011, 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 year ended December 31, 2011.
The carrying values of accounts receivable, available for sale securities, accounts payable, mortgage notes payable and the Bridge Loan
with SNH approximate fair value as of December 31, 2011 and 2010. The carrying value and fair value of the Notes was $37,282 and $33,181,
respectively, as of December 31, 2011, and $37,905 and $35,631, respectively, as of December 31, 2010. We estimate the fair value of the
Notes using quoted market data for these securities. We measured the fair value of our equity investment in AIC by considering, among other
things, the individual assets and liabilities held by AIC, AIC's overall financial condition and earning trends, and the financial condition and
prospects for the insurance industry generally.
9. Indebtedness
We have a $35,000 revolving secured line of credit, or our Credit Agreement, that matures on March 18, 2013 when all amounts
outstanding under our Credit Agreement are due. Borrowings under our Credit Agreement are available for acquisitions, working capital and
general business purposes. Funds available under our Credit Agreement may be drawn, repaid and redrawn until maturity and no principal
payment is due until maturity. We borrow in U.S. dollars and borrowings under our Credit Agreement bear interest at LIBOR (with a floor of
2% per annum) plus 400 basis points, or 6% as of December 31, 2011. 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 contains covenants requiring us to maintain certain financial ratios, places limits on our ability to
incur or assume debt or create liens with respect to certain of our properties and has other customary provisions. Our Credit Agreement also
provides for acceleration of payment of all amounts due thereunder or upon the occurrence and continuation of certain events of default. As of
December 31, 2011, no amounts were outstanding under our Credit Agreement. As of December 31, 2011, we believe we were in compliance
with all applicable covenants under our Credit Agreement. We incurred interest expense and other associated costs related to our Credit
Agreement of $726, $508 and $340 for the years ended December 31, 2011, 2010 and 2009, respectively.
In May 2011, we entered into a bridge loan agreement with SNH, or the Bridge Loan, under which SNH agreed to lend us up to $80,000
to fund a part of the purchase price for the acquisitions of the majority of the assets of six senior living communities located in Indiana, or the
Indiana Communities. During 2011, we completed our acquisitions of the majority of the assets of the Indiana Communities and, in connection
with the acquisitions, borrowed $80,000 under the Bridge Loan. We subsequently repaid $42,000 of this advance with proceeds from a public
offering of our common shares, or the Public Offering, and cash generated by operations (see Note 12). As of December 31, 2011, an aggregate
principal amount of $38,000 was outstanding under the Bridge Loan. No additional amounts are available for borrowing by us under the Bridge
Loan. The Bridge Loan is secured by mortgages on seven of our senior living communities. The Bridge Loan matures on July 1, 2012 and
bears interest at a rate equal to the annual rates of interest applicable to SNH's borrowings under its
F-24
Table of Contents
FIVE STAR QUALITY CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)
9. Indebtedness (Continued)
revolving credit facility, plus 1%. As of December 31, 2011, the interest rate was 2.9% under the Bridge Loan. The Bridge Loan contains
various covenants, including restrictions on our ability to incur liens upon or dispose of the collateral securing the Bridge Loan. The Bridge
Loan agreement also contains events of default including non-payment, a change in control of us and certain events of insolvency, as
determined under the Bridge Loan. As of December 31, 2011, we believe we were in compliance with all applicable covenants in the Bridge
Loan. We incurred interest expense and other associated costs related to the Bridge Loan of $593 for the year ended December 31, 2011.
On July 1, 2010, we repaid our outstanding balance and terminated our non-recourse credit facility with UBS AG, or UBS. Interest
expense and other associated costs related to this facility were $0, $149 and $551 for the years ended December 31, 2011, 2010 and 2009,
respectively.
At December 31, 2011, we had six irrevocable standby letters of credit totaling $736. The six letters of credit are security for our lease
obligation to HCP, Inc., or HCP, to an automobile leasing company, and to a mortgagee of our property encumbered by a Federal National
Mortgage Association, or FNMA, insured mortgage. The letters of credit are renewed annually. The maturity dates for these letters of credit
range from April 2012 to September 2012. Our obligations under these letters of credit are secured by cash.
In October 2006, we issued $126,500 principal amount of the Notes. Our net proceeds from this issuance were approximately $122,600.
The Notes bear interest at a rate of 3.75% per annum and are convertible into our common shares at any time. The initial conversion rate, which
is subject to adjustment, is 76.9231 common shares per $1 principal amount of the Notes, which represents an initial conversion price of $13.00
per share. The Notes are guaranteed by certain of our wholly owned subsidiaries. The Notes mature on October 15, 2026. We may prepay the
Notes at any time and the holders may require that we purchase all or a portion of these Notes on each of October 15 of 2013, 2016 and 2021.
If a "fundamental change", as defined in the indenture governing the Notes, occurs, holders of the Notes may require us to repurchase all or a
portion of their Notes for cash at a repurchase price equal to 100% of the principal amount of the Notes to be repurchased, plus any accrued and
unpaid interest and, in certain circumstances, plus a make whole premium as defined in the indenture governing the Notes. Interest expense and
other associated costs related to the Notes was $1,470, $1,738 and $2,673 for the years ended December 31, 2011, 2010 and 2009, respectively.
We issued these Notes pursuant to an indenture which contains various customary covenants. As of December 31, 2011, we believe we were in
compliance with all applicable covenants of this indenture.
During the years ended December 31, 2011 and 2010, we purchased and retired $623 and $11,802 par value of the outstanding Notes,
respectively, and recorded a gain of $1 and $726, respectively, net of related unamortized costs, on early extinguishment of debt. We funded
these purchases principally with available cash. As a result of these purchases and other purchases we made in prior years, $37,282 in principal
amount of the Notes remain outstanding.
At December 31, 2011, two of our communities, which we have classified as discontinued operations, were encumbered by United States
Department of Housing and Urban Development, or HUD, insured mortgage notes, one of our communities was encumbered by a FNMA
mortgage note, and three of our communities were encumbered by Federal Home Loan Mortgage Corporation, or FMCC, mortgage notes.
These mortgages contain HUD, FNMA and FMCC standard mortgage
F-25
Table of Contents
FIVE STAR QUALITY CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)
9. Indebtedness (Continued)
covenants. We recorded a mortgage premium in connection with our assumption of the FNMA and FMCC mortgage notes in order to record
the assumed mortgage notes at their estimated fair value. We are amortizing the mortgage premiums as a reduction of interest expense until the
maturity of the respective mortgage notes. In July 2010, we prepaid a HUD insured mortgage note with a balance of $4,635 and paid $134 in
prepayment penalties. The following table is a summary of these mortgage notes as of December 31, 2011:
Balance as of
December 31, 2011
Effective
Interest Rate
Cash Interest
Rate
$
19,767
7,091
3,071
9,813
3,114
4,575
6.64%
8.99%
6.36%
6.20%
5.25%
5.55%
5.86%
5.46%
6.70%
6.70%
5.25%
5.55%
$
47,431
6.69% (1)
5.96% (1)
(1)
Monthly
Payment
Maturity Date
June 2023
February 2025
September 2028
September 2032
June 2035
May 2039
$
123
63
25
72
19
27
$
329
Weighted average interest rate.
We incurred mortgage interest expense, including premium amortization, of $1,588, $650 and $802 for the years ended December 31,
2011, 2010 and 2009, respectively, including interest expense recorded in discontinued operations. Our mortgages require monthly payments
into escrows for taxes, insurance and property replacement funds; withdrawals from these escrows require applicable HUD, FNMA and FMCC
approval. As of December 31, 2011, we believe we were in compliance with all applicable covenants under these mortgages.
Principal payments due under the terms of these mortgages (including mortgages included in discontinued operations) are as follows:
2012
2013
2014
2015
2016
Thereafter
$
1,171
1,242
1,318
1,398
1,483
40,819
$ 47,431
F-26
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FIVE STAR QUALITY CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)
10. Leases
As of December 31, 2011, we leased 187 senior living communities, two rehabilitation hospitals and one assisted living community that
we have classified as discontinued operations, under four non-cancelable leases with SNH. As of December 31, 2011, we also leased four
senior living communities under a lease with HCP. These leases are "triple-net" leases which require that we pay all costs incurred in the
operation of the communities and hospitals, including the cost of insurance and real estate taxes, maintaining the communities and hospitals,
and indemnifying the landlord for any liability which may arise from their operation during the lease term.
Our leases with SNH require us to pay percentage rent at 181 of the senior living communities we lease from SNH equal to 4% of the
amount by which gross revenues, as defined in our leases, exceeds gross revenues in a base year. We recorded approximately $4,879 and
$4,443 in percentage rent to SNH for the years ended December 31, 2011 and 2010, respectively.
SNH may fund amounts that we request for renovations and improvements to communities and hospitals we lease from SNH in return for
rent increases according to formulas in the leases; however, SNH is not obligated to purchase these renovations and improvements from us and
we are not required to sell them to SNH. In 2011 and 2010, SNH funded $33,269 and $31,894, respectively, for renovations and improvements
to some of our communities and hospitals and, as a result, our annual rent increased by $2,665 and $2,550, respectively.
F-27
Table of Contents
FIVE STAR QUALITY CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)
10. Leases (Continued)
The following table is a summary of our real property leases (including one assisted living community that we have classified as
discontinued operations):
Number of
properties
Annual
minimum rent
as of
December 31,
2011
Initial expiration
date
Renewal terms
1.
Lease No. 1 for SNFs and
independent and assisted living
communities (1)
89 $
56,004
December 31,
2024
Two 15-year
renewal
options.
2.
Lease No. 2 for SNFs, independent
and assisted living communities
and rehabilitation hospitals
48
52,536
June 30, 2026
Two 10-year
renewal
options.
3.
Lease No. 3 for independent and
assisted living communities (2)
28
62,968
December 31,
2028
Two 15-year
renewal
options.
4.
Lease No. 4 for SNFs and
independent and assisted living
communities (3)
25
23,720
April 30, 2017
Two 15-year
renewal
options.
5.
One HCP lease
4
1,183
June 30, 2014
Two 10-year
renewal
options.
Totals
194 $
196,411
(1)
Lease No. 1 is comprised of four separate leases. Three of these four leases exist to accommodate mortgage financings in
effect at the time SNH acquired the properties; we have agreed with SNH to combine all four of these leases into one
lease as and when these mortgage financings are paid.
(2)
Lease No. 3 exists to accommodate certain mortgage financing by SNH.
(3)
Lease No. 4 is comprised of three separate leases. Two of these three leases exist to accommodate mortgage obligations
in effect at the time SNH acquired the properties; we have agreed with SNH to combine all three of these leases into one
lease when these mortgage financings are paid.
The future minimum rents required by our leases as of December 31, 2011, are as follows:
2012
2013
2014
2015
2016
Thereafter
$
196,411
196,411
195,819
195,228
195,228
1,710,648
$ 2,689,745
F-28
Table of Contents
FIVE STAR QUALITY CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)
11. Shareholders' Equity
We issued 379 and 351 of our common shares in 2011 and 2010, respectively, to our Directors, officers and others who provide services
to us. We valued the shares at the average price of our common shares on the exchange on which they were listed on the dates of issue, or
$1,044 in 2011, based on a $2.75 weighted average share price, or $1,980 in 2010, based on a $5.64 weighted average share price. Shares
issued to Directors vest immediately; one fifth of the shares issued to our officers and others vest on the date of grant and on the four
succeeding anniversaries of the date of grant. We recognize the cost ratably over the vesting period. As of December 31, 2011, 1,128 of our
common shares remain available for issuance under our Share Award Plan.
In June 2011, we issued 11,500 of our common shares in the Public Offering, raising net proceeds of approximately $53,953. We used
proceeds from the Public Offering to repay amounts outstanding under the Bridge Loan and to fund a portion of the cash purchase price of the
majority of the assets of the Indiana Communities described in Note 12.
12. Acquisitions
In August 2010, we acquired from an unrelated party a continuing care retirement community, which offers independent, assisted living
and skilled nursing services, containing 110 living units located in Wisconsin for $14,700. We financed the acquisition with cash on hand and
by the assumption of approximately $1,311 of resident deposits. We have included the results of this community's operations in our
consolidated financial statements from the date of acquisition. We allocated the purchase price of this community to land, buildings and
equipment. As of December 31, 2011, the majority of this community's revenues comes from residents private resources. We acquired this
community as part of our strategy of expanding our business in high quality senior living operations where residents pay for our services with
private resources.
In May 2011, we acquired an assisted living community containing 116 living units located in Arizona for $25,600, excluding closing
costs. We financed the acquisition with cash on hand and by assuming a FNMA mortgage note for $18,652. We have included the results of
this community's operations in our consolidated financial statements from the date of acquisition. We allocated the purchase price of this
community to land, building and equipment. This community primarily provides independent and assisted living services and as of
December 31, 2011, all of the residents pay for their services with private resources.
In May 2011, we agreed to purchase the majority of the assets of the Indiana Communities containing 738 living units for an aggregate
purchase price, excluding closing costs, of $122,760. The Indiana Communities primarily offer independent and assisted living services, which
are currently primarily paid by residents from their private resources. In June 2011, we completed our acquisitions of the majority of the assets
of two of these Indiana Communities containing 197 living units for an aggregate purchase price, excluding closing costs, of $40,360 and
funded the acquisitions with proceeds from the Bridge Loan and the assumption of net working capital liabilities of those two Indiana
Communities. In July 2011, we completed our acquisition of the majority of the assets of an additional Indiana Community containing 151
living units for a purchase price, excluding closing costs, of $30,400 and funded the acquisition with a portion of the proceeds of the Public
Offering, by borrowing an additional $15,000 under the Bridge Loan and by assuming net working capital liabilities of that Indiana
Community. In September 2011, we completed our acquisitions of the majority of the assets of
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)
12. Acquisitions (Continued)
the remaining three Indiana Communities containing 390 living units for an aggregate purchase price, excluding closing costs, of $52,000. We
funded these acquisitions with $24,000 of borrowings under the Bridge Loan, by assuming approximately $19,260 of mortgage notes secured
by these three Indiana Communities, by assuming net working capital liabilities of those three Indiana Communities and with cash on hand,
including a portion of the proceeds of the Public Offering. We recorded the acquired land, building and equipment of these Indiana
Communities at estimated fair value. The values assigned to the land, buildings and equipment of our Indiana Communities are based upon
preliminary estimates of the fair value of assets acquired. Consequently, amounts preliminarily assigned to assets acquired could change from
those reported in these consolidated financial statements.
For the year ended December 31, 2011, we incurred $1,759 in acquisition related costs. These costs include transaction closing costs,
professional fees (legal and accounting) and other acquisition related expenses for completed transactions.
13. Discontinued Operations
In December 2007, we decided to sell our institutional pharmacy located in California and our mail order pharmacy located in Nebraska.
We sold the institutional pharmacy in two separate transactions during the year ended December 31, 2009, which resulted in a $1,226 gain on
sale. We were unable to sell the mail order pharmacy on acceptable terms and we ceased its operations on March 31, 2009.
During 2009, at our request, SNH sold two SNFs that we lease from SNH. In October 2009, SNH sold one of those SNFs, which was
located in Iowa, to an unrelated party for net proceeds of approximately $473 and our annual rent payable to SNH decreased by approximately
$47 per year. In November 2009, SNH sold the other of those two SNFs, which was located in Missouri, to an unrelated party for net proceeds
of approximately $1,247 and our annual rent payable to SNH decreased by approximately $125 per year.
In August 2010, at our request, SNH sold four SNFs located in Nebraska which we leased from SNH to an unrelated party for net
proceeds of approximately $1,450, and our annual rent payable to SNH decreased by approximately $145 per year.
In November 2010, at our request, SNH agreed to sell one assisted living community in Pennsylvania with 70 living units that was leased
to us. SNH sold this community in May 2011, and our annual rent to SNH decreased by approximately $72 per year.
Also in November 2010, at our request, SNH agreed to sell three SNFs in Georgia with an aggregate of 329 living units that were leased to
us. SNH consummated the sale of two of these communities in May 2011 and one community in June 2011, and our annual rent to SNH
decreased by approximately $1,790 per year.
Early in 2011, we decided to offer for sale two SNFs we own that are located in Michigan with an aggregate of 271 living units. In
September 2011, we recorded a $3,938 asset impairment charge to reduce the carrying value of these two SNFs to their estimated fair value
based upon expected sales prices less costs to sell. While we continue to market these properties, we can provide no assurance that a sale of
these SNFs will be completed.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)
13. Discontinued Operations (Continued)
In August 2011, we agreed with SNH that SNH should sell one assisted living community located in Pennsylvania with 103 living units,
which we lease from SNH. We and SNH are in the process of selling this assisted living community and, if sold, our annual minimum rent
payable to SNH will decrease by 9.0% of the net proceeds of the sale to SNH, in accordance with the terms of our lease with SNH.
We have reclassified the consolidated balance sheet and the consolidated statement of income for all periods presented to show the
financial position and results of operations of the communities and pharmacies which have been sold or are expected to be sold as discontinued.
Below is a summary of the operating results of these discontinued operations included in the financial statements for the years ended
December 31, 2011, 2010 and 2009:
2011
Revenues
Expenses
Impairment on assets
Benefit for income taxes
Gain on sale
Net loss
2010
2009
$ 31,074 $ 47,725 $ 57,705
(33,951)
(49,795)
(61,021)
(3,938)
—
—
2,739
—
—
—
—
1,226
$ (4,076) $ (2,070) $ (2,090)
14. Off Balance Sheet Arrangement
As of December 31, 2011, we had no off balance sheet arrangements that have had or are reasonably likely to have a current or future
material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources, except for the pledge of certain of our assets, such as accounts receivable, with a carrying value of $21,024
arising from our operation of 56 properties owned by SNH and leased to us which secures SNH's borrowings from its lender, FNMA.
15. Related Person Transactions
We have adopted written Governance Guidelines that address, among other things, the consideration and approval of any related person
transactions. Under these Governance Guidelines, we may not enter into any transaction in which any Director or executive officer, any
member of the immediate family of any Director or executive officer or any other related person, has or will have a direct or indirect material
interest unless that transaction has been disclosed or made known to our Board of Directors and our Board of Directors reviews, authorizes and
approves or ratifies the transaction by the affirmative vote of a majority of the disinterested Directors, even if the disinterested Directors
constitute less than a quorum. If there are no disinterested Directors, the transaction shall be reviewed, authorized and approved or ratified by
both (1) the affirmative vote of a majority of our entire Board of Directors and (2) the affirmative vote of a majority of our Independent
Directors. The Governance Guidelines further provide that, in determining whether to approve or ratify a transaction, our Board of Directors, or
disinterested Directors or Independent Directors, as the case may be, shall act in accordance with any applicable provisions of our charter,
consider all of the relevant facts and
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)
15. Related Person Transactions (Continued)
circumstances, and approve only those transactions that are fair and reasonable to us. All related person transactions described below were
reviewed and approved or ratified by a majority of the disinterested Directors or otherwise in accordance with our policies described above. In
the case of any transaction with us in which any other employee of ours who is subject to our Code of Business Conduct and Ethics and who
has a direct or indirect material interest in the transaction, the employee must seek approval from an executive officer who has no interest in the
matter for which approval is being requested.
As of December 31, 2011, we leased 188 of our 245 senior living communities (including one that we have classified as discontinued
operations) and two rehabilitation hospitals from SNH and managed 22 senior living communities for the account of SNH.
We were a 100% owned subsidiary of SNH before December 31, 2001; and SNH is today our largest landlord and our largest stockholder.
As of February 15, 2012, SNH owned 4,235 of our common shares (which includes 1,000 of our common shares SNH acquired from the
underwriters in our public equity offering we completed in June 2011), which represented approximately 8.8% of our outstanding common
shares. On December 31, 2001, SNH distributed substantially all of our then outstanding common shares to its shareholders. At the time of our
spin off from SNH, all of the persons serving as our Directors were trustees of SNH. In order to effect this spin off and to govern relations after
the spin off, we entered into agreements with SNH and others, including Reit Management & Research LLC, or RMR, CommonWealth REIT,
or CWH, and Hospitality Properties Trust, or HPT. Since then we have entered into various leases with SNH and other agreements that include
provisions that confirm and modify these undertakings. Among other matters, these agreements provide that:
•
so long as SNH remains a real estate investment trust, or REIT, we may not waive the share ownership restrictions in our charter
on the ability of any person or group to acquire more than 9.8% of any class of our equity shares without the consent of SNH;
•
so long as we are a tenant of SNH, we will not permit nor take any action that, in the reasonable judgment of SNH, might
jeopardize the tax status of SNH as a REIT;
•
SNH has the option to cancel all of our rights under the leases we have with SNH upon the acquisition by a person or group of
more than 9.8% of our voting stock and upon other change in control events affecting us, as defined in those documents,
including the adoption of any stockholder proposal (other than a precatory proposal) or the election to our Board of Directors of
any individual if such proposal or individual was not approved, nominated or appointed, as the case may be, by vote of a
majority of our Directors in office immediately prior to the making of such proposal or the nomination or appointment of such
individual;
•
the resolution of disputes, claims and controversies arising from our leases with SNH may be referred to binding arbitration
proceedings; and
•
so long as we are a tenant of SNH or so long as we have a business management agreement with RMR, we will not acquire or
finance any real estate of a type then owned or financed by SNH or any other company managed by RMR without first giving
SNH or the other company managed by RMR, as applicable, the opportunity to acquire or finance real estate investments of the
type in which SNH or the other company managed by RMR, respectively, invests.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)
15. Related Person Transactions (Continued)
Under our leases with SNH, we pay SNH rent set at minimum annual amounts plus percentage rent based on increases in gross revenues
at certain properties. Our total minimum annual rent payable to SNH under those leases as of December 31, 2011 was $195,228, excluding
percentage rent based on increases in gross revenues at certain properties. For the years ended December 31, 2011, 2010 and 2009 our rent
expense under our leases with SNH was $194,524, $188,768 and $177,673, respectively, net of $901, $901 and $868, respectively,
amortization of a lease inducement from SNH.
In 2009 and 2010 there were additional transactions between us and SNH, including a Lease Realignment Agreement that we entered into
with respect to certain properties leased to us by SNH and to which SNH obtained mortgage refinancing from FNMA. A further description of
the terms of certain of those transactions is included in our annual reports to stockholders and our Annual Reports on Form 10-K filed with the
Securities and Exchange Commission, or SEC, in each case for the years ended December 31, 2010 and December 31, 2009. Since January
2011, we engaged in additional transactions with SNH, including:
•
In November 2010, at our request, SNH agreed to sell three SNFs in Georgia with an aggregate of 329 living units that were
leased to us. SNH consummated the sale of two of these communities in May 2011 and one community in June 2011, and our
annual rent to SNH decreased by approximately $1,790.
•
Also in November 2010, at our request, SNH agreed to sell one assisted living community in Pennsylvania with 70 living units
that was leased to us. SNH sold this community in May 2011, and our annual rent to SNH decreased by approximately $72.
•
In March 2011, SNH agreed to acquire 20 senior living communities with 2,111 living units located in five states in the
southeastern United States. In May 2011, we entered into long term contracts with SNH to manage 15 of these communities and
agreed to lease the remaining five communities, when SNH acquired them. As of December 31, 2011, we leased those five
communities with 651 living units from SNH and managed 13 of the 15 communities with 1,214 living units for SNH's account.
We are currently managing or have agreed to manage the remaining two communities with 291 living units for the account of
the existing owner, pending SNH's acquisition of those two communities. SNH's acquisitions of those two remaining
communities are subject to conditions and may not occur. Our minimum rent payable to SNH for the communities we are
leasing is approximately $6,900 per year. Percentage rent, based on increases in gross revenues at these communities we are
leasing, will commence in 2013. We added these communities we are leasing to our existing leases with SNH, which have
current terms expiring at varying dates ranging from April 2017 to June 2026.
•
In May 2011, we commenced leasing a senior living community from SNH with 73 living units located in Illinois and we
acquired 14 acres of vacant land adjacent to the community for possible expansion for $1,250 from an unrelated party. Our rent
payable to SNH for this community is $608 per year. Percentage rent, based on increases in gross revenues at this community,
will commence in 2013. We added this community to our Lease No. 1 with SNH, which has a current term expiring in 2024.
•
In July 2011, SNH agreed to acquire nine large senior living communities then operated by Vi® as Classic Residence
communities and which were formerly known as Classic Residence by
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)
15. Related Person Transactions (Continued)
Hyatt® communities. The nine senior living communities include 2,226 living units of which 1,708 are independent living
apartments, 471 are assisted living suites and 47 are suites offering specialized Alzheimer's care. The communities are located in
six states, with four located in Florida and one in each of Maryland, Nevada, New Jersey, New York and Texas. In December
2011, SNH completed the acquisition of eight of those communities and we entered into long term management contracts with
SNH to manage those eight communities. The one remaining community that has not yet been acquired by SNH is located in
New York. That acquisition is subject to conditions, including licensing approval. It is currently expected that that acquisition
will be completed during 2012 but there can be no assurances that the acquisition will be completed. If SNH completes that
acquisition, we expect that we will enter into a long term management contract with SNH to manage that community on terms
substantially consistent with those that we have previously entered into with SNH.
•
In August 2011, we agreed with SNH that SNH should sell one assisted living community located in Pennsylvania with 103
living units, which we lease from SNH. We and SNH are in the process of selling this assisted living community and, if sold,
our annual minimum rent payable to SNH will decrease by 9.0% of the net proceeds of the sale to SNH, in accordance with the
terms of our lease with SNH.
•
In December 2011, SNH acquired a senior living community with 57 units and we entered into a long term management
contract with SNH to manage this community on terms substantially consistent with those that we have previously entered into
with SNH for communities that include assisted living units.
•
In February 2012, SNH acquired a senior living community containing 92 units and we entered into a long term management
contract with SNH to manage this community on terms substantially consistent with those that we have previously entered into
with SNH for communities that include assisted living units.
The management contracts for the communities we manage for SNH's account, or the Management Contracts, provide us with a
management fee equal to 3% of the gross revenues realized at the communities, plus reimbursement for our direct costs and expenses related to
the communities and an incentive fee equal to 35% of the annual net operating income of the communities after SNH realizes an annual return
equal to 8% of its invested capital. The Management Contracts have an initial term of 20 years and are subject to automatic renewal for two
consecutive 15 year terms, unless earlier terminated or timely notice of nonrenewal is delivered. The Management Contracts provide that we
and SNH each have the option to terminate the contracts upon the acquisition by a person or group of more than 9.8% of the other's voting
stock and upon other change in control events affecting the other, as defined in those documents, including the adoption of any shareholder
proposal (other than a precatory proposal) or the election to the board of directors of any individual if such proposal or individual was not
approved, nominated or appointed, as the case may be, by vote of a majority of the board of directors in office immediately prior to the making
of such proposal or the nomination or appointment of such individual. As of December 31, 2011, all of our Management Contracts with SNH
have been made subject to a pooling agreement we entered with SNH in connection with the 20 communities SNH agreed to acquire in March
2011 referred to above, except for a community we manage for SNH's account that only includes independent living apartments. Communities
with only
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)
15. Related Person Transactions (Continued)
independent living apartments will be subject to a separate pooling agreement. Under the pooling agreement currently in effect, determinations
of fees and expenses of the various communities that are subject to the applicable pooled Management Contracts are aggregated, including
determination of SNH's return of its invested capital and our incentive fees. Under the pooling agreement, after December 31, 2017, SNH has
the right, subject to our cure rights, to terminate all, but not less than all, the Management Contracts that are subject to the pooling agreement if
it does not receive its minimum return in each of three consecutive years. In addition, under the pooling agreement, we have a limited right to
require the sale of underperforming communities. Also, under the pooling agreement, any nonrenewal notice given by us with respect to a
community that is subject to the pooling agreement would be deemed a nonrenewal with respect to all the communities (and related
Management Contracts) that are the subject of the pooling agreement. Special committees of each of our Board of Directors and SNH's board
of trustees composed solely of our Independent Directors and SNH's independent trustees who are not also directors or trustees of the other
party and who were represented by separate counsel reviewed and approved the terms of the initial Management Contracts and pooling
agreement. We expect the terms of the pooling agreement for communities with only independent living apartments will be on substantially the
same terms. The terms of the subsequent Management Contracts and pooling agreement were approved by our Independent Directors and
Board of Directors and by the independent trustees and board of trustees of SNH. For the year ended December 31, 2011, we recorded $835 in
management fee revenue and $19,762 of reimbursed costs incurred on behalf of the communities we manage for SNH's account.
We expect that we may enter into additional management arrangements with SNH for senior living communities SNH may acquire in the
future on terms similar to those management arrangements we currently have with SNH, although there can be no assurances that we will do
so. For example, in February 2012, SNH agreed to acquire an independent living community located in Missouri, which we understand is
expected to close in the first half of 2012 and which we expect we would manage for SNH's account pursuant to a long term management
contract on terms similar to those management arrangements we currently have with SNH and which we expect would be included in a separate
pooling agreement that would include Management Contracts for communities consisting of only independent living apartments. However, this
acquisition is subject to conditions and may not close.
During the years ended December 31, 2011, 2010 and 2009, pursuant to the terms of our leases with SNH, SNH purchased $33,269,
$31,894 and $36,700, respectively, of improvements made to its properties leased to us, and, as a result, the annual rent payable by us to SNH
increased by approximately $2,665, $2,550 and $2,945, respectively.
Simultaneously with our negotiation of the management contract terms described above, in May 2011 we entered into the Bridge Loan,
under which SNH agreed to lend us up to $80,000. The Bridge Loan matures on July 1, 2012, and bears interest at a rate equal to the annual
rates of interest applicable to SNH's borrowings under its revolving credit facility, plus 1%, or 2.9% as of December 31, 2011. As of
December 31, 2011, there was $38,000 aggregate principal amount outstanding under the Bridge Loan and no additional amounts were
available for borrowing under the Bridge Loan. Proceeds of the Bridge Loan were used to fund our acquisitions, completed in September 2011,
of the majority of the assets of the Indiana Communities. The Bridge Loan is secured by mortgages on three of these
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)
15. Related Person Transactions (Continued)
six communities we acquired and on four other senior living communities that we own, in each case including related furniture, fixtures and
equipment.
The terms of the leases and Bridge Loan between us and SNH were reviewed and approved by special committees of each of our Board of
Directors and SNH's board of trustees composed solely of Independent Directors or independent trustees who are not also directors or trustees
of the other party and who were represented by separate counsel. Our leases, management agreements and Bridge Loan with SNH include
arbitration provisions for the resolution of certain disputes, claims and controversies.
At the time we became a separate publicly owned company as a result of the distribution of our shares to SNH's shareholders, we entered a
management and shared services agreement, or a business management agreement, with RMR. One of our Managing Directors, Mr. Barry
Portnoy, is Chairman, majority owner and an employee of RMR. Our other Managing Director, Mr. Martin, is a Director of RMR.
Mr. Mackey, our President and Chief Executive Officer, is an Executive Vice President of RMR, and Mr. Hoagland, our Treasurer and Chief
Financial Officer, and Mr. Larkin, our Vice President, General Counsel and Secretary, are each a Senior Vice President of RMR. Mr. Portnoy's
son, Mr. Adam Portnoy, is an owner of RMR and serves as President and Chief Executive Officer and as a Director of RMR. Additionally,
Mr. Barry Portnoy's son-in-law, who is Mr. Adam Portnoy's brother-in-law, is an officer of RMR. RMR provides management services to both
us and SNH; Mr. Barry Portnoy and Mr. Adam Portnoy are Managing Trustees of SNH. SNH's executive officers are officers of RMR and
SNH's president and chief operating officer is also a director of RMR. Messrs. Mackey, Hoagland and Larkin devote a substantial majority of
their business time to our affairs and the remainder to RMR's business, which is separate from our business. Because at least 80% of
Messrs. Mackey's, Hoagland's and Larkin's business time is devoted to services to us, 80% of their total cash compensation (that is, the
combined cash compensation paid by us and RMR, including base salary and cash bonus) was paid by us and the remainder was paid by RMR.
We believe the compensation we paid to these officers reasonably reflected their division of business time; however, periodically, these
individuals may divide their business time differently than they do currently and their compensation from us may become disproportionate to
this division. RMR has approximately 740 employees and provides management services to other companies in addition to us and SNH.
Our Board of Directors has given our Compensation Committee, which is comprised exclusively of our Independent Directors, authority
to act on our behalf with respect to our business management agreement with RMR. The charter of our Compensation Committee requires the
Committee annually to review the business management agreement, evaluate RMR's performance under this agreement and renew, amend,
terminate or allow to expire the business management agreement.
Pursuant to the business management agreement, RMR assists us with various aspects of our business, which may include, but are not
limited to, compliance with various laws and rules applicable to our status as a publicly owned company, maintenance of our facilities,
evaluation of business opportunities, accounting and financial reporting, capital markets and financing activities, investor relations and general
oversight of our daily business activities, including legal and tax matters, human resources, insurance programs, management information
systems and the like. In May 2011, we and RMR entered into an amendment to the business management agreement. The amendment adjusted
the determination of the fees payable by us to RMR under the business management agreement. The business management agreement provides
for compensation to RMR at an annual business
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)
15. Related Person Transactions (Continued)
management fee equal to 0.6% of our revenues. As amended, revenues are defined as our total revenues from all sources reportable under
generally accepted accounting principles in the United States, or GAAP, less any revenues reportable by us with respect to communities for
which we provide management services plus the gross revenues at those communities determined in accordance with GAAP. In addition, the
amendment also amended certain procedures for the arbitration of disputes pursuant to the business management agreement. The business
management agreement further provides that RMR is compensated at a rate equal to 80% of the employment expenses of RMR's employees,
other than its Chief Information Officer, actively engaged in providing management information systems for us. The terms of the amendment
described above were reviewed and approved by the Compensation Committee of our Board of Directors, which consists solely of our
Independent Directors. The aggregate fees earned by RMR from us for management, administrative and information system services pursuant
to the business management agreement totaled $11,726 in 2011, $11,214 in 2010 and $10,546 in 2009.
RMR also provides internal audit services to us in return for our pro rata share of the total internal audit costs incurred by RMR for us and
other companies managed by RMR and its affiliates, which amounts are subject to determination by our Compensation Committee. Our Audit
Committee appoints our Director of Internal Audit. Our pro rata share of RMR's costs of providing this internal audit function was
approximately $247 in 2011, $211 in 2010 and $220 in 2009. These allocated costs are in addition to the business management fees paid to
RMR. We are also generally responsible for all of our expenses and certain expenses incurred by RMR on our behalf.
The business management agreement automatically renews for successive one year terms unless we or RMR give notice of non-renewal
before the end of an applicable term. We or RMR may terminate the business management agreement upon 60 days prior written notice. RMR
may also terminate the business management agreement upon five business days notice if we undergo a change of control, as defined in the
business management agreement. The current term for the business management agreement expires on December 31, 2012, and will be subject
to automatic renewal unless earlier terminated.
Under our business management agreement with RMR, we acknowledge that RMR provides management services to other businesses,
including SNH. The fact that RMR has responsibilities to other entities, including our largest landlord and largest stockholder, SNH, could
create conflicts; and in the event of such conflicts between us and RMR, any affiliate of RMR or any other publicly owned company for which
RMR provides services, including SNH, our business management agreement allows RMR to act on its own behalf and on behalf of SNH or
such other company rather than on our behalf. Under the business management agreement, we afford SNH and any other company that is
managed by RMR with a right of first refusal to invest in or finance any real estate property of a type then owned or financed by any of them
before we do. Under the business management agreement, RMR has agreed not to provide business management services to any other business
or enterprise, other than SNH, competitive with our business. The business management agreement also includes arbitration provisions for the
resolution of certain disputes, claims and controversies.
Pursuant to our business management agreement, RMR may from time to time negotiate on our behalf with certain third party vendors and
suppliers for the procurement of services to us. As part of this arrangement, we may enter agreements with RMR and other companies to which
RMR provides
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)
15. Related Person Transactions (Continued)
management services for the purpose of obtaining more favorable terms with such vendors and suppliers.
As part of our annual restricted share grants under our Share Award Plan, we typically grant restricted shares to certain employees of
RMR who are not also Directors, officers or employees of ours. In 2011, 2010 and 2009, we granted a total of 77, 65 and 55 restricted shares,
respectively, with an aggregate value of $168, $394 and $168, respectively, to such persons, based upon the closing price of our common
shares on the date of grant on the New York Stock Exchange for the grants made in 2011 and on the NYSE Amex for the grants made in 2010
and 2009. One fifth of those restricted shares vested on the grant date and one fifth vests on each of the next four anniversaries of the grant
date. These share grants to RMR employees are in addition to the fees we pay to RMR.
An affiliated company of RMR is the owner of the buildings in which we leased our corporate headquarters and administrative offices
until the expiration of those leases in June 2011. In May 2011, we entered into a new lease that consolidated our headquarters into one building
owned by an affiliate of RMR. This new lease requires us to pay current annual rent of approximately $730. The terms of this new lease were
reviewed and approved by a special committee of our Board of Directors composed solely of our Independent Directors. During 2011, we
incurred rent, which included our proportionate share of utilities and real estate taxes, under the expired leases and the new lease of $1,337. We
believe the terms of the expired leases and the new lease were and are commercially reasonable.
In December 2006, we began leasing space for a regional office in Atlanta, Georgia from CWH. Our lease for this space expired in
December 2011 and was not renewed. We incurred rent, which included our proportionate share of utilities and real estate taxes, under this
lease during 2011, 2010 and 2009 of $71, $66 and $66, respectively. We believe that the terms of that lease were commercially reasonable.
Our Independent Directors also serve as directors or trustees of other public companies to which RMR provides management services.
Mr. Barry Portnoy serves as a managing director or managing trustee of those companies, including SNH, CWH, HPT, Government Properties
Income Trust, or GOV, and TravelCenters of America LLC, or TA. We understand that the other companies to which RMR provides
management services also have certain other relationships with each other, including business and property management agreements and lease
arrangements. In addition, officers of RMR serve as officers of those companies. We understand that further information regarding those
relationships is provided in the applicable periodic reports and proxy statements filed by those other companies with the SEC.
We, RMR, SNH, CWH, HPT, GOV and TA each currently own approximately 14.29% of AIC. All of our Directors, all of the trustees and
directors of the other publicly held AIC shareholders and nearly all of the directors of RMR currently serve on the board of directors of AIC.
RMR provides management and administrative services to AIC pursuant to a management and administrative services agreement with AIC.
Our Governance Guidelines provide that any material transaction between us and AIC shall be reviewed, authorized and approved or ratified
by both the affirmative vote of a majority of our entire Board of Directors and the affirmative vote of a majority of our Independent Directors.
The shareholders agreement that we, the other shareholders of AIC and AIC are parties to includes arbitration provisions for the resolution of
certain disputes, claims and controversies.
F-38
Table of Contents
FIVE STAR QUALITY CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)
15. Related Person Transactions (Continued)
As of February 16, 2012, we have invested $5,209 in AIC since its formation in November 2008. We may invest additional amounts in
AIC in the future if the expansion of this insurance business requires additional capital, but we are not obligated to do so. For 2011, 2010 and
2009, we recognized income of $139 and a loss of $1 and $134, respectively, related to our investment in AIC. In June 2010, we and the other
shareholders of AIC purchased property insurance providing $500,000 of coverage pursuant to an insurance program arranged by AIC and with
respect to which AIC is a reinsurer of certain coverage amounts. This program was modified and extended in June 2011 for a one year term.
Our annual premiums for this property insurance of approximately $4,500 and $2,900 were paid in June 2011 and 2010, respectively. The
amounts we expensed in relation to those insurance premiums for year 2011 and 2010 were $3,832 and $1,414, respectively. We are currently
investigating the possibilities to expand our insurance relationships with AIC to include other types of insurance. By participating in this
insurance business with RMR and the other companies to which RMR provides management services, we expect that we may benefit
financially by possibly reducing our insurance expenses or by realizing our pro-rata share of any profits of this insurance business.
16. Employee Benefit Plans
We have several employee savings plans under the provisions of Section 401(k) of the Internal Revenue Code. All our employees are
eligible to participate in at least one of our plans and are entitled upon termination or retirement to receive their vested portion of the plan
assets. For some of our plans, we match a certain amount of employee contributions. We also pay certain expenses related to all of our plans.
Expenses for all our plans, including our contributions, were $1,451, $1,476 and $1,235 for the years ended December 31, 2011, 2010 and
2009, respectively.
17. Selected Quarterly Financial Data (Unaudited)
The following is a summary of unaudited quarterly results of operations for the years ended December 31, 2011 and 2010:
2011
First
Quarter
Revenues
Operating income
Net income from continuing operations
Net income
Net income per common share—Basic
Net income per common share—Diluted
Second
Quarter
Third
Quarter
Fourth
Quarter
$ 307,615 $ 311,886 $ 329,475 $ 332,788
6,456
8,075
4,158
2,659
5,905
5,991
3,637
52,744
4,132
5,196
(528)
55,401
$
0.12 $
0.14 $ (0.01) $
1.16
$
0.11 $
0.14 $ (0.01) $
1.10
F-39
Table of Contents
FIVE STAR QUALITY CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)
17. Selected Quarterly Financial Data (Unaudited) (Continued)
2010
First
Quarter
Revenues
Operating income
Net income from continuing operations
Net income
Net income per common share—Basic
Net income per common share—Diluted
Second
Quarter
Third
Quarter
Fourth
Quarter
$ 298,046 $ 301,567 $ 304,803 $ 308,845
5,185
8,276
5,967
6,696
4,664
8,080
5,934
6,884
4,085
8,153
5,158
6,096
$
0.12 $
0.22 $
0.15 $
0.17
$
0.12 $
0.22 $
0.14 $
0.16
Note 18. Unaudited Pro Forma Financial Information
The following table shows operating results attributable to the majority of the assets of the Indiana Communities we acquired during 2011
that are included in our condensed consolidated statement of operations from the date of the acquisition through December 31, 2011.
Revenues
Net income
$ 9,165
$ 1,725
The pro forma financial information in the table below gives effect to the following transactions as if they had occurred as of January 1,
2011 for the 2011 information and as if they had occurred as of January 1, 2010 for the 2010 information: (i) our acquisition of the majority of
the assets of the Indiana Communities; (ii) our assumption of $19,260 of mortgage notes with respect to three of the Indiana Communities;
(iii) our net borrowings of $48,000 under the Bridge Loan in connection with our acquisition of the majority of the assets of these Indiana
Communities; (iv) our assumption of net working capital liabilities of the Indiana Communities; and (v) the Public Offering.
2011
Revenues
Income from continuing operations
Weighted average shares outstanding—basic
Weighted average shares outstanding—diluted
Earnings per share from continuing operations:
Basic
Diluted
2010
$ 1,294,722 $ 1,234,352
68,702
27,918
47,581
47,236
50,598
50,707
$
$
1.44 $
1.38 $
0.59
0.58
This pro forma financial information is presented for informational purposes only and is not necessarily indicative of our consolidated
operating results that would have been reported had the transactions been completed as described herein, and the pro forma financial
information is not necessarily indicative of our consolidated operating results for any future period.
F-40
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
FIVE STAR QUALITY CARE, INC.
By:
/s/ BRUCE J. MACKEY JR.
Bruce J. Mackey Jr.
President and Chief Executive Officer
Dated: February 17, 2012
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf
of the registrant and in the capacities and on the dates indicated.
Signature
/s/ BRUCE J. MACKEY JR.
Bruce J. Mackey Jr.
/s/ PAUL V. HOAGLAND
Paul V. Hoagland
Title
Date
President and Chief Executive Officer
(Principal Executive Officer)
February 17, 2012
Chief Financial Officer and Treasurer
(Principal Financial Officer and
Accounting Officer)
February 17, 2012
Managing Director
February 17, 2012
Managing Director
February 17, 2012
Independent Director
February 17, 2012
Independent Director
February 17, 2012
Independent Director
February 17, 2012
/s/ BARRY M. PORTNOY
Barry M. Portnoy
/s/ GERARD M. MARTIN
Gerard M. Martin
/s/ BRUCE M. GANS
Bruce M. Gans
/s/ BARBARA D. GILMORE
Barbara D. Gilmore
/s/ DONNA D. FRAICHE
Donna D. Fraiche
Exhibit 3.3
FIVE STAR QUALITY CARE, INC.
AMENDED AND RESTATED BYLAWS
As Amended and Restated February 14, 2012
Table of Contents
ARTICLE I OFFICES
Section 1.1.
Section 1.2.
1
1
1
Principal Office
Additional Offices
ARTICLE II MEETINGS OF STOCKHOLDERS
Section 2.1.
Place
Section 2.2.
Annual Meeting
Section 2.3.
Special Meetings
Section 2.4.
Notice of Regular or Special Meetings
Section 2.5.
Notice of Adjourned Meetings
Section 2.6.
Scope of Meetings
Section 2.7.
Organization of Stockholder Meetings
Section 2.8.
Quorum
Section 2.9.
Voting
Section 2.10.
Proxies
Section 2.11.
Record Date
Section 2.12.
Voting of Stock by Certain Holders
Section 2.13.
Inspectors
Section 2.14.
Nominations and Other Proposals to be Considered at Meetings of Stockholders
Section 2.14.1
Annual Meetings of Stockholders
Section 2.14.2
Stockholder Nominations or Other Proposals Causing Covenant Breaches or Defaults
Section 2.14.3
Stockholder Nominations or Other Proposals Requiring Governmental Action
Section 2.14.4
Special Meetings of Stockholders
Section 2.14.5
General
Section 2.15.
Voting by Ballot
Section 2.16.
Proposals of Business Which Are Not Proper Matters For Action By Stockholders
1
1
1
1
4
5
5
5
6
6
6
7
7
7
7
8
15
16
17
18
19
20
ARTICLE III DIRECTORS
Section 3.1.
General Powers; Qualifications; Directors Holding Over
Section 3.2.
Independent Directors and Managing Directors
Section 3.3.
Number and Tenure
Section 3.4.
Annual and Regular Meetings
Section 3.5.
Special Meetings
Section 3.6.
Notice
Section 3.7.
Quorum
Section 3.8.
Voting
Section 3.9.
Telephone Meetings
Section 3.10.
Action by Written Consent of Board of Directors
Section 3.11.
Waiver of Notice
Section 3.12.
Vacancies
Section 3.13.
Compensation
Section 3.14.
Surety Bonds
20
20
20
21
21
21
21
22
22
22
22
22
22
23
23
i
Section 3.15.
Section 3.16.
Section 3.17.
Section 3.18.
Reliance
Qualifying Shares of Stock Not Required
Certain Rights of Directors, Officers, Employees and Agents
Emergency Provisions
23
23
23
23
ARTICLE IV COMMITTEES
Section 4.1.
Number; Tenure and Qualifications
Section 4.2.
Powers
Section 4.3.
Meetings
Section 4.4.
Telephone Meetings
Section 4.5.
Action by Written Consent of Committees
Section 4.6.
Vacancies
24
24
24
24
25
25
25
ARTICLE V OFFICERS
Section 5.1.
Section 5.2.
Section 5.3.
Section 5.4.
Section 5.5.
Section 5.6.
Section 5.7.
Section 5.8.
Section 5.9.
Section 5.10.
Section 5.11.
Section 5.12.
25
25
25
25
26
26
26
26
26
26
26
27
27
General Provisions
Removal and Resignation
Vacancies
Chief Executive Officer
Chief Operating Officer
Chief Financial Officer
Chairman and Vice Chairman of the Board
President
Vice Presidents
Secretary
Treasurer
Assistant Secretaries and Assistant Treasurers
ARTICLE VI CONTRACTS, LOANS, CHECKS AND DEPOSITS
Section 6.1.
Contracts
Section 6.2.
Checks and Drafts
Section 6.3.
Deposits
27
27
27
27
ARTICLE VII STOCK
Section 7.1.
Section 7.2.
Section 7.3.
Section 7.4.
Section 7.5.
Section 7.6.
27
27
28
28
28
29
29
Certificates
Transfers
Lost Certificates
Closing of Transfer Books or Fixing of Record Date
Stock Ledger
Fractional Stock; Issuance of Units
ARTICLE VIII REGULATORY COMPLIANCE AND DISCLOSURE
Section 8.1.
Actions Requiring Regulatory Compliance Implicating the Corporation
Section 8.2.
Compliance With Law
Section 8.3.
Limitation on Voting Shares of Stock or Proxies
Section 8.4.
Representations, Warranties and Covenants Made to Governmental or Regulatory Bodies
Section 8.5.
Board of Directors’ Determinations
29
29
30
31
31
31
ARTICLE IX RESTRICTIONS ON TRANSFER OF SHARES
31
ii
Section 9.1.
Section 9.2.
Section 9.3.
Section 9.4.
Section 9.5.
Section 9.6.
Section 9.7.
Section 9.8.
Section 9.9.
Section 9.10.
Section 9.11.
Section 9.12.
Section 9.13.
Section 9.14.
Section 9.15.
Section 9.16.
Definitions
Transfer And Ownership Restrictions
Exceptions
Excess Securities
Modification Of Remedies For Certain Indirect Transfers
Legal Proceedings; Prompt Enforcement
Liability
Obligation To Provide Information
Legend
Authority Of Board Of Directors
Transactions on a National Securities Exchange
Reliance
Benefits Of This Article IX
Severability
Waiver
Conflict
31
33
33
34
34
35
35
35
35
36
36
36
37
37
37
37
ARTICLE X ACCOUNTING YEAR
Section 10.1.
Accounting Year
37
37
ARTICLE XI DIVIDENDS AND OTHER DISTRIBUTIONS
Section 11.1.
Dividends and Other Distributions
37
37
ARTICLE XII SEAL
Section 12.1.
Section 12.2.
37
37
38
Seal
Affixing Seal
ARTICLE XIII WAIVER OF NOTICE
Section 13.1.
Waiver of Notice
38
38
ARTICLE XIV AMENDMENT OF BYLAWS
Section 14.1.
Amendment of Bylaws
38
38
ARTICLE XV MISCELLANEOUS
Section 15.1.
References to Charter of the Corporation
Section 15.2.
Costs and Expenses
Section 15.3.
Ratification
Section 15.4.
Ambiguity
Section 15.5.
Inspection of Bylaws
Section 15.6.
Special Voting Provisions relating to Control Shares
38
38
38
39
39
39
39
ARTICLE XVI ARBITRATION
Section 16.1.
Procedures for Arbitration of Disputes
Section 16.2.
Arbitrators
Section 16.3.
Place of Arbitration
Section 16.4.
Discovery
Section 16.5.
Awards
Section 16.6.
Costs and Expenses
Section 16.7.
Final and Binding
Section 16.8.
Beneficiaries
39
39
40
40
40
40
41
41
41
iii
FIVE STAR QUALITY CARE, INC.
AMENDED AND RESTATED BYLAWS
ARTICLE I
OFFICES
Section 1.1.
Directors may designate.
Principal Office . The principal office of the Corporation shall be located at such place or places as the Board of
Section 1.2.
Additional Offices . The Corporation may have additional offices at such places as the Board of Directors may
from time to time determine or the business of the Corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 2.1.
Place . All meetings of stockholders shall be held at the principal office of the Corporation or at such other place as
is designated by the Board of Directors or the chairman of the board or president.
Section 2.2.
Annual Meeting . An annual meeting of the stockholders for the election of Directors and the transaction of any
business within the powers of the Corporation shall be held at such times as the Board of Directors may designate. Failure to hold an annual
meeting does not invalidate the Corporation’s existence or affect any otherwise valid acts of the Corporation.
Section 2.3.
Special Meetings .
(a)
General . The president of the Corporation or a majority of the entire Board of Directors may call a special meeting of the
stockholders. Subject to Section 2.3(b), if at the time stockholders are entitled by law to cause a special meeting of the stockholders to be
called, a special meeting of stockholders shall also be called by the secretary of the Corporation upon the written request of stockholders
entitled to cast not less than the Special Meeting Percentage of all the votes entitled to be cast at such meeting. The “Special Meeting
Percentage” shall be a majority or, if greater from time to time, the largest portion which the Corporation is legally permitted to specify with
respect to stockholders entitled by law to cause a special meeting of the stockholders to be called.
(b)
Stockholder Requested Special Meetings .
Any stockholder of record seeking to have stockholders request a special meeting shall, by sending written
(i)
notice to the secretary of the Corporation (the “Record Date Request Notice”) by registered mail, return receipt requested, request the
Board of Directors to fix a record date to determine the stockholders entitled to request a special meeting (the “Request Record
Date”). No stockholder may make a Record Date Request Notice unless such stockholder (i) complies with the requirements set forth
in Section 2.14.1(c)(ii)(A) and (ii) holds certificates for all shares of stock of the Corporation owned by such stockholder during all
times described in Section 2.14.1(c), and a copy of each such certificate held by such stockholder at the time of giving such written
request shall accompany such stockholder’s written request to the secretary in order for such request to be effective. The Record Date
Request Notice shall set forth the purpose of the meeting and the matters proposed to be acted on at the meeting, shall be signed by
one or more stockholders of record as of the date of signature (or their duly authorized agents), shall bear the date of signature of each
such stockholder (or its duly authorized agent) signing the Record Date Request Notice and shall set forth all information that each
such stockholder would be required to disclose in solicitations of proxies for election of Directors in an election contest (even though
an election contest is not involved), or is otherwise required, in each case, pursuant to Section 14 (or any successor provision) of the
Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the rules and regulations promulgated thereunder, as well as
additional information required by Section 2.14. Upon receiving the Record Date Request Notice, the Board of Directors may in its
discretion fix a Request Record Date, which need not be the same date as that requested in the Record Date Request Notice. The
Request Record Date shall not precede, and shall not be more than 10 days after the close of business on the date on which the
resolution fixing the Request Record Date is adopted by the Board of Directors. If the Board of Directors, within 10 days after the
date on which a valid Record Date Request Notice is received, fails to adopt a resolution fixing the Request Record Date and make a
public announcement (as defined in Section 2.14.5(c)) of such Request Record Date, the Request Record Date shall be the close of
business on the 10th day after the date a valid Record Date Request Notice is received by the secretary.
(ii)
In order for any stockholder to request a special meeting, one or more written requests for a special
meeting signed by stockholders of record (or their duly authorized agents) as of the Request Record Date entitled to cast not less than
the Special Meeting Percentage (the “Special Meeting Request”) shall be delivered to the secretary. No stockholder may make a
Special Meeting Request unless such stockholder (i) complies with the requirements set forth in Section 2.14.1(c)(ii)(A) and (ii) holds
certificates for all shares of stock of the Corporation owned by such stockholder during all times described in Section 2.14.1(c), and a
copy of each such certificate held by such stockholder at the time of giving such written request shall accompany such stockholder’s
written request to the secretary in order for such request to be effective. In addition, the Special Meeting Request shall set forth the
purpose of the meeting and the matters
2
proposed to be acted on at the meeting (which shall be limited to the matters set forth in the Record Date Request Notice received by
the secretary), shall bear the date of signature of each such stockholder (or its duly authorized agent) signing the Special Meeting
Request, shall set forth the name and address, as they appear in the Corporation’s books, of each stockholder signing such request (or
on whose behalf the Special Meeting Request is signed) and the class and number of shares of stock of the Corporation which are
owned of record and beneficially by each such stockholder, shall be sent to the secretary by registered mail, return receipt requested,
and shall be received by the secretary within 10 days after the Request Record Date. Any requesting stockholder may revoke his, her
or its request for a special meeting at any time by written revocation delivered to the secretary.
(iii)
The secretary shall inform the requesting stockholders of the reasonably estimated cost of preparing,
mailing and filing the notice of meeting (including the Corporation’s proxy materials). The secretary shall not be required to call a
special meeting upon stockholder request and such meeting shall not be held unless, in addition to the documents and information
required by Section 2.3(b)(ii), the secretary receives payment of such reasonably estimated cost prior to the mailing of any notice of
the meeting.
(iv)
Except as provided in the next sentence, any special meeting shall be held at such place, date and time as
may be designated by the officer who called the meeting in accordance with Section 2.3(a), if any, and otherwise by the Board of
Directors. In the case of any special meeting called by the secretary upon the request of stockholders (a “Stockholder Requested
Meeting”), such meeting shall be held at such place, date and time as may be designated by the Board of Directors; provided,
however, that the date of any Stockholder Requested Meeting shall be not more than 90 days after the record date for such meeting
(the “Meeting Record Date”); and provided further that if the Board of Directors fails to designate, within 10 days after the date that a
valid Special Meeting Request is actually received by the secretary (the “Delivery Date”), a date and time for a Stockholder Requested
Meeting, then such meeting shall be held at 2:00 p.m. local time on the 90th day after the Meeting Record Date or, if such 90th day is
not a Business Day (as defined below), on the first Business Day preceding such 90th day; and provided further that in the event that
the Board of Directors fails to designate a place for a Stockholder Requested Meeting within 10 days after the Delivery Date, then
such meeting shall be held at the principal executive office of the Corporation. In fixing a date for any special meeting, the president
or Board of Directors may consider such factors as he, she or it deems relevant within the exercise of their business judgment,
including, without limitation, the nature of the matters to be considered, the facts and circumstances surrounding any request for
meeting and any plan of the Board of Directors to call an annual meeting or a special meeting. In the case of any Stockholder
Requested Meeting, if the Board of Directors fails to fix a Meeting Record Date that is a date within 30 days after the Delivery Date,
then the close of
3
business on the 30th day after the Delivery Date shall be the Meeting Record Date.
(v)
If at any time as a result of written revocations of requests for the special meeting, stockholders of record
(or their duly authorized agents) as of the Request Record Date entitled to cast less than the Special Meeting Percentage shall have
delivered and not revoked requests for a special meeting, the secretary may refrain from mailing the notice of the meeting or, if the
notice of the meeting has been mailed, the secretary may revoke the notice of the meeting at any time before 10 days before the
meeting if the secretary has sent to all other requesting stockholders written notice of such revocation and of the intention to revoke
the notice of the meeting and the Corporation may cancel and not hold such meeting. Any request for a special meeting received after
a revocation by the secretary of a notice of a meeting shall be considered a request for a new special meeting.
(vi)
The Board of Directors shall determine the validity of any purported Record Date Request Notice or
Special Meeting Request received by the secretary. For the purpose of permitting the Board of Directors to perform such review, no
such purported request shall be deemed to have been delivered to the secretary until the earlier of (A) five Business Days after receipt
by the secretary of such purported request and (B) such date as the Board of Directors may certify whether valid requests received by
the secretary represent at least a majority of the issued and outstanding shares of stock (or such larger portion which the Corporation is
legally permitted to specify with respect to stockholders entitled by law to cause a special meeting of the stockholders to be called)
that would be entitled to vote at such meeting.
(vii)
For purposes of these Bylaws, “Business Day” shall mean any day other than a Saturday, a Sunday or a
day on which banking institutions in the Commonwealth of Massachusetts are authorized or obligated by law or executive order to
close.
Section 2.4.
Notice of Regular or Special Meetings . In accordance with applicable law and the charter of the Corporation, the
secretary shall give to each stockholder entitled to vote at such meeting and to each stockholder not entitled to vote who is entitled to notice of
the meeting written or printed notice stating the time and place of the meeting and, in the case of a special meeting or as otherwise may be
required by any statute, the purpose for which the meeting is called, either by mail, by presenting it to such stockholder personally, by leaving
it at the stockholder’s residence or usual place of business, by electronic transmission or by any other means permitted by Maryland law. If
mailed, such notice shall be deemed to be given once deposited in the U.S. mail addressed to the stockholder at the stockholder’s address as it
appears on the records of the Corporation, with postage thereon prepaid.
4
Section 2.5.
Notice of Adjourned Meetings . It shall not be necessary to give notice of the time and place of any adjourned
meeting or of the business to be transacted thereat other than by announcement at the meeting at which such adjournment is taken.
Section 2.6.
Scope of Meetings . Except as otherwise expressly set forth elsewhere in these Bylaws, no business shall be
transacted at an annual or special meeting of stockholders except as specifically designated in the notice or otherwise properly brought before
the meeting of stockholders by or at the direction of the Board of Directors.
Section 2.7.
Organization of Stockholder Meetings . Every meeting of stockholders shall be conducted by an individual
appointed by the Board of Directors to be chairperson of the meeting or, in the absence of such appointment or the absence of the appointed
individual, by the chairman of the board or, in the case of a vacancy in the office or absence of the chairman of the board, by one of the
following officers present at the meeting in the following order: the vice chairman of the board, if there be one, the president, the vice
presidents in their order of seniority, or, in the absence of such officers, a chairperson chosen by the stockholders by the vote of a majority of
the votes cast on such appointment by stockholders present in person or represented by proxy. The secretary, an assistant secretary or a person
appointed by the Board of Directors or, in the absence of such appointment, a person appointed by the chairperson of the meeting shall act as
secretary of the meeting and record the minutes of the meeting. If the secretary presides as chairperson at a meeting of the stockholders, then
the secretary shall not also act as secretary of the meeting and record the minutes of the meeting. The order of business and all other matters of
procedure at any meeting of stockholders shall be determined by the chairperson of the meeting. The chairperson of the meeting may prescribe
such rules, regulations and procedures and take such action as, in the discretion of such chairperson, are appropriate for the proper conduct of
the meeting, including, without limitation: (a) restricting admission to the time set for the commencement of the meeting; (b) limiting
attendance at the meeting to stockholders of record of the Corporation, their duly authorized proxies or other such persons as the chairperson of
the meeting may determine; (c) limiting participation at the meeting on any matter to stockholders of record of the Corporation entitled to vote
on such matter, their duly authorized proxies or other such persons as the chairperson of the meeting may determine; (d) limiting the time
allotted to questions or comments by participants; (e) maintaining order and security at the meeting; (f) removing any stockholder or other
person who refuses to comply with meeting procedures, rules or guidelines as set forth by the chairperson of the meeting; (g) concluding a
meeting or recessing or adjourning the meeting to a later date and time and at a place announced at the meeting; and (h) complying with any
state and local laws and regulations concerning safety and security. Without limiting the generality of the powers of the chairperson of the
meeting pursuant to the foregoing provisions, the chairperson may adjourn any meeting of stockholders for any reason deemed necessary by
the chairperson, including, without limitation, if (i) no quorum is present for the transaction of the business, (ii) the Board of Directors or the
chairperson of the meeting determines that adjournment is necessary or appropriate to enable the stockholders to consider fully information that
the Board of Directors or the chairperson of the meeting determines has not been made sufficiently or timely available to stockholders or
(iii) the Board of Directors or the chairperson of the meeting determines that adjournment is otherwise in the best interests of the Corporation.
Unless otherwise determined by the chairperson of the meeting, meetings of stockholders shall not be required to be held in
5
accordance with the general rules of parliamentary procedure or any otherwise established rules of order.
Section 2.8.
Quorum . At any annual or special meeting of stockholders called by the Board of Directors or any authorized
officer of the Corporation, the presence in person or by proxy of stockholders entitled to cast one-third of all the votes entitled to be cast at such
meeting shall constitute a quorum. Notwithstanding the immediately preceding sentence, at any special meeting of stockholders called upon
the written request of stockholders pursuant to Section 2.3(b), the presence in person or by proxy of stockholders entitled to cast a majority of
all the votes entitled to be cast at such meeting shall constitute a quorum. This section shall not affect any requirement under any statute or the
charter of the Corporation for the vote necessary for the adoption of any measure. If, however, a quorum shall not be present at any meeting of
the stockholders, the chairperson of the meeting shall have the power to adjourn the meeting from time to time without the Corporation having
to set a new record date or provide any additional notice of such meeting, subject to any obligation of the Corporation to give notice pursuant to
Section 2.5. At such adjourned meeting at which a quorum shall be present, any business may be transacted which might have been transacted
at the meeting as originally notified. The stockholders present, either in person or by proxy, at a meeting of stockholders which has been duly
called and convened and at which a quorum was established may continue to transact business until adjournment, notwithstanding the
withdrawal of enough votes to leave less than a quorum then being present at the meeting.
Section 2.9.
Voting .
(a)
A majority of all the votes entitled to be cast for the election of a Director shall be required to elect a Director in a contested
election (which, for purposes of these Bylaws, is an election at which the number of nominees exceeds the number of Directors to be elected at
the meeting). A plurality of all the votes cast at a meeting of stockholders duly called and at which a quorum is present shall be sufficient to
elect a Director in an uncontested election. Each share of stock of the Corporation may be voted for as many individuals as there are Directors
to be elected and for whose election the share is entitled to be voted; provided, however, that there shall be no cumulative voting in the election
of Directors.
(b)
For all matters to be voted upon by stockholders other than the election of Directors, unless otherwise required by applicable
law, by the listing requirements of the principal exchange on which shares of the Corporation’s common stock are listed or by a specific
provision of the charter of the Corporation, the vote required for approval shall be the affirmative vote of 75% of the votes entitled to be cast
for each such matter unless such matter has been previously approved by the Board of Directors, in which case the vote required for approval
shall be a majority of the votes cast at a meeting of stockholders duly called and at which a quorum is present.
Section 2.10.
Proxies . A stockholder may cast the votes entitled to be cast by him or her either in person or by proxy executed
by the stockholder or by his or her duly authorized agent in any manner permitted by law. Such proxy shall be filed with such officer of the
Corporation or third party agent as the Board of Directors shall have designated for such purpose for verification
6
at or prior to such meeting. Any proxy relating to shares of stock of the Corporation shall be valid until the expiration date therein or, if no
expiration is so indicated, for such period as is permitted pursuant to Maryland law. At a meeting of stockholders, all questions concerning the
qualification of voters, the validity of proxies, and the acceptance or rejection of votes, shall be decided by or on behalf of the chairperson of
the meeting, subject to Section 2.13.
Section 2.11.
Record Date . The Board of Directors may fix the date for determination of stockholders entitled to notice of and to
vote at a meeting of stockholders. If no date is fixed for the determination of the stockholders entitled to vote at any meeting of stockholders,
only persons in whose names shares of stock entitled to vote are recorded on the stock records of the Corporation at the opening of business on
the day of any meeting of stockholders shall be entitled to vote at such meeting.
Section 2.12.
Voting of Stock by Certain Holders . Stock of the Corporation registered in the name of a corporation, partnership,
trust or other entity, if entitled to be voted, may be voted by the president or a vice president, a general partner or trustee thereof, as the case
may be, or a proxy appointed by any of the foregoing individuals, unless some other person who has been appointed to vote such stock
pursuant to a bylaw or a resolution of the governing body of such corporation or other entity or pursuant to an agreement of the partners of the
partnership presents a certified copy of such bylaw, resolution or agreement, in which case such person may vote such stock. Any director or
other fiduciary may vote stock registered in his or her name as such fiduciary, either in person or by proxy.
Section 2.13.
Inspectors .
(a)
Before or at any meeting of stockholders, the chairperson of the meeting may appoint one or more persons as inspectors for
such meeting. Such inspectors shall (i) ascertain and report the number of shares of stock represented at the meeting, in person or by proxy,
and the validity and effect of proxies, (ii) receive and tabulate all votes, ballots or consents, (iii) report such tabulation to the chairperson of the
meeting and (iv) perform such other acts as are proper to conduct the election or voting at the meeting.
(b)
Each report of an inspector shall be in writing and signed by him or her or by a majority of them if there is more than one
inspector acting at such meeting. If there is more than one inspector, the report of a majority shall be the report of the inspectors. The report of
the inspector or inspectors on the number of shares of stock represented at the meeting and the results of the voting shall be prima facie
evidence thereof.
Section 2.14.
Nominations and Other Proposals to be Considered at Meetings of Stockholders . Nominations of individuals for
election to the Board of Directors and the proposal of other business to be considered by the stockholders at meetings of stockholders may be
properly brought before the meeting only as set forth in this Section 2.14. All judgments and determinations made by the Board of Directors or
the chairperson of the meeting, as applicable, under this Section 2.14 (including, without limitation, judgments and determinations as to the
propriety of a proposed nomination or a proposal of other business for consideration by
7
stockholders) shall be final and binding unless determined by a court of competent jurisdiction to have been made in bad faith.
Section 2.14.1
Annual Meetings of Stockholders .
(a)
A stockholder of the Corporation may recommend to the Nominating and Governance Committee of the Board of Directors
an individual as a nominee for election to the Board of Directors. Such recommendation shall be made by written notice to the Chair of such
committee and the Secretary of the Corporation, which notice should contain or be accompanied by the information and documents with
respect to such recommended nominee and stockholder that such stockholder believes to be relevant or helpful to the Nominating and
Governance Committee’s deliberations. In considering such recommendation, the Nominating and Governance Committee may request
additional information concerning the recommended nominee or the stockholder making the recommendation. The Nominating and
Governance Committee of the Board of Directors will consider any such recommendation in its discretion. A stockholder seeking to make a
nomination of an individual for election to the Board of Directors must make such nomination in accordance with Section 2.14.1(b)(ii).
(b)
Nominations of individuals for election to the Board of Directors at an annual meeting of stockholders may be properly
brought before the meeting (i) pursuant to the Corporation’s notice of meeting by or at the direction of the Board of Directors or (ii) by any one
or more stockholders of the Corporation who (A) (1) at the date of the giving of the notice provided for in this Section 2.14.1, individually or in
the aggregate, hold at least 3% of the Corporation’s shares of common stock entitled to vote at the meeting on such election and have held such
shares continuously for at least three years, and (2) continuously hold such shares through and including the time of the annual meeting
(including any adjournment or postponement thereof), (B) are each a stockholder of record of the Corporation at the time of giving the notice
provided for in this Section 2.14.1 through and including the time of the annual meeting (including any adjournment or postponement thereof),
(C) are each entitled to make nominations and to vote at the meeting on such election and (D) comply with the notice procedures set forth in
this Section 2.14.1 as to such nomination. Section 2.14.1(b)(ii) shall be the exclusive means for any stockholder to make nominations of
individuals for election to the Board of Directors.
(c)
The proposal of business to be considered by the stockholders at an annual meeting of stockholders, other than the
nomination of individuals for election to the Board of Directors, may be properly brought before the meeting (i) pursuant to the Corporation’s
notice of meeting by or at the direction of the Board of Directors or (ii) by any stockholder of the Corporation who (A) has continuously held at
least $2,000 in market value, or 1%, of the Corporation’s shares of common stock entitled to vote at the meeting on the proposal for business
for at least one year from the date such stockholder gives the notice provided for in this Section 2.14.1, and continuously holds such shares
through and including the time of the annual meeting (including any adjournment or postponement thereof), (B) is a stockholder of record at
the time of giving the notice
8
provided for in this Section 2.14.1 through and including the time of the annual meeting (including any adjournment or postponement thereof),
(C) is entitled to propose such business and to vote at the meeting on the proposal for such business and (D) complies with the notice
procedures set forth in this Section 2.14.1 as to such business. Section 2.14.1(c)(ii) shall be the exclusive means for a stockholder to propose
business before an annual meeting of stockholders, except (x) to the extent of matters which are required to be presented to stockholders by
applicable law which have been properly presented in accordance with the requirements of such law and (y) nominations of individuals for
election to the Board of Directors shall be made in accordance with Section 2.14.1(b). For purposes of determining compliance with the
requirement in subclause (A) of Section 2.14.1(c)(ii), the market value of the Corporation’s shares of common stock held by the applicable
stockholder shall be determined by multiplying the number of shares such stockholder continuously held for that one-year period by the highest
selling price of the Corporation’s shares of common stock as reported on the principal exchange on which shares of the Corporation’s common
stock are listed during the 60 calendar days before the date such notice was submitted.
(d)
For nominations for election to the Board of Directors or other business to be properly brought before an annual meeting by
one or more stockholders pursuant to Section 2.14.1, such stockholder(s) shall have given timely notice thereof in writing to the secretary of the
Corporation in accordance with this Section 2.14 and such other business shall otherwise be a proper matter for action by stockholders. To be
timely, the notice of such stockholder(s) shall set forth all information required under this Section 2.14 and shall be delivered to the secretary at
the principal executive offices of the Corporation not later than 5:00 p.m. (Eastern Time) on the 120th day nor earlier than the 150th day prior
to the first anniversary of the date of the proxy statement for the preceding year’s annual meeting; provided, however, that in the event that the
annual meeting is called for a date that is more than 30 days earlier or later than the first anniversary of the date of the preceding year’s annual
meeting, notice by such stockholder(s) to be timely shall be so delivered not later than 5:00 p.m. (Eastern Time) on the 10th day following the
earlier of the day on which (i) notice of the date of the annual meeting is mailed or otherwise made available or (ii) public announcement of the
date of the annual meeting is first made by the Corporation. Neither the postponement or adjournment of an annual meeting, nor the public
announcement of such postponement or adjournment, shall commence a new time period for the giving of a notice of one or more stockholders
as described above. No stockholder may give a notice to the secretary described in this Section 2.14.1(d) unless such stockholder holds a
certificate for all shares of stock of the Corporation owned by such stockholder during all times described in Section 2.14.1(b), in the case of a
nomination of one or more individuals for election to the Board of Directors, or Section 2.14.1(c), in the case of the proposal of other business,
and a copy of each such certificate held by such stockholder at the time of giving such notice shall accompany such stockholder’s notice to the
secretary in order for such notice to be effective.
A notice of one or more stockholders pursuant to this Section 2.14.1 shall set forth:
9
(A)
separately as to each individual whom such stockholder(s) propose to nominate for election or reelection as a
Director (a “Proposed Nominee”) and any Proposed Nominee Associated Person (as defined in Section 2.14.1(g)),
(1) the name, age, business address and residence address of such Proposed Nominee and the name and address of
such Proposed Nominee Associated Person, (2) a statement of whether such Proposed Nominee is proposed for
nomination as an Independent Director (as defined in Section 3.2) or a Managing Director (as defined in
Section 3.2) and a description of such Proposed Nominee’s qualifications to be an Independent Director or
Managing Director, as the case may be, and such Proposed Nominee’s qualifications to be a Director pursuant to the
criteria set forth in Section 3.1, (3) the class, series and number of any shares of stock of the Corporation that are,
directly or indirectly, beneficially owned or owned of record by such Proposed Nominee or by such Proposed
Nominee Associated Person, (4) the date such shares were acquired and the investment intent of such acquisition,
(5) a description of all purchases and sales of securities of the Corporation by such Proposed Nominee or by such
Proposed Nominee Associated Person during the previous 36 month period, including the date of the transactions,
the class, series and number of securities involved in the transactions and the consideration involved, (6) a
description of all Derivative Transactions (as defined in Section 2.14.1(g)) by such Proposed Nominee or by such
Proposed Nominee Associated Person during the previous 36 month period, including the date of the transactions
and the class, series and number of securities involved in, and the material economic terms of, the transactions, such
description to include, without limitation, all information that such Proposed Nominee or Proposed Nominee
Associated Person would be required to report on an Insider Report (as defined in Section 2.14.1(g)) if such
Proposed Nominee or Proposed Nominee Associated Person were a Director of the Corporation or the beneficial
owner of more than 10% of the shares of stock of the Corporation at the time of the transactions, (7) any
performance related fees (other than an asset based fee) to which such Proposed Nominee or such Proposed
Nominee Associated Person is entitled based on any increase or decrease in the value of any shares of stock of the
Corporation or instrument or arrangement of the type contemplated within the definition of Derivative
10
Transaction, if any, including, without limitation, any such interests held by members of such Proposed Nominee’s
or such Proposed Nominee Associated Person’s immediate family sharing the same household with such Proposed
Nominee or such Proposed Nominee Associated Person, (8) any proportionate interest in shares of stock of the
Corporation or instrument or arrangement of the type contemplated within the definition of Derivative Transaction
held, directly or indirectly, by a general or limited partnership in which such Proposed Nominee or such Proposed
Nominee Associated Person is a general partner or, directly or indirectly, beneficially owns an interest in a general
partner, (9) a description of all direct and indirect compensation and other material monetary agreements,
arrangements and understandings during the past three years, and any other material relationships, between or
among any stockholder making the nomination, any Proposed Nominee Associated Person, or any of their
respective affiliates and associates, or others acting in concert therewith, on the one hand, and each Proposed
Nominee, or his or her respective affiliates and associates, or others acting in concert therewith, on the other hand,
including, without limitation, all information that would be required to be disclosed pursuant to Item 404 of
Regulation S-K promulgated by the U.S. Securities and Exchange Commission (the “S.E.C.”) (and any successor
regulation), if any stockholder making the nomination and any Proposed Nominee Associated Person on whose
behalf the nomination is made, or any affiliate or associate thereof or person acting in concert therewith, were the
“registrant” for purposes of such rule and the Proposed Nominee were a director or executive officer of such
registrant, (10) any rights to dividends on the shares of stock of the Corporation owned beneficially by such
Proposed Nominee or such Proposed Nominee Associated Person that are separated or separable from the
underlying shares of stock of the Corporation, (11) to the extent known by such Proposed Nominee or such
Proposed Nominee Associated Person, the name and address of any other person who owns, of record or
beneficially, any shares of stock of the Corporation and who supports the Proposed Nominee for election or
reelection as a Director, and (12) all other information relating to such Proposed Nominee or such Proposed
Nominee Associated Person that is required to be disclosed in solicitations of proxies for election of Directors in an
election contest (even if an election contest is not
11
involved), or is otherwise required, in each case, pursuant to Section 14 (or any successor provision) of the
Exchange Act and the rules and regulations promulgated thereunder;
(B)
as to any other business that the stockholder proposes to bring before the meeting, (1) a description of such
business, (2) the reasons for proposing such business at the meeting and any material interest in such business of
such stockholder or any Stockholder Associated Person (as defined in Section 2.14.1(g)), including any anticipated
benefit to such stockholder or any Stockholder Associated Person therefrom, (3) a description of all agreements,
arrangements and understandings between such stockholder and Stockholder Associated Person amongst themselves
or with any other person or persons (including their names) in connection with the proposal of such business by such
stockholder and (4) a representation that such stockholder intends to appear in person or by proxy at the meeting to
bring the business before the meeting;
(C)
separately as to each stockholder giving the notice and any Stockholder Associated Person, (1) the class, series and
number of all shares of stock of the Corporation that are owned of record by such stockholder or by such
Stockholder Associated Person, if any, (2) the class, series and number of, and the nominee holder for, any shares of
stock of the Corporation that are owned, directly or indirectly, beneficially but not of record by such stockholder or
by such Stockholder Associated Person, if any, (3) with respect to the shares referenced in the foregoing clauses
(1) and (2), the date such shares were acquired and the investment intent of such acquisition, and (4) all information
relating to such stockholder and Stockholder Associated Person that is required to be disclosed in connection with
the solicitation of proxies for election of Directors in an election contest (even if an election contest is not involved),
or is otherwise required, in each case, pursuant to Section 14 (or any successor provision) of the Exchange Act and
the rules and regulations promulgated thereunder;
(D)
separately as to each stockholder giving the notice and any Stockholder Associated Person, (1) the name and
address of such stockholder, as they appear on the Corporation’s
12
stock ledger and the current name and address, if different, of such stockholder and Stockholder Associated Person
and (2) the investment strategy or objective, if any, of such stockholder or Stockholder Associated Person and a
copy of the prospectus, offering memorandum or similar document, if any, provided to investors or potential
investors in such stockholder or Stockholder Associated Person;
(E)
separately as to the stockholder giving the notice and any Stockholder Associated Person, (1) a description of all
purchases and sales of securities of the Corporation by such stockholder or Stockholder Associated Person during
the previous 36 month period, including the date of the transactions, the class, series and number of securities
involved in the transactions and the consideration involved, (2) a description of all Derivative Transactions by such
stockholder or Stockholder Associated Person during the previous 36 month period, including the date of the
transactions and the class, series and number of securities involved in, and the material economic terms of, the
transactions, such description to include, without limitation, all information that such stockholder or Stockholder
Associated Person would be required to report on an Insider Report if such stockholder or Stockholder Associated
Person were a Director of the Corporation or the beneficial owner of more than 10% of the shares of stock of the
Corporation at the time of the transactions, (3) any performance related fees (other than an asset based fee) to which
such stockholder or Stockholder Associated Person is entitled based on any increase or decrease in the value of
shares of stock of the Corporation or instrument or arrangement of the type contemplated within the definition of
Derivative Transaction, if any, as of the date of such notice, including, without limitation, any such interests held by
members of such stockholder’s or Stockholder Associated Person’s immediate family sharing the same household
with such stockholder or Stockholder Associated Person, (4) any proportionate interest in shares of stock of the
Corporation or instrument or arrangement of the type contemplated within the definition of Derivative Transaction
held, directly or indirectly, by a general or limited partnership in which such stockholder or Stockholder Associated
Person is a general partner or, directly or indirectly, beneficially owns an interest in a general partner and (5) any
rights to dividends on the shares
13
of stock of the Corporation owned beneficially by such stockholder or Stockholder Associated Person that are
separated or separable from the underlying shares of stock of the Corporation;
(e)
(F)
to the extent known by the stockholder giving the notice, the name and address of any other person who owns,
beneficially or of record, any shares of stock of the Corporation and who supports the nominee for election or
reelection as a Director or the proposal of other business; and
(G)
if more than one class or series of shares of capital stock of the Corporation is outstanding, the class and series of
shares of capital stock of the Corporation entitled to vote for such Proposed Nominee and/or stockholder’s proposal,
as applicable.
A notice of one or more stockholders making a nomination pursuant to Section 2.14.1(b)(ii) shall be accompanied by:
(A)
a signed and notarized statement of each stockholder giving the notice certifying that (1) all information
contained in the notice is true and complete in all respects, (2) the notice complies with this Section 2.14.1, and (3) such stockholder will
continue to hold all shares referenced in Section 2.14.1(b)(ii)(A) through and including the time of the annual meeting (including any
adjournment or postponement thereof); and
(B)
a signed and notarized certificate of each Proposed Nominee (1) certifying that the information contained
in the notice regarding such Proposed Nominee and any Proposed Nominee Associated Person is true and complete and complies with this
Section 2.14.1 and (2) consenting to being named in the stockholder’s proxy statement as a nominee and to serving as a Director if elected.
(f)
Notwithstanding anything in the second sentence of Section 2.14.1(d) to the contrary, in the event that the number of
Directors to be elected to the Board of Directors is increased and there is no public announcement of such action at least 130 days prior to the
first anniversary of the date of the proxy statement for the preceding year’s annual meeting, a stockholder’s notice required by this Section
2.14.1 also shall be considered timely, but only with respect to nominees for any new positions created by such increase, if the notice is
delivered to the secretary at the principal executive offices of the Corporation not later than 5:00 p.m. (Eastern Time) on the 10th day
immediately following the day on which such public announcement is first made by the Corporation.
14
(g)
For purposes of this Section 2.14, (i) “Stockholder Associated Person” of any stockholder shall mean (A) any person acting
in concert with, such stockholder, (B) any direct or indirect beneficial owner of shares of capital stock of the Corporation owned of record or
beneficially by such stockholder and (C) any person controlling, controlled by or under common control with such stockholder or a
Stockholder Associated Person; (ii) “Proposed Nominee Associated Person” of any Proposed Nominee shall mean (A) any person acting in
concert with such Proposed Nominee, (B) any direct or indirect beneficial owner of shares of capital stock of the Corporation owned of record
or beneficially by such Proposed Nominee and (C) any person controlling, controlled by or under common control with such Proposed
Nominee or a Proposed Nominee Associated Person; (iii) “Derivative Transaction” by a person shall mean any (A) transaction in, or
arrangement, agreement or understanding with respect to, any option, warrant, convertible security, stock appreciation right or similar right
with an exercise, conversion or exchange privilege, or settlement payment or mechanism related to, any security of the Corporation, or similar
instrument with a value derived in whole or in part from the value of a security of the Corporation, in any such case whether or not it is subject
to settlement in a security of the Corporation or otherwise or (B) any transaction, arrangement, agreement or understanding which included or
includes an opportunity for such person, directly or indirectly, to profit or share in any profit derived from any increase or decrease in the value
of any security of the Corporation, to mitigate any loss or manage any risk associated with any increase or decrease in the value of any security
of the Corporation or to increase or decrease the number of securities of the Corporation which such person was, is or will be entitled to vote,
in any such case whether or not it is subject to settlement in a security of the Corporation or otherwise; and (iv) “Insider Report” shall mean a
statement required to be filed pursuant to Section 16 of the Exchange Act (or any successor provisions) by a person who is a Director of the
Corporation or who is directly or indirectly the beneficial owner of more than 10% of the shares of stock of the Corporation.
Section 2.14.2
Stockholder Nominations or Other Proposals Causing Covenant Breaches or Defaults . At the
same time as the submission of any stockholder nomination or proposal of other business to be considered at a stockholders meeting that, if
approved and implemented by the Corporation, would cause the Corporation or any subsidiary (as defined in Section 2.14.5(c)) of the
Corporation to be in breach of any covenant of the Corporation or any subsidiary of the Corporation or otherwise cause a default (in any case,
with or without notice or lapse of time) in any existing debt instrument or agreement of the Corporation or any subsidiary of the Corporation or
other material contract or agreement of the Corporation or any subsidiary of the Corporation, the proponent stockholder or stockholders shall
submit to the secretary at the principal executive offices of the Corporation (a) evidence satisfactory to the Board of Directors of the lender’s or
contracting party’s willingness to waive the breach of covenant or default or (b) a detailed plan for repayment of the indebtedness to the lender
or curing the contractual breach or default and satisfying any resulting damage claim, specifically identifying the actions to be taken or the
source of funds, which plan must be satisfactory to the Board of Directors in its discretion, and evidence of the availability to the Corporation
of substitute credit or contractual arrangements similar to the credit or contractual arrangements which are implicated by the stockholder
nomination or other proposal that are at least as favorable to the Corporation, as determined by the Board of Directors in its discretion.
15
As an example and not as a limitation, at the time these Bylaws are being amended and restated, the Corporation is party to a bank credit
facility that contains covenants which prohibit certain changes in the management and policies of the Corporation without the approval of the
lenders; accordingly, a stockholder nomination or proposal which implicates these covenants shall be accompanied by a waiver of these
covenants duly executed by the banks or by evidence satisfactory to the Board of Directors of the availability of funding to the Corporation to
repay outstanding indebtedness under this credit facility and of the availability of a new credit facility on terms as favorable to the Corporation
as the existing credit facility. As a further example and not as a limitation, at the time these Bylaws are being amended and restated, the
Corporation is party to lease and related agreements with Senior Housing Properties Trust or its subsidiaries (“Senior Housing”). Those
agreements contain covenants which prohibit certain changes in the management and policies of the Corporation without the approval of Senior
Housing. Accordingly, a stockholder nomination or proposal which implicates these covenants shall be accompanied by a waiver of these
covenants duly executed by the applicable Senior Housing entity or by evidence satisfactory to the Board of Directors of the availability of
alternative facilities for lease and operation by the Corporation on terms as favorable to the Corporation as the applicable arrangement and of
funds for the payment by the Corporation of any amounts required under the applicable agreement or otherwise as a result of any breach or
termination of the agreement with Senior Housing.
Section 2.14.3
Stockholder Nominations or Other Proposals Requiring Governmental Action . If (a) submission
of any stockholder nomination or proposal of other business to be considered at a stockholders meeting that could not be considered or, if
approved, implemented by the Corporation without the Corporation, any subsidiary of the Corporation, the proponent stockholder, any
Proposed Nominee of such stockholder, any Proposed Nominee Associated Person of such Proposed Nominee, any Stockholder Associated
Person of such stockholder, the holder of proxies or their respective affiliates or associates filing with or otherwise notifying or obtaining the
consent, approval or other action of any federal, state, municipal or other governmental or regulatory body (a “Governmental Action”) or
(b) such stockholder’s ownership of shares of stock of the Corporation or any solicitation of proxies or votes or holding or exercising proxies
by such stockholder, any Proposed Nominee of such stockholder, any Proposed Nominee Associated Person of such Proposed Nominee, any
Stockholder Associated Person of such stockholder, or their respective affiliates or associates would require Governmental Action, then, at the
same time as the submission of any stockholder nomination or proposal of other business to be considered at a stockholders meeting, the
proponent stockholder or stockholders shall submit to the secretary at the principal executive offices of the Corporation (x) evidence
satisfactory to the Board of Directors that any and all Governmental Action has been given or obtained, including, without limitation, such
evidence as the Board of Directors may require so that any nominee may be determined to satisfy any suitability or other requirements or (y) if
such evidence was not obtainable from a governmental or regulatory body by such time despite the stockholder’s diligent and best efforts, a
detailed plan for making or obtaining the Governmental Action prior to the election of any such Proposed Nominee or the implementation of
such proposal, which plan must be satisfactory to the Board of Directors in its discretion. As an example and not as a limitation, at the time
these Bylaws are being amended and restated, the Corporation holds a controlling ownership position in a company formed and licensed as an
insurance company in the State of Indiana. The laws of the
16
State of Indiana have certain regulatory requirements for any person who seeks to control (as defined under Indiana law) a company which
itself controls an insurance company domiciled in the State of Indiana, including by exercising proxies representing 10% or more of its voting
securities. Accordingly, a stockholder who seeks to exercise proxies for a nomination or a proposal affecting the governance of the
Corporation shall obtain any applicable approvals from the Indiana insurance regulatory authorities prior to exercising such proxies. Similarly,
as a further example and not as a limitation, at the time these Bylaws are being amended and restated, the Corporation operates healthcare
facilities in various states; such facilities are governed by and subject to the regulatory and licensing requirements of the state in which such
facility is located. The licensing terms or regulatory regime of certain states with jurisdiction over the Corporation may require that certain
consents or approvals be obtained prior to the Corporation considering or implementing certain actions, including potentially requiring that a
Proposed Nominee obtain regulatory approval or consent prior to being nominated for or elected as a Director. Accordingly, a stockholder
nomination or stockholder proposal that, if approved, would require the Corporation to obtain the consent or approval of a state authority due to
the fact that the Corporation operates licensed healthcare facilities in such state, shall be accompanied by evidence that the stockholder or
Proposed Nominee has either secured the required approvals or consents from all applicable state regulatory authorities or if such required
approvals have not been obtained, then the stockholder nomination or other proposal shall be accompanied by a copy of any applications or
forms required to be completed by the Proposed Nominee or stockholder as submitted or to be submitted to the applicable state authorities so
that the Board of Directors may determine the likelihood that the stockholder or the Proposed Nominee, as applicable, will receive any such
required approval.
Section 2.14.4
Special Meetings of Stockholders . As set forth in Section 2.6, only business brought before the
meeting pursuant to the Corporation’s notice of meeting shall be conducted at a special meeting of stockholders. Nominations of individuals for
election to the Board of Directors only may be made at a special meeting of stockholders at which Directors are to be elected: (a) pursuant to
the Corporation’s notice of meeting; (b) otherwise properly brought before the meeting by or at the direction of the Board of Directors; or
(c) provided that the Board of Directors has determined that Directors shall be elected at such special meeting, by any stockholder of the
Corporation who is a stockholder of record both at the time of giving of notice provided for in this Section 2.14.4 through and including the
time of the special meeting, who is entitled to vote at the meeting on such election and who has complied with the notice procedures and other
requirements set forth in this Section 2.14.4. In the event the Corporation calls a special meeting of stockholders for the purpose of electing
one or more Directors to the Board of Directors, any such stockholder may nominate an individual or individuals (as the case may be) for
election as a Director as specified in the Corporation’s notice of meeting, if the stockholder satisfies the holding period and certificate
requirements set forth in Section 2.14.1(b) and Section 2.14.1(d), the stockholder’s notice contains or is accompanied by the information and
documents required by Section 2.14 and the stockholder has given timely notice thereof in writing to the secretary of the Corporation at the
principal executive offices of the Corporation. To be timely, a stockholder’s notice shall be delivered to the secretary of the Corporation at the
principal executive offices of the Corporation not earlier than the 150th day prior to such special meeting and not later than 5:00 p.m. (Eastern
Time) on the later of (i) the 120th day prior to such special meeting or (ii) the 10th day following the day on which public
17
announcement is first made of the date of the special meeting and of the nominees proposed by the Board of Directors to be elected at such
meeting. Neither the postponement or adjournment of a special meeting, nor the public announcement of such postponement or adjournment,
shall commence a new time period for the giving of a stockholder’s notice as described above.
Section 2.14.5
General .
(a)
If information submitted pursuant to this Section 2.14 by any stockholder proposing a nominee for election as a Director or
any proposal for other business at a meeting of stockholders shall be deemed by the Board of Directors incomplete or inaccurate, any
authorized officer or the Board of Directors or any committee thereof may treat such information as not having been provided in accordance
with this Section 2.14. Any notice submitted by a stockholder pursuant to this Section 2.14 that is deemed by the Board of Directors
inaccurate, incomplete or otherwise fails to satisfy completely any provision of this Section 2.14 shall be deemed defective and shall thereby
render all proposals and nominations set forth in such notice defective. Upon written request by the secretary of the Corporation or the Board
of Directors or any committee thereof (which may be made from time to time), any stockholder proposing a nominee for election as a Director
or any proposal for other business at a meeting of stockholders shall provide, within three Business Days after such request (or such other
period as may be specified in such request), (i) written verification, satisfactory to the secretary or any other authorized officer or the Board of
Directors or any committee thereof, in his, her or its discretion, to demonstrate the accuracy of any information submitted by the stockholder
pursuant to this Section 2.14, (ii) written responses to information reasonably requested by the secretary, the Board of Directors or any
committee thereof and (iii) a written update, to a current date, of any information submitted by the stockholder pursuant to this Section 2.14 as
of an earlier date. If a stockholder fails to provide such written verification, information or update within such period, the secretary or any
other authorized officer or the Board of Directors may treat the information which was previously provided and to which the verification,
request or update relates as not having been provided in accordance with this Section 2.14; provided, however, that no such written verification,
response or update shall cure any incompleteness, inaccuracy or failure in any notice provided by a stockholder pursuant to this Section 2.14.
It is the responsibility of a stockholder who wishes to make a nomination or other proposal to comply with the requirements of Section 2.14;
nothing in this Section 2.14.5(a) or otherwise shall create any duty of the Corporation, the Board of Directors or any committee thereof nor any
officer of the Corporation to inform a stockholder that the information submitted pursuant to this Section 2.14 by or on behalf of such
stockholder is incomplete or inaccurate or not otherwise in accordance with this Section 2.14 nor require the Corporation, the Board of
Directors, any committee of the Board of Directors or any officer of the Corporation to request clarification or updating of information
provided by any stockholder, but the Board of Directors, a committee thereof or the secretary acting on behalf of the Board of Directors or a
committee, may do so in its, his or her discretion.
Only such individuals who are nominated in accordance with this Section 2.14 shall be eligible for election by stockholders
(b)
as Directors and only such business
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shall be conducted at a meeting of stockholders as shall have been properly brought before the meeting in accordance with this Section 2.14.
The chairperson of the meeting and the Board of Directors shall each have the power to determine whether a nomination or any other business
proposed to be brought before the meeting was made or proposed, as the case may be, in accordance with this Section 2.14 and, if any proposed
nomination or other business is determined not to be in compliance with this Section 2.14, to declare that such defective nomination or
proposal be disregarded.
For purposes of this Section 2.14: (i) “public announcement” shall mean disclosure in (A) a press release reported by the
(c)
Dow Jones News Service, Associated Press, Business Wire, PR Newswire or any other widely circulated news or wire service or (B) a
document publicly filed by the Corporation with the S.E.C. pursuant to the Exchange Act; and (ii) “subsidiary” shall include, with respect to a
person, any corporation, partnership, joint venture or other entity of which such person (A) owns, directly or indirectly, 10% or more of the
outstanding voting securities or other interests or (B) has a person designated by such person serving on, or a right, contractual or otherwise, to
designate a person, so to serve on, the board of directors (or analogous governing body).
(d)
Notwithstanding the foregoing provisions of this Section 2.14, a stockholder shall also comply with all applicable legal
requirements, including, without limitation, applicable requirements of state law and the Exchange Act and the rules and regulations
thereunder, with respect to the matters set forth in this Section 2.14. Nothing in this Section 2.14 shall be deemed to require that a stockholder
nomination of an individual for election to the Board of Directors or a stockholder proposal relating to other business be included in the
Corporation’s proxy statement, except as may be required by law.
(e)
The Board of Directors may from time to time require any individual nominated to serve as a Director to agree in writing
with regard to matters of business ethics and confidentiality while such nominee serves as a Director, such agreement to be on the terms and in
a form (the “Agreement”) determined satisfactory by the Board of Directors, as amended and supplemented from time to time in the discretion
of the Board of Directors. The terms of the Agreement may be substantially similar to the Code of Business Conduct and Ethics of the
Corporation or any similar code promulgated by the Corporation (the “Code of Business Conduct”) or may differ from or supplement the Code
of Business Conduct.
(f)
Determinations required or permitted to be made under this Section 2.14 by the Board of Directors may be delegated by the
Board of Directors to a committee of the Board of Directors, subject to applicable law.
Voting by Ballot . Voting on any question or in any election may be voice vote unless the chairperson of the
Section 2.15.
meeting or any stockholder shall demand that voting be by ballot.
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Section 2.16.
Proposals of Business Which Are Not Proper Matters For Action By Stockholders . Notwithstanding anything in
these Bylaws to the contrary, subject to applicable law, any stockholder proposal for business the subject matter or effect of which would be
within the exclusive purview of the Board of Directors, shall be deemed not to be a matter upon which the stockholders are entitled to vote.
The Board of Directors in its discretion shall be entitled to determine whether a stockholder proposal for business is not a matter upon which
the stockholders are entitled to vote pursuant to this Section 2.16, and its decision shall be final and binding unless determined by a court of
competent jurisdiction to have been made in bad faith.
ARTICLE III
DIRECTORS
Section 3.1.
General Powers; Qualifications; Directors Holding Over . The business and affairs of the Corporation shall be
managed under the direction of its Board of Directors. A Director shall be an individual at least 21 years of age who is not under legal
disability. To qualify for nomination or election as a Director, an individual, at the time of nomination and election, shall, without limitation,
(a) have substantial expertise or experience relevant to the business of the Corporation and its subsidiaries, (b) not have been convicted of a
felony, (c) meet the qualifications of an Independent Director or a Managing Director, each as defined in Section 3.2, as the case may be,
depending upon the position for which such individual may be nominated and elected and (d) have been nominated for election to the Board of
Directors in accordance with Section 2.14.1(b). In case of failure to elect Directors at an annual meeting of the stockholders, the incumbent
Directors shall hold over and continue to direct the management of the business and affairs of the Corporation until they may resign or until
their successors are elected and qualify.
Section 3.2.
Independent Directors and Managing Directors . A majority of the Directors holding office shall at all times be
Independent Directors; provided, however, that upon a failure to comply with this requirement as a result of the creation of a temporary
vacancy which shall be filled by an Independent Director, whether as a result of enlargement of the Board of Directors or the resignation,
removal or death of a Director who is an Independent Director, such requirement shall not be applicable. An “Independent Director” is one
who is not an employee of the Corporation or Reit Management & Research LLC (or its permitted successors or assigns under the Shared
Services Agreement between the Corporation and Reit Management & Research LLC), who is not involved in the Corporation’s day to day
activities and who meets the qualifications of an independent director (not including the specific independence requirements applicable only to
members of the Audit Committee of the Board of Directors) under the applicable rules of each stock exchange upon which shares of stock of
the Corporation are listed for trading and the S.E.C., as those requirements may be amended from time to time. If the number of Directors, at
any time, is set at less than five, at least one Director shall be a Managing Director. So long as the number of Directors shall be five or greater,
at least two Directors shall be Managing Director. “Managing Directors” shall mean Directors who are not Independent Directors and who
have been employees of the Corporation or Reit Management & Research LLC (or its permitted successors or assigns under the Shared
Services Agreement between the Corporation and Reit Management & Research LLC) or involved in the day to day
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activities of the Corporation for at least one year prior to their election. If at any time the Board of Directors shall not be comprised of a
majority of Independent Directors, the Board of Directors shall take such actions as will cure such condition; provided that the fact that the
Board of Directors does not have a majority of Independent Directors or has not taken such action at any time or from time to time shall not
affect the validity of any action taken by the Board of Directors. If at any time the Board of Directors shall not be comprised of a number of
Managing Directors as is required under this Section 3.2, the Board of Directors shall take such actions as will cure such condition; provided
that the fact that the Board of Directors does not have the requisite number of Managing Directors or has not taken such action at any time or
from time to time shall not affect the validity of any action taken by the Board of Directors.
Section 3.3.
Number and Tenure . The Board of Directors may establish, increase or decrease the number of Directors;
provided, that the number thereof shall never be less than the minimum number required by the Maryland General Corporation Law, nor more
than seven; and further, provided, that the tenure of office of a Director shall not be affected by any decrease in the number of Directors. The
number of Directors shall be five until increased or decreased by the Board of Directors.
Annual and Regular Meetings . An annual meeting of the Board of Directors shall be held immediately after the
Section 3.4.
annual meeting of stockholders, no notice other than this Bylaw being necessary. The time and place of the annual meeting of the Board of
Directors may be changed by the Board of Directors. The Board of Directors may provide, by resolution, the time and place, either within or
without the State of Maryland, for the holding of regular meetings of the Board of Directors without other notice than such resolution. In the
event any such regular meeting is not so provided for, the meeting may be held at such time and place as shall be specified in a notice given as
hereinafter provided for special meetings of the Board of Directors.
Section 3.5.
Special Meetings . Special meetings of the Board of Directors may be called at any time by any Managing
Director, the president or pursuant to the request of any two Directors then in office. The person or persons authorized to call special meetings
of the Board of Directors may fix any place, either within or without the State of Maryland, as the place for holding any special meeting of the
Board of Directors called by them.
Notice . Notice of any special meeting shall be given by written notice delivered personally or by electronic mail,
Section 3.6.
telephoned, facsimile transmitted, overnight couriered (with proof of delivery) or mailed to each Director at his or her business or residence
address. Personally delivered, telephoned, facsimile transmitted or electronically mailed notices shall be given at least 24 hours prior to the
meeting. Notice by mail shall be deposited in the U.S. mail at least 72 hours prior to the meeting. If mailed, such notice shall be deemed to be
given when deposited in the U.S. mail properly addressed, with postage thereon prepaid. Electronic mail notice shall be deemed to be given
upon transmission of the message to the electronic mail address given to the Corporation by the Director. Telephone notice shall be deemed
given when the Director is personally given such notice in a telephone call to which he is a party. Facsimile transmission notice shall be
deemed given upon completion of the transmission of the message to the number given to the Corporation by the Director and receipt of a
completed answer back indicating receipt. If sent by overnight courier, such notice shall be deemed given when
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delivered to the courier. Neither the business to be transacted at, nor the purpose of, any annual, regular or special meeting of the Board of
Directors need be stated in the notice, unless specifically required by statute or these Bylaws.
Section 3.7.
Quorum . A majority of the Directors shall constitute a quorum for transaction of business at any meeting of the
Board of Directors, provided that, if less than a majority of such Directors are present at a meeting, a majority of the Directors present may
adjourn the meeting from time to time without further notice, and provided further that if, pursuant to the charter of the Corporation or these
Bylaws, the vote of a majority of a particular group of Directors is required for action, a quorum for that action shall also include a majority of
such group. The Directors present at a meeting of the Board of Directors which has been duly called and convened and at which a quorum was
established may continue to transact business until adjournment, notwithstanding the withdrawal of a number of Directors resulting in less than
a quorum then being present at the meeting.
Section 3.8.
Voting . The action of the majority of the Directors present at a meeting at which a quorum is or was present shall
be the action of the Board of Directors, unless the concurrence of a greater proportion is required for such action by specific provision of an
applicable statute, the charter of the Corporation or these Bylaws. If enough Directors have withdrawn from a meeting to leave fewer than are
required to establish a quorum, but the meeting is not adjourned, the action of the majority of that number of Directors necessary to constitute a
quorum at such meeting shall be the action of the Board of Directors, unless the concurrence of a greater proportion is required for such action
by applicable law, the charter of the Corporation or these Bylaws.
Section 3.9.
Telephone Meetings . Directors may participate in a meeting by means of a conference telephone or similar
communications equipment if all persons participating in the meeting can hear each other at the same time. Participation in a meeting by these
means shall constitute presence in person at the meeting. Such meeting shall be deemed to have been held at a place designated by the
Directors at the meeting.
Section 3.10.
Action by Written Consent of Board of Directors . Unless specifically otherwise provided in the charter of the
Corporation, any action required or permitted to be taken at any meeting of the Board of Directors may be taken without a meeting, if a consent
in writing to such action is signed by each Director and such written consent is filed with the minutes of proceedings of the Board of Directors.
Waiver of Notice . The actions taken at any meeting of the Board of Directors, however called and noticed or
Section 3.11.
wherever held, shall be as valid as though taken at a meeting duly held after regular call and notice if a quorum is present and if, either before
or after the meeting, each of the Directors not present waives notice, consents to the holding of such meeting or approves the minutes thereof.
Section 3.12.
Vacancies . If for any reason any or all the Directors cease to be Directors, such event shall not terminate the
Corporation or affect these Bylaws or the powers of the remaining Directors hereunder (even if fewer than three Directors remain). Except as
may be provided by the Board of Directors in setting the terms of any class or series of preferred stock,
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any vacancy on the Board of Directors may be filled only by a majority of the remaining Directors, even if the remaining Directors do not
constitute a quorum. Any Director elected to fill a vacancy, whether occurring due to an increase in size of the Board of Directors or by the
death, resignation or removal of any Director, shall hold office for the remainder of the full term of the class in which the vacancy occurred or
was created and until a successor is elected and qualifies.
Section 3.13.
Compensation . Directors shall be entitled to receive such reasonable compensation for their services as Directors
as the Board of Directors may determine from time to time. Directors may be reimbursed for expenses of attendance, if any, at each annual,
regular or special meeting of the Board of Directors or of any committee thereof; and for their expenses, if any, in connection with each
property visit and any other service or activity performed or engaged in as Directors. The Directors shall be entitled to receive remuneration
for services rendered to the Corporation in any other capacity, and such services may include, without limitation, services as an officer of the
Corporation, legal, accounting or other professional services, or services as a broker, transfer agent or underwriter, whether performed by a
Director or any person affiliated with a Director.
Section 3.14.
Surety Bonds . Unless specifically required by law, no Director shall be obligated to give any bond or surety or
other security for the performance of any of his or her duties.
Section 3.15.
Reliance . Each Director, officer, employee and agent of the Corporation shall, in the performance of his or her
duties with respect to the Corporation, be entitled to rely on any information, opinion, report or statement, including any financial statement or
other financial data, prepared or presented by an officer or employee of the Corporation or by the advisers, accountants, appraisers or other
experts or consultants selected by the Board of Directors or officers of the Corporation, regardless of whether such counsel or expert may also
be a Director.
Section 3.16.
Qualifying Shares of Stock Not Required . Directors need not be stockholders of the Corporation.
Section 3.17.
Certain Rights of Directors, Officers, Employees and Agents . A Director shall have no responsibility to devote his
or her full time to the affairs of the Corporation. Any Director or officer, employee or agent of the Corporation, in his or her personal capacity
or in a capacity as an affiliate, employee or agent of any other person, or otherwise, may have business interests and engage in business
activities similar or in addition to those of or relating to the Corporation.
Section 3.18.
Emergency Provisions . Notwithstanding any other provision in the charter of the Corporation or these
Bylaws, this Section 3.18 shall apply during the existence of any catastrophe, or other similar emergency condition, as a result of which a
quorum of the Board of Directors under ARTICLE III cannot readily be obtained (an “Emergency”). During any Emergency, unless otherwise
provided by the Board of Directors, (a) a meeting of the Board of Directors may be called by any Managing Director or officer of the
Corporation by any means feasible under the circumstances and (b) notice of any meeting of the Board of Directors during
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such an Emergency may be given less than 24 hours prior to the meeting to as many Directors and by such means as it may be feasible at the
time, including publication, television or radio.
ARTICLE IV
COMMITTEES
Section 4.1.
Number; Tenure and Qualifications . The Board of Directors shall appoint an Audit Committee, a Compensation
Committee and a Nominating and Governance Committee. Each of these committees shall be composed of three or more Directors, to serve at
the pleasure of the Board of Directors. The Board of Directors may also appoint other committees from time to time composed of one or more
Directors, to serve at the pleasure of the Board of Directors. The Board of Directors shall adopt a charter with respect to the Audit Committee,
the Compensation Committee and the Nominating and Governance Committee, which charter shall specify the purposes, the criteria for
membership and the responsibility and duties and may specify other matters with respect to each committee. The Board of Directors may also
adopt a charter with respect to other committees.
Powers . The Board of Directors may delegate any of the powers of the Board of Directors to committees
Section 4.2.
appointed under Section 4.1, except as prohibited by law. In the event that a charter has been adopted with respect to a committee, the charter
shall constitute a delegation by the Board of Directors of the powers of the Board of Directors necessary to carry out the purposes,
responsibilities and duties of a committee provided in the charter or reasonably related to those purposes, responsibilities and duties, to the
extent permitted by law.
Section 4.3.
Meetings . Notice of committee meetings shall be given in the same manner as notice for special meetings of the
Board of Directors. A majority of the members of any committee shall be present in person at any meeting of a committee in order to
constitute a quorum for the transaction of business at a meeting, and the act of a majority present at a meeting at the time of a vote if a quorum
is then present shall be the act of a committee. The Board of Directors or, if authorized by the Board in a committee charter or otherwise, the
committee members may designate a chairman of any committee, and the chairman or, in the absence of a chairman, a majority of any
committee may fix the time and place of its meetings unless the Board shall otherwise provide. In the absence or disqualification of any
member of any committee, the members thereof present at any meeting and not disqualified from voting, whether or not they constitute a
quorum, may unanimously appoint another Director to act at the meeting in the place of absent or disqualified members.
Each committee shall keep minutes of its proceedings and shall periodically report its activities to the full Board of Directors and,
except as otherwise provided by law or under the rules of the S.E.C. and applicable stock exchanges on which the Corporation’s shares of stock
are listed, any action by any committee shall be subject to revision and alteration by the Board of Directors, provided that no rights of third
persons shall be affected by any such revision or alteration.
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Section 4.4.
Telephone Meetings . Members of a committee may participate in a meeting by means of a conference telephone
or similar communications equipment and participation in a meeting by these means shall constitute presence in person at the meeting.
Section 4.5.
Action by Written Consent of Committees . Any action required or permitted to be taken at any meeting of a
committee of the Board of Directors may be taken without a meeting, if a consent in writing to such action is signed by each member of the
committee and such written consent is filed with the minutes of proceedings of such committee.
Section 4.6.
Vacancies . Subject to the provisions hereof, the Board of Directors shall have the power at any time to change the
membership of any committee, to fill all vacancies, to designate alternate members to replace any absent or disqualified member or to dissolve
any such committee.
ARTICLE V
OFFICERS
General Provisions . The officers of the Corporation shall include a president, a secretary and a treasurer and may
Section 5.1.
include a chairman of the board, a vice chairman of the board, a chief executive officer, a chief operating officer, a chief financial officer, one
or more vice presidents, one or more assistant secretaries and one or more assistant treasurers. In addition, the Board of Directors may from
time to time elect such other officers with such powers and duties as they shall deem necessary or desirable. The officers of the Corporation
shall be elected annually by the Board of Directors, except that the chief executive officer or president may from time to time appoint one or
more vice presidents, assistant secretaries and assistant treasurers or other officers. Each officer shall hold office until his or her successor is
elected and qualifies or until his or her death, or his or her resignation or removal in the manner hereinafter provided. Any two or more offices
except president and vice president may be held by the same person. In its discretion, the Board of Directors may leave unfilled any office
except that of president, secretary and treasurer. Election of an officer or agent shall not of itself create contract rights between the Corporation
and such officer or agent.
Section 5.2.
Removal and Resignation . Any officer or agent of the Corporation may be removed by the Board of Directors if
in its judgment the best interests of the Corporation would be served thereby, but the removal shall be without prejudice to the contract rights,
if any, of the person so removed. Any officer of the Corporation may resign at any time by giving written notice of his or her resignation to the
Board of Directors, the chairman of the board, the president or the secretary. Any resignation shall take effect at any time specified therein or,
if the time when it shall become effective is not specified therein, immediately upon its receipt. The acceptance of a resignation shall not be
necessary to make it effective unless otherwise stated in the resignation. A resignation shall be without prejudice to the contract rights, if any,
of the Corporation.
Section 5.3.
Vacancies . A vacancy in any office may be filled by the Board of Directors for the balance of the term.
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Section 5.4.
Chief Executive Officer . The Board of Directors may designate a chief executive officer from among the
Directors or elected officers. The chief executive officer shall have responsibility for implementation of the policies of the Corporation, as
determined by the Board of Directors, and for the administration of the business affairs of the Corporation. Unless the Board of Directors
determines otherwise: in the absence of a chairman and a vice chairman of the board, a Managing Director shall preside at all meetings of the
Board of Directors, and in the absence of any Managing Director, the chief executive officer shall preside.
Chief Operating Officer . The Board of Directors may designate a chief operating officer from among the elected
Section 5.5.
officers. Said officer will have the responsibilities and duties as set forth by the Board of Directors or the chief executive officer.
Section 5.6.
Chief Financial Officer . The Board of Directors may designate a chief financial officer from among the elected
officers. Said officer will have the responsibilities and duties as set forth by the Board of Directors or the chief executive officer.
Chairman and Vice Chairman of the Board . The chairman of the board, if any, and the vice chairman of the board,
Section 5.7.
if any, shall perform such duties as may be assigned to him, her or them by the Board of Directors. In the absence of a chairman and vice
chairman of the board or if none are appointed, the Managing Directors, or any of them, shall preside at meetings of the Board of Directors.
Section 5.8.
President . The president may execute any deed, mortgage, bond, lease, contract or other instrument, except in
cases where the execution thereof shall be expressly delegated by the Board of Directors or by these Bylaws to some other officer or agent of
the Corporation or shall be required by law to be otherwise executed, and in general shall perform all duties incident to the office of president
and such other duties as may be prescribed by the chief executive officer or the Board of Directors.
Vice Presidents . In the absence or unavailability of the president, the vice president (or in the event there be more
Section 5.9.
than one vice president, any vice president) shall perform the duties of the president and when so acting shall have all the powers of the
president; and shall perform such other duties as from time to time may be assigned to him or her by the president, the chief executive officer
or by the Board of Directors. The Board of Directors may designate one or more vice presidents as executive vice presidents, senior vice
presidents or as vice presidents for particular areas of responsibility.
Secretary . The secretary (or his or her designee) shall (a) keep the minutes of the proceedings of the stockholders,
Section 5.10.
the Board of Directors and committees of the Board of Directors in one or more books provided for that purpose; (b) see that all notices are
duly given in accordance with the provisions of these Bylaws or as required by law; (c) be custodian of the corporate records and of the seal of
the Corporation, if any; (d) maintain a share register, showing the ownership and transfers of ownership of all shares of stock of the
Corporation, unless a transfer agent is employed to maintain and does maintain such a share register; and (e) in general perform such other
duties as from time to time may be assigned to the secretary by the chief executive officer or the Board of Directors.
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Section 5.11.
Treasurer . The treasurer shall have the custody of the funds and securities of the Corporation and shall keep full
and accurate accounts of receipts and disbursements in books belonging to the Corporation and shall deposit all moneys and other valuable
effects in the name and to the credit of the Corporation in such depositories as may be authorized by the Board of Directors. The treasurer shall
also have such other responsibilities as may be assigned to him or her by the chief executive officer or the Board of Directors.
Section 5.12.
Assistant Secretaries and Assistant Treasurers . The assistant secretaries and assistant treasurers, in general, shall
perform such duties as shall be assigned to them by the secretary or treasurer, respectively, or by the chief executive officer or the Board of
Directors.
ARTICLE VI
CONTRACTS, LOANS, CHECKS AND DEPOSITS
Section 6.1.
Contracts . The Board of Directors may authorize any Director, officer or agent to enter into any contract or to
execute and deliver any instrument in the name of and on behalf of the Corporation and such authority may be general or confined to specific
instances. Any agreement, deed, mortgage, lease or other document executed by an authorized Director, officer or agent shall be valid and
binding upon the Corporation when authorized or ratified by action of the Board of Directors.
Section 6.2.
Checks and Drafts . All checks, drafts or other orders for the payment of money, notes or other evidences of
indebtedness issued in the name of the Corporation shall be signed by such officer or agent of the Corporation in such manner as shall from
time to time be determined by the treasurer, the chief executive officer or the Board of Directors.
Section 6.3.
Deposits . All funds of the Corporation not otherwise employed shall be deposited from time to time to the credit
of the Corporation in such banks, trust companies or other depositories as the treasurer, the chief executive officer or the Board of Directors
may designate.
ARTICLE VII
STOCK
Section 7.1.
Certificates . Except as otherwise provided in these Bylaws, this Section 7.1 shall not be interpreted to limit the
authority of the Board of Directors to issue some or all of the shares of any or all of its classes or series without certificates. Each certificate
issued shall be signed by the chairman of the board, the president or a vice president and countersigned by the secretary or an assistant
secretary or the treasurer or an assistant treasurer and may be sealed with the seal, if any, of the Corporation. The signatures may be either
manual or facsimile. Certificates shall be consecutively numbered and if the Corporation shall from time to time issue several classes of stock,
each class may have its own number series. A certificate is valid and may be issued whether or not an officer who signed it is still an officer
when it is issued. At the election of the stockholder, a certificate may be in book entry form.
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Section 7.2.
Transfers .
(a)
Shares of capital stock of the Corporation shall be transferable in the manner provided by applicable law, the charter of the
Corporation and these Bylaws. Upon surrender to the Corporation or the transfer agent of the Corporation of a stock certificate duly endorsed
or accompanied by proper evidence of succession, assignment or authority to transfer, the Corporation shall issue a new certificate to the
person entitled thereto, cancel the old certificate and record the transaction upon its books.
(b)
The Corporation shall be entitled to treat the holder of record of any share of stock as the holder in fact thereof and,
accordingly, shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person,
whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of the State of Maryland.
Section 7.3.
Lost Certificates . For shares of stock evidenced by certificates, any officer designated by the Board of Directors
may direct a new certificate to be issued in place of any certificate previously issued by the Corporation alleged to have been lost, stolen or
destroyed upon the making of an affidavit of that fact by the person claiming the certificate to be lost, stolen or destroyed. When authorizing
the issuance of a new certificate, an officer designated by the Board of Directors may, in such officer’s discretion and as a condition precedent
to the issuance thereof, require the owner of such lost, stolen or destroyed certificate or the owner’s legal representative to advertise the same in
such manner as he shall require and/or to give bond, with sufficient surety, to the Corporation to indemnify it against any loss or claim which
may arise as a result of the issuance of a new certificate.
Section 7.4.
Closing of Transfer Books or Fixing of Record Date .
(a)
The Board of Directors may set, in advance, a record date for the purpose of determining stockholders entitled to notice of or
to vote at any meeting of stockholders or determining stockholders entitled to receive payment of any dividend or the allotment of any other
rights, or in order to make a determination of stockholders for any other proper purpose.
(b)
In lieu of fixing a record date, the Board of Directors may provide that the stock transfer books shall be closed for a stated
period but not longer than 20 days. If the stock transfer books are closed for the purpose of determining stockholders entitled to notice of or to
vote at a meeting of stockholders, such books shall be closed for at least 10 days before the date of such meeting.
(c)
If no record date is fixed and the stock transfer books are not closed for the determination of stockholders, (i) the record date
for the determination of stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day on
which the notice of meeting is mailed or the 30th day before the meeting, whichever is the closer date to the meeting; and (ii) the record date
for the determination of stockholders entitled to receive payment of a dividend or an allotment of any other rights shall be the close of business
on the day on which the
28
resolution of the Board of Directors, declaring the dividend or allotment of rights, is adopted.
(d)
When a determination of stockholders entitled to vote at any meeting of stockholders has been made as provided in this
section, such determination shall apply to any adjournment thereof unless the Board of Directors shall set a new record date with respect
thereto.
Section 7.5.
Stock Ledger . The Corporation shall maintain at its principal office or at the office of its counsel, accountants or
transfer agent a stock ledger containing the name and address of each stockholder and the number of shares of each class of stock held by such
stockholder.
Section 7.6.
Fractional Stock; Issuance of Units . The Board of Directors may issue fractional stock or provide for the issuance
of scrip, all on such terms and under such conditions as they may determine. Notwithstanding any other provision of the charter of the
Corporation or these Bylaws, the Board of Directors may issue units consisting of different securities of the Corporation. Any security issued
in a unit shall have the same characteristics as any identical securities issued by the Corporation, except that the Board of Directors may
provide that for a specified period securities of the Corporation issued in such unit may be transferred on the books of the Corporation only in
such unit.
ARTICLE VIII
REGULATORY COMPLIANCE AND DISCLOSURE
Section 8.1.
Actions Requiring Regulatory Compliance Implicating the Corporation . If any stockholder (whether
individually or constituting a group, as determined by the Board of Directors), by virtue of such stockholder’s ownership interest in the
Corporation or actions taken by the stockholder affecting the Corporation, triggers the application of any requirement or regulation of any
federal, state, municipal or other governmental or regulatory body on the Corporation or any subsidiary (for purposes of this ARTICLE VIII, as
defined in Section 2.14.5(c)) of the Corporation or any of their respective businesses, assets or operations, including, without limitation, any
obligations to make or obtain a Governmental Action (as defined in Section 2.14.3), such stockholder shall promptly take all actions necessary
and fully cooperate with the Corporation to ensure that such requirements or regulations are satisfied without restricting, imposing additional
obligations on or in any way limiting the business, assets, operations or prospects of the Corporation or any subsidiary of the Corporation. If
the stockholder fails or is otherwise unable to promptly take such actions so to cause satisfaction of such requirements or regulations, the
stockholder shall promptly divest a sufficient number of shares of stock of the Corporation necessary to cause the application of such
requirement or regulation to not apply to the Corporation or any subsidiary of the Corporation. If the stockholder fails to cause such
satisfaction or divest itself of such sufficient number of shares of stock of the Corporation by not later than the 10th day after triggering such
requirement or regulation referred to in this Section 8.1, the acquisition of any shares of stock of the Corporation beneficially owned by such
stockholder at and in excess of the level triggering the application of
29
such requirement or regulation shall, to the fullest extent permitted by law, be deemed to constitute shares held in violation of the ownership
limitations set forth in Article VI of the charter of the Corporation and be subject to Article VI of the charter of the Corporation and any actions
triggering the application of such a requirement or regulation may be deemed by the Corporation to be of no force or effect. Moreover, if the
stockholder who triggers the application of any regulation or requirement fails to satisfy the requirements or regulations or to take curative
actions within such 10 day period, the Corporation may take all other actions which the Board of Directors deems appropriate to require
compliance or to preserve the value of the Corporation’s assets; and the Corporation may charge the offending stockholder for the
Corporation’s costs and expenses as well as any damages which may result to the Corporation.
As an example and not as a limitation, at the time these Bylaws are being amended and restated, the Corporation holds a controlling
ownership position in a company formed and licensed as an insurance company in the State of Indiana. The laws of the State of Indiana have
certain regulatory requirements for any person who seeks to control (as defined under Indiana law) a company which itself controls an
insurance company domiciled in the State of Indiana, including by exercising proxies representing 10% or more of the Corporation’s voting
securities. Accordingly, if a stockholder seeks to exercise proxies for a matter to be voted upon at a meeting of the Corporation’s stockholders
without having obtained any applicable approvals from the Indiana insurance regulatory authorities, such proxies representing 10% or more of
the Corporation’s voting securities will, subject to Section 8.3, be void and of no further force or effect.
As a further example and not as a limitation, at the time these Bylaws are being amended and restated, the Corporation operates
healthcare facilities in various states which are subject to state regulatory and licensing requirements in each such state. Under the licensing
terms or regulatory regime of certain states with jurisdiction over the Corporation, a stockholder which acquires a controlling equity position in
the Corporation may be required to obtain regulatory approval or consent prior to or as a result of obtaining such ownership. Accordingly, if a
stockholder which acquires a controlling equity position in the Corporation that would require the stockholder or the Corporation to obtain the
consent or approval of a state authority due to the fact that the Corporation operates licensed healthcare facilities in such state, and the
stockholder refuses to provide the Corporation with information required to be submitted to the applicable state authority or if the state
authority declines to approve the stockholder’s ownership of the Corporation, then, in either event, shares of stock of the Corporation owned by
the stockholder necessary to reduce its ownership to an amount so that the stockholder’s ownership of Corporation shares of stock would not
require it to provide any such information to, or for consent to be obtained from, the state authority, may be deemed by the Board of Directors
to be shares of stock held in violation of the ownership limitation in Article VI of the charter of the Corporation and shall be subject to the
provisions of Article VI of the charter of the Corporation.
Section 8.2.
Compliance With Law . Stockholders shall comply with all applicable requirements of federal and state laws,
including all rules and regulations promulgated thereunder, in connection with such stockholder’s ownership interest in the Corporation and all
other laws which apply to the Corporation or any subsidiary of the Corporation or their respective businesses, assets or operations and which
require action or inaction on the part of the stockholder.
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Section 8.3.
Limitation on Voting Shares of Stock or Proxies . Without limiting the provisions of Section 8.1, if a stockholder
(whether individually or constituting a group, as determined by the Board of Directors), by virtue of such stockholder’s ownership interest in
the Corporation or its receipt or exercise of proxies to vote shares of stock owned by other stockholders, would not be permitted to vote the
stockholder’s shares of stock of the Corporation or proxies for shares of stock of the Corporation in excess of a certain amount pursuant to
applicable law (including by way of example, applicable state insurance regulations) but the Board of Directors determines that the excess
shares or shares represented by the excess proxies are necessary to obtain a quorum, then such stockholder shall not be entitled to vote any such
excess shares or proxies, and instead such excess shares or proxies may, to the fullest extent permitted by law, be voted by the Board of
Directors (or by another person designated by the Board of Directors) in proportion to the total shares otherwise voted on such matter.
Section 8.4.
Representations, Warranties and Covenants Made to Governmental or Regulatory Bodies . To the fullest extent
permitted by law, any representation, warranty or covenant made by a stockholder with any governmental or regulatory body in connection
with such stockholder’s interest in the Corporation or any subsidiary of the Corporation shall be deemed to be simultaneously made to, for the
benefit of and enforceable by, the Corporation and any applicable subsidiary of the Corporation.
Section 8.5.
Board of Directors’ Determinations . The Board of Directors shall be empowered to make all determinations
regarding the interpretation, application, enforcement and compliance with any matters referred to or contemplated by this ARTICLE VIII.
ARTICLE IX
RESTRICTIONS ON TRANSFER OF SHARES
Section 9.1.
Definitions . As used in this ARTICLE IX, the following terms have the following meanings (and any
references to any portions of Treasury Regulation Sections 1.382-2T, 1.382-3 and 1.382-4 shall include any successor provisions):
(a)
“5-percent Stockholder” means a Person or group of Persons that is a “5-percent shareholder” of the Corporation
pursuant to Treasury Regulation Section 1.382-2T(g).
(b)
“5-percent Transaction” means any Transfer described in clause (a) or (b) of Section 9.2.
(c)
“Code” means the United States Internal Revenue Code of 1986, as amended from time to time, and the rulings
issued thereunder.
(d)
“Corporation Security” or “Corporation Securities” means (i) shares of common stock of the Corporation,
(ii) shares of preferred stock of the Corporation (other than preferred stock described in Section 1504(a)(4) of the Code), (iii) warrants, rights,
or options (including options within the meaning of Treasury
31
Regulation Sections 1.382-2T(h)(4)(v) and 1.382-4) to purchase Securities issued by the Corporation, and (iv) any Shares not included within
the preceding clauses (i) through (iii) of this definition.
(e)
“Effective Date” means November 10, 2009.
(f)
“Excess Securities” has the meaning given such term in Section 9.4.
(g)
“Expiration Date” means the earlier of (i) the repeal of Section 382 of the Code or any successor statute if the
Board of Directors determines that this ARTICLE IX is no longer necessary for the preservation of Tax Benefits, (ii) the beginning of a taxable
year of the Corporation to which the Board of Directors determines that no Tax Benefits may be carried forward, or (iii) such date as the Board
of Directors shall fix in accordance with Section 9.10.
(h)
“Grandfathered Owner” has the meaning given such term in Section 9.2.
(i)
“Percentage Share Ownership” means the percentage Share Ownership interest of any Person or group (as the
context may require) for purposes of Section 382 of the Code as determined in accordance with the Treasury Regulation Sections 1.382-2T(g),
(h), (j) and (k) and 1.382-4.
(j)
“Person” means any individual, firm, corporation, company, limited liability company, partnership, joint venture,
estate, trust, or other legal entity, including a group of persons treated as an entity pursuant to Treasury Regulation Section 1.382-3(a)(1)(i).
(k)
“Prohibited Transfer” means any Transfer or purported Transfer of Corporation Securities to the extent that such
Transfer is prohibited and/or void under this ARTICLE IX.
(l)
“Public Group” has the meaning set forth in Treasury Regulation Section 1.382-2T(f)(13), excluding any “direct
public group” with respect to the Corporation, as that term is used in Treasury Regulation Section 1.382-2T(j)(2)(ii).
(m)
“Purported Transferee” has the meaning set forth in Section 9.4.
(n)
“Securities” and “Security” each has the meaning set forth in Section 9.5.
(o)
Section 1.382-2T(f)(18).
“Shares” means any interest that would be treated as “stock” of the Corporation pursuant to Treasury Regulation
(p)
“Share Ownership” means any direct or indirect ownership of Shares, including any ownership by virtue of
application of constructive ownership rules,
32
with such direct, indirect, and constructive ownership determined under the provisions of Section 382 of the Code and the Treasury
Regulations.
(q)
“Tax Benefits” means the net operating loss carryforwards, capital loss carryforwards, general business credit
carryforwards, alternative minimum tax credit carryforwards and foreign tax credit carryforwards, as well as any loss or deduction attributable
to a “net unrealized built-in loss” of the Corporation or any direct or indirect subsidiary thereof, within the meaning of Section 382 of the Code.
(r)
“Transfer” means, any direct or indirect (by operation of law or otherwise) sale, transfer, assignment,
conveyance, pledge, devise or other disposition or other action taken by a Person, other than the Corporation, that alters the Percentage Share
Ownership of any Person. A Transfer also shall include the creation or grant of an option (including an option within the meaning of Treasury
Regulation Sections 1.382-2T(h)(4)(v) and 1.382-4). For the avoidance of doubt, a Transfer shall not include the creation or grant by the
Corporation of an option to purchase securities of the Corporation, nor shall a Transfer include the issuance of Shares by the Corporation.
(s)
“Transferee” means any Person to whom Corporation Securities are Transferred.
(t)
“Treasury Regulations” means the regulations, including temporary regulations or any successor regulations
promulgated under the Code, as amended from time to time.
Section 9.2.
Transfer And Ownership Restrictions . From and after the Effective Date, any attempted Transfer of
Corporation Securities prior to the Expiration Date and any attempted Transfer of Corporation Securities pursuant to an agreement entered into
prior to the Expiration Date shall be prohibited and void ab initio to the extent that, as a result of such Transfer (or any series of Transfers of
which such Transfer is a part), either (a) any Person or Persons would become a 5-percent Stockholder or (b) the Percentage Share Ownership
of any 5-percent Stockholder would be increased. Any 5-percent Stockholder as of the Effective Date (the “Grandfathered Owner”) shall not
be required, solely as a result of the adoption of this ARTICLE IX and the occurrence of the Effective Date, pursuant to this ARTICLE IX, to
reduce or dispose of any Corporation Securities owned by such Grandfathered Owner as of the Effective Date and none of such Corporation
Securities owned by such Grandfathered Owner as of the Effective Date shall be deemed, solely as a result of the adoption of this ARTICLE IX
and the occurrence of the Effective Date, to be Excess Securities; provided, however, that such Grandfathered Owner may not acquire any
additional Corporation Securities at any time such Grandfathered Owner remains a 5-percent Stockholder and, upon such Grandfathered Owner
no longer being a 5-percent Stockholder, the provisions of this ARTICLE IX shall apply in their entirety to such Grandfathered Owner.
33
Section 9.3.
Exceptions .
(a)
Notwithstanding anything to the contrary herein, Transfers to a Public Group (including a new Public Group
created under Treasury Regulation Section 1.382-2T(j)(3)(i)) shall be permitted.
(b)
The restrictions set forth in Section 9.2 shall not apply to an attempted Transfer that is a 5-percent Transaction if
the transferor or the Transferee obtains the written approval of the Board of Directors or a duly authorized committee thereof. The Board of
Directors may impose conditions in connection with such approval, including, without limitation, restrictions on the ability or right of any
Transferee to Transfer Shares acquired through a Transfer. Approvals of the Board of Directors hereunder may be given prospectively or
retroactively.
Section 9.4.
Excess Securities .
(a)
No employee or agent of the Corporation shall record any Prohibited Transfer in the share register for the
Corporation, and the purported transferee of such a Prohibited Transfer (the “Purported Transferee”) shall not be recognized as a stockholder of
the Corporation for any purpose whatsoever in respect of the Corporation Securities which are the subject of the Prohibited Transfer (the
“Excess Securities”). The Purported Transferee shall not be entitled with respect to such Excess Securities to any rights of stockholders of the
Corporation, including, without limitation, the right to vote such Excess Securities or to receive dividends or distributions, whether liquidating
or otherwise, in respect thereof, if any, and the Excess Securities shall be deemed to constitute shares of the Corporation in excess of the
Ownership Limit (as defined in Section 6.1 of the charter of the Corporation) and be subject to ARTICLE VI of the charter of the Corporation.
Any Transfer of Excess Securities in accordance with the provisions of this ARTICLE IX shall cease to be Excess Securities upon
consummation of such Transfer.
(b)
The Corporation may require as a condition to the registration of the Transfer of any Corporation Securities in the
share register of the Corporation or the payment of any distribution on any Corporation Securities that the proposed Transferee or payee furnish
to the Corporation all information reasonably requested by the Corporation with respect to its direct or indirect ownership interests in such
Corporation Securities. The Corporation may make such arrangements or issue such instructions to its employees or agents as may be
determined by the Board of Directors to be necessary or advisable to implement this ARTICLE IX, including, without limitation, authorizing
its employees or agents to require, as a condition to registering any Transfer in the share register of the Corporation, an affidavit from a
Purported Transferee regarding such Person’s actual and constructive ownership of shares and other evidence that a Transfer will not be
prohibited by this ARTICLE IX.
Section 9.5.
Modification Of Remedies For Certain Indirect Transfers . In the event of any Transfer which does not
involve a transfer of securities of the Corporation within the meaning of Maryland law ( “ Securities,” and individually, a “Security”) but
which would cause a 5-percent Stockholder to violate a restriction on Transfers provided for in this ARTICLE IX, a sufficient amount of
Securities of such 5-percent Stockholder and/or any Person whose
34
ownership of Securities is attributed to such 5-percent Stockholder shall be deemed to be Excess Securities and shall be treated as provided in
Section 9.4, including, without limitation, being deemed to constitute shares of the Corporation in excess of the Ownership Limit (as defined in
Section 6.1 of the charter of the Corporation) and be subject to ARTICLE VI of the charter of the Corporation. For the avoidance of doubt, no
such 5-percent Stockholder shall be required, pursuant to this Section 9.5, to dispose of any interest that is not a Security. The purpose of this
Section 9.5 is to extend the restrictions in Section 9.2 to situations in which there is a 5-percent Transaction without a direct Transfer of
Securities, and this Section 9.5, along with the other provisions of this ARTICLE IX, shall be interpreted to produce the same results, with such
differences as the context requires or as determined by the Board of Directors, as a direct Transfer of Corporation Securities.
Section 9.6.
Legal Proceedings; Prompt Enforcement . The Board of Directors may authorize such additional actions,
beyond those provided for or contemplated by this ARTICLE IX, to give effect to or in furtherance of the provisions of this ARTICLE IX.
Nothing in this Section 9.6 shall (a) be deemed inconsistent with any Transfer of the Excess Securities provided in this ARTICLE IX being
void ab initio , (b) preclude the Corporation in the sole discretion of the Board of Directors from immediately bringing legal proceedings
without a prior demand, or (c) cause any failure of the Corporation to act within any particular time period to constitute a waiver or loss of any
right of the Corporation under this ARTICLE IX.
Section 9.7.
Liability . To the fullest extent permitted by law and without limiting any other remedies of the Corporation
and related matters provided elsewhere in these Bylaws or in the charter of the Corporation, any stockholder subject to the provisions of this
ARTICLE IX who knowingly violates the provisions of this ARTICLE IX and any Persons controlling, controlled by or under common control
with such stockholder shall be jointly and severally liable to the Corporation for, and shall indemnify and hold the Corporation harmless
against, any and all damages suffered as a result of such violation, including but not limited to damages resulting from a reduction in, or
elimination of, the Corporation’s ability or right to utilize its Tax Benefits, and attorneys’ and auditors’ fees incurred in connection with such
violation.
Section 9.8.
Obligation To Provide Information . As a condition to the registration of the Transfer of any Shares in the
share register for the Corporation, any Person who is a beneficial, legal or record holder of Shares, and any proposed Transferee and any Person
controlling, controlled by or under common control with the proposed Transferee, shall provide such information as the Corporation may
request from time to time in order to determine compliance with this ARTICLE IX or the status of the Tax Benefits of the Corporation.
Section 9.9.
Legend . Unless otherwise provided by the Board of Directors, each certificate or account statement
evidencing or representing Shares (or securities exercisable for or convertible into Shares) shall bear a legend with respect to the restrictions
contained in this ARTICLE IX in such form as shall be prescribed by the Board of Directors. Instead of the foregoing legend, the certificate or
account statement may state that the Corporation will furnish a full statement about certain restrictions on transferability to a stockholder on
request and without charge.
35
Section 9.10.
Authority Of Board Of Directors .
(a)
The Board of Directors shall have the power to determine all matters necessary for assessing compliance with this
ARTICLE IX, including, without limitation, (i) the identification of 5-percent Stockholders, (ii) whether a Transfer is a 5-percent Transaction
or a Prohibited Transfer, (iii) the Percentage Share Ownership of any 5-percent Stockholder, (iv) whether an instrument constitutes a
Corporation Security, (v) the application of Section 9.4, including, without limitation, the application of ARTICLE VI of the charter of the
Corporation to Excess Securities, and Section 9.5, and (vi) any other matters which the Board of Directors determines to be relevant; and the
determination of the Board of Directors on such matters shall be conclusive and binding for all the purposes of this ARTICLE IX.
(b)
Nothing contained in this ARTICLE IX shall limit the authority of the Board of Directors to take such other
action to the extent permitted by law as it deems necessary or advisable to protect the Corporation and its stockholders in preserving the Tax
Benefits. Without limiting the generality of the foregoing, the Board of Directors may, by adopting a written resolution, (i) accelerate or extend
the Expiration Date, (ii) modify the ownership interest percentage in the Corporation or the Persons or groups covered by this ARTICLE IX,
(iii) modify the definitions of any terms set forth in this ARTICLE IX or (iv) modify the terms of this ARTICLE IX as appropriate, in each
case, in order to prevent an ownership change for purposes of Section 382 of the Code as a result of any changes in applicable Treasury
Regulations or otherwise. Stockholders of the Corporation may be notified of such determination through a filing with the S.E.C. or such other
method of notice as the Board of Directors may determine. All actions, calculations, interpretations and determinations which are done or made
by the Board of Directors shall be conclusive and binding on the Corporation and all other parties for all other purposes of this ARTICLE IX.
(c)
The Board of Directors may delegate all or any portion of its duties and powers under this ARTICLE IX to a
committee of the Board of Directors as it deems necessary or advisable and, to the fullest extent permitted by law, may exercise the authority
granted by this ARTICLE IX through duly authorized officers or agents of the Corporation.
Section 9.11.
Transactions on a National Securities Exchange . Nothing in this ARTICLE IX shall preclude the
settlement of any transaction entered into through the facilities of a national securities exchange or any automated inter-dealer quotation
system. The fact that the settlement of any transaction takes place shall not negate the effect of any other provision of this ARTICLE IX and
any transferor and transferee in such a transaction shall be subject to all of the provisions and limitations set forth in this ARTICLE IX.
Section 9.12.
Reliance . For purposes of determining the existence, identity and amount of any Corporation Securities
owned by any stockholder, the Corporation is entitled to rely on the existence and absence of filings of Schedule 13D or 13G under the
Exchange Act (or similar filings), as of any date, subject to its actual knowledge of the ownership of Corporation Securities.
36
Section 9.13.
Benefits Of This Article IX . Nothing in this ARTICLE IX shall be construed to give to any Person, other
than the Corporation and the Charitable Trustee (as defined in the charter of the Corporation) any legal or equitable right, remedy or claim
under this ARTICLE IX. This ARTICLE IX shall be for the sole and exclusive benefit of the Corporation and the Charitable Trustee.
Section 9.14.
Severability . If any provision of this ARTICLE IX or the application of any such provision to any Person
or under any circumstance shall be held invalid, illegal or unenforceable in any respect by a court of competent jurisdiction, such invalidity,
illegality or unenforceability shall not affect any other provision of this ARTICLE IX.
Section 9.15.
Waiver . With regard to any power, remedy or right provided herein or otherwise available to the
Corporation under this ARTICLE IX, (a) no waiver will be effective unless authorized by the Board of Directors and expressly contained in a
writing signed by the Corporation; and (b) no alteration, modification or impairment will be implied by reason of any previous waiver,
extension of time, delay or omission in exercise, or other indulgence.
Section 9.16.
Conflict . If there shall be any conflict between the provisions of this ARTICLE IX or the application
thereof and the provisions of ARTICLE VI of the charter of the Corporation or the application thereof to the matters addressed in this
ARTICLE IX, as contemplated by this ARTICLE IX, the provisions of this ARTICLE IX and the application thereof shall control.
ARTICLE X
ACCOUNTING YEAR
Section 10.1.
Accounting Year . The Board of Directors shall have the power, from time to time, to fix the fiscal year of the
Corporation by a duly adopted resolution.
ARTICLE XI
DIVIDENDS AND OTHER DISTRIBUTIONS
Section 11.1.
Dividends and Other Distributions . Dividends and other distributions upon the stock of the Corporation may be
authorized and declared by the Board of Directors. Dividends and other distributions may be paid in cash, property or stock of the Corporation.
ARTICLE XII
SEAL
Section 12.1.
Seal . The Board of Directors may authorize the adoption of a seal by the Corporation. The seal shall contain the
name of the Corporation and the year of its incorporation
37
and the words “Incorporated Maryland.” The Board of Directors may authorize one or more duplicate seals.
Section 12.2.
Affixing Seal . Whenever the Corporation is permitted or required to affix its seal to a document, it shall be
sufficient to meet the requirements of any law, rule or regulation relating to a seal to place the word “(SEAL)” adjacent to the signature of the
person authorized to execute the document on behalf of the Corporation.
ARTICLE XIII
WAIVER OF NOTICE
Section 13.1.
Waiver of Notice . Whenever any notice is required to be given pursuant to the charter of the Corporation, these
Bylaws or applicable law, a waiver thereof in writing, signed by the person or persons entitled to such notice, or a waiver by electronic
transmission by the person or persons entitled to such notice, whether before or after the time stated therein, shall be deemed equivalent to the
giving of such notice. Neither the business to be transacted at nor the purpose of any meeting need be set forth in the waiver of notice or
waiver by electronic transmission, unless specifically required by statute. The attendance of any person at any meeting shall constitute a
waiver of notice of such meeting, except where such person attends a meeting for the express purpose of objecting to the transaction of any
business on the ground that the meeting is not lawfully called or convened.
ARTICLE XIV
AMENDMENT OF BYLAWS
Section 14.1.
Amendment of Bylaws . The Board of Directors shall have the exclusive power to adopt, alter or repeal any
provision of these Bylaws and to make new Bylaws.
ARTICLE XV
MISCELLANEOUS
Section 15.1.
amendments thereto.
References to Charter of the Corporation . All references to the charter of the Corporation shall include any
Section 15.2.
Costs and Expenses . To the fullest extent permitted by law, each stockholder will be liable to the Corporation (and
any subsidiaries or affiliates thereof) for, and indemnify and hold harmless the Corporation (and any subsidiaries or affiliates thereof) from and
against, all costs, expenses, penalties, fines or other amounts, including without limitation, reasonable attorneys’ and other professional fees,
whether third party or internal, arising from such stockholder’s breach of or failure to fully comply with any covenant, condition or provision
of these Bylaws or the charter of the Corporation (including Section 2.14 of these Bylaws) or any action by or against the Corporation (or any
subsidiaries or affiliates thereof) in which such
38
stockholder is not the prevailing party, and shall pay such amounts to such indemnitee on demand, together with interest on such amounts,
which interest will accrue at the lesser of the Corporation’s highest marginal borrowing rate, per annum compounded, and the maximum
amount permitted by law, from the date such costs or the like are incurred until the receipt of payment.
Section 15.3.
Ratification . The Board of Directors or the stockholders may ratify and make binding on the Corporation any
action or inaction by the Corporation or its officers to the extent that the Board of Directors or the stockholders could have originally
authorized the matter. Moreover, any action or inaction questioned in any stockholder’s derivative proceeding or any other proceeding on the
ground of lack of authority, defective or irregular execution, adverse interest of a Director, officer or stockholder, non-disclosure,
miscomputation, the application of improper principles or practices of accounting, or otherwise, may be ratified, before or after judgment, by
the Board of Directors or by the stockholders and, if so ratified, shall have the same force and effect as if the questioned action or inaction had
been originally duly authorized, and such ratification shall be binding upon the Corporation and its stockholders and shall constitute a bar to
any claim or execution of any judgment in respect of such questioned action or inaction.
Section 15.4.
Ambiguity . In the case of an ambiguity in the application of any provision of these Bylaws or any definition
contained in these Bylaws, the Board of Directors shall have the sole power to determine the application of such provisions with respect to any
situation based on the facts known to it and such determination shall be final and binding unless determined by a court of competent
jurisdiction to have been made in bad faith.
Section 15.5.
Inspection of Bylaws . The Board of Directors shall keep at the principal office for the transaction of business of
the Corporation the original or a copy of the Bylaws as amended or otherwise altered to date, certified by the secretary, which shall be open to
inspection by the stockholders at all reasonable times during office hours.
Section 15.6.
Special Voting Provisions relating to Control Shares . Notwithstanding any other provision contained herein or in
the charter of the Corporation or these Bylaws, Title 3, Subtitle 7 of the Maryland General Corporation Law (or any successor statute) shall not
apply to any acquisition by any person of shares of stock of the Corporation. This section may be repealed, in whole or in part, at any time,
whether before or after an acquisition of control shares and, upon such repeal, may, to the extent provided by any successor bylaw, apply to any
prior or subsequent control share acquisition.
ARTICLE XVI
ARBITRATION
Section 16.1.
Procedures for Arbitration of Disputes . Any disputes, claims or controversies brought by or on behalf of any
stockholder of the Corporation (which, for purposes of this ARTICLE XVI, shall mean any stockholder of record or any beneficial owner of
shares of stock of the Corporation, or any former stockholder of record or beneficial owner of shares of
39
stock of the Corporation), either on his, her or its own behalf, on behalf of the Corporation or on behalf of any series or class of shares of stock
of the Corporation or stockholders of the Corporation against the Corporation or any Director, officer, manager (including Reit Management &
Research LLC or its successor), agent or employee of the Corporation, including disputes, claims or controversies relating to the meaning,
interpretation, effect, validity, performance or enforcement of the charter of the Corporation or these Bylaws (all of which are referred to as
“Disputes”) or relating in any way to such a Dispute or Disputes shall, on the demand of any party to such Dispute, be resolved through binding
and final arbitration in accordance with the Commercial Arbitration Rules (the “Rules”) of the American Arbitration Association (“AAA”) then
in effect, except as those Rules may be modified in this ARTICLE XVI. For the avoidance of doubt, and not as a limitation, Disputes are
intended to include derivative actions against Directors, officers or managers of the Corporation and class actions by stockholders against those
individuals or entities and the Corporation. For the avoidance of doubt, a Dispute shall include a Dispute made derivatively on behalf of one
party against another party.
Section 16.2.
Arbitrators . There shall be three arbitrators. If there are only two parties to the Dispute, each party shall select one
arbitrator within 15 days after receipt by respondent of a copy of the demand for arbitration. Such arbitrators may be affiliated or interested
persons of such parties. If either party fails to timely select an arbitrator, the other party to the Dispute shall select the second arbitrator who
shall be neutral and impartial and shall not be affiliated with or an interested person of either party. If there are more than two parties to the
Dispute, all claimants, on the one hand, and all respondents, on the other hand, shall each select, by the vote of a majority of the claimants or
the respondents, as the case may be, one arbitrator. Such arbitrators may be affiliated or interested persons of the claimants or the respondents,
as the case may be. If either all claimants or all respondents fail to timely select an arbitrator then such arbitrator (who shall be neutral,
impartial and unaffiliated with any party) shall be appointed by the parties who have appointed the first arbitrator. The two arbitrators so
appointed shall jointly appoint the third and presiding arbitrator (who shall be neutral, impartial and unaffiliated with any party) within 15 days
of the appointment of the second arbitrator. If the third arbitrator has not been appointed within the time limit specified herein, then the AAA
shall provide a list of proposed arbitrators in accordance with the Rules, and the arbitrator shall be appointed by the AAA in accordance with a
listing, striking and ranking procedure, with each party having a limited number of strikes, excluding strikes for cause.
Section 16.3.
Place of Arbitration . The place of arbitration shall be Boston, Massachusetts unless otherwise agreed by the
parties.
Section 16.4.
Discovery . There shall be only limited documentary discovery of documents directly related to the issues in
dispute, as may be ordered by the arbitrators.
Section 16.5.
Awards . In rendering an award or decision (the “Award”), the arbitrators shall be required to follow the laws of
the State of Maryland. Any arbitration proceedings or Award rendered hereunder and the validity, effect and interpretation of this arbitration
agreement shall be governed by the Federal Arbitration Act, 9 U.S.C. §1 et seq. The Award shall be in writing and may, but shall not be
required to, briefly state the findings of fact and conclusions of law on which it is based. Any monetary award shall be made and payable in
U.S. dollars free of
40
any tax, deduction or offset. The party against which the Award assesses a monetary obligation shall pay that obligation on or before the 30th
day following the date of the Award or such other date as the Award may provide.
Section 16.6.
Costs and Expenses . Except as otherwise set forth in the charter of the Corporation or these Bylaws, including
Section 15.2 of these Bylaws, or as otherwise agreed between the parties, each party involved in a Dispute shall bear its own costs and
expenses (including attorneys’ fees), and the arbitrators shall not render an award that would include shifting of any such costs or expenses
(including attorneys’ fees) or, in a derivative case or class action, award any portion of the Corporation’s award to the claimant or the
claimant’s attorneys. Each party (or, if there are more than two parties to the Dispute, all claimants, on the one hand, and all respondents, on
the other hand, respectively) shall bear the costs and expenses of its (or their) selected arbitrator and the parties (or, if there are more than two
parties to the Dispute, all claimants, on the one hand, and all respondents, on the other hand) shall equally bear the costs and expenses of the
third appointed arbitrator.
Section 16.7.
Final and Binding . An Award shall be final and binding upon the parties thereto and shall be the sole and
exclusive remedy between such parties relating to the Dispute, including any claims, counterclaims, issues or accounting presented to the
arbitrators. Judgment upon the Award may be entered in any court having jurisdiction. To the fullest extent permitted by law, no application
or appeal to any court of competent jurisdiction may be made in connection with any question of law arising in the course of arbitration or with
respect to any award made except for actions relating to enforcement of this agreement to arbitrate or any arbitral award issued hereunder and
except for actions seeking interim or other provisional relief in aid of arbitration proceedings in any court of competent jurisdiction.
Section 16.8.
Beneficiaries . This ARTICLE XVI is intended to benefit and be enforceable by the shareholders, Directors,
officers, managers (including Reit Management & Research LLC or its successor), agents or employees of the Corporation and the Corporation
and shall be binding on the stockholders of the Corporation and the Corporation, as applicable, and shall be in addition to, and not in
substitution for, any other rights to indemnification or contribution that such individuals or entities may have by contract or otherwise.
41
Exhibit 3.4
FIVE STAR QUALITY CARE, INC.
AMENDED AND RESTATED BYLAWS
As Amended and Restated November 22, 2011 February 14, 2012
Table of Contents
ARTICLE I OFFICES
Section 1.1.
Section 1.2.
Principal Office
Additional Offices
1
1
1
ARTICLE II MEETINGS OF STOCKHOLDERS
Section 2.1.
Place
Section 2.2.
Annual Meeting
Section 2.3.
Special Meetings
Section 2.4.
Notice of Regular or Special Meetings
Section 2.5.
Notice of Adjourned Meetings
Section 2.6.
Scope of Meetings
Section 2.7.
Organization of Stockholder Meetings
Section 2.8.
Quorum
Section 2.9.
Voting
Section 2.10.
Proxies
Section 2.11.
Record Date
Section 2.12.
Voting of Stock by Certain Holders
Section 2.13.
Inspectors
Section 2.14.
Nominations and Other Proposals to be Considered at Meetings of Stockholders
Section 2.14.1
Annual Meetings of Stockholders
Section 2.14.2
Stockholder Nominations or Other Proposals Causing Covenant Breaches or Defaults
Section 2.14.3
Stockholder Nominations or Other Proposals Requiring Governmental Action
Section 2.14.4
Special Meetings of Stockholders
Section 2.14.5
General
Section 2.15.
Voting by Ballot
Section 2.16.
Proposals of Business Which Are Not Proper Matters For Action By Stockholders
1
1
1
1
4
5
5
5
6
6
6
7
7
7
7
8
15
16
17
18
19
19
ARTICLE III DIRECTORS
Section 3.1.
Section 3.2.
Section 3.3.
Section 3.4.
Section 3.5.
Section 3.6.
Section 3.7.
Section 3.8.
Section 3.9.
Section 3.10.
Section 3.11.
Section 3.12.
Section 3.13.
Section 3.14.
Section 3.15.
19
19
20
20
20
21
21
21
21
22
22
22
22
22
22
23
General Powers; Qualifications; Directors Holding Over
Independent Directors and Managing Directors
Number and Tenure
Annual and Regular Meetings
Special Meetings
Notice
Quorum
Voting
Telephone Meetings
Action by Written Consent of Board of Directors
Waiver of Notice
Vacancies
Compensation
Surety Bonds
Reliance
Section 3.16.
Section 3.17.
Section 3.18.
Qualifying Shares of Stock Not Required
Certain Rights of Directors, Officers, Employees and Agents
Emergency Provisions
23
23
23
ARTICLE IV COMMITTEES
Section 4.1.
Section 4.2.
Section 4.3.
Section 4.4.
Section 4.5.
Section 4.6.
Number; Tenure and Qualifications
Powers
Meetings
Telephone Meetings
Action by Written Consent of Committees
Vacancies
23
23
23
24
24
24
24
ARTICLE V OFFICERS
Section 5.1.
Section 5.2.
Section 5.3.
Section 5.4.
Section 5.5.
Section 5.6.
Section 5.7.
Section 5.8.
Section 5.9.
Section 5.10.
Section 5.11.
Section 5.12.
General Provisions
Removal and Resignation
Vacancies
Chief Executive Officer
Chief Operating Officer
Chief Financial Officer
Chairman and Vice Chairman of the Board
President
Vice Presidents
Secretary
Treasurer
Assistant Secretaries and Assistant Treasurers
24
24
25
25
25
25
25
25
26
26
26
26
26
ARTICLE VI CONTRACTS, LOANS, CHECKS AND DEPOSITS
Section 6.1.
Contracts
Section 6.2.
Checks and Drafts
Section 6.3.
Deposits
26
26
27
27
ARTICLE VII STOCK
Section 7.1.
Section 7.2.
Section 7.3.
Section 7.4.
Section 7.5.
Section 7.6.
27
27
27
28
28
28
28
Certificates
Transfers
Lost Certificates
Closing of Transfer Books or Fixing of Record Date
Stock Ledger
Fractional Stock; Issuance of Units
ARTICLE VIII REGULATORY COMPLIANCE AND DISCLOSURE
Section 8.1.
Actions Requiring Regulatory Compliance Implicating the Corporation
Section 8.2.
Compliance With Law
Section 8.3.
Limitation on Voting Shares of Stock or Proxies
Section 8.4.
Representations, Warranties and Covenants Made to Governmental or Regulatory Bodies
Section 8.5.
Board of Directors’ Determinations
29
30
30
30
30
30
ARTICLE IX RESTRICTIONS ON TRANSFER OF SHARES
Section 9.1.
Definitions
Section 9.2.
Transfer And Ownership Restrictions
Section 9.3.
Exceptions
31
31
33
33
Section 9.4.
Section 9.5.
Section 9.6.
Section 9.7.
Section 9.8.
Section 9.9.
Section 9.10.
Section 9.11.
Section 9.12.
Section 9.13.
Section 9.14.
Section 9.15.
Section 9.16.
Excess Securities
Modification Of Remedies For Certain Indirect Transfers
Legal Proceedings; Prompt Enforcement
Liability
Obligation To Provide Information
Legend
Authority Of Board Of Directors
Transactions on a National Securities Exchange
Reliance
Benefits Of This Article IX
Severability
Waiver
Conflict
33
34
34
34
35
35
35
36
36
36
36
36
36
ARTICLE X ACCOUNTING YEAR
Section 10.1.
Accounting Year
37
37
ARTICLE XI DIVIDENDS AND OTHER DISTRIBUTIONS
Section 11.1.
Dividends and Other Distributions
37
37
ARTICLE XII SEAL
Section 12.1.
Section 12.2.
37
37
37
Seal
Affixing Seal
ARTICLE XIII WAIVER OF NOTICE
Section 13.1.
Waiver of Notice
37
37
ARTICLE XIV AMENDMENT OF BYLAWS
Section 14.1.
Amendment of Bylaws
38
38
ARTICLE XV MISCELLANEOUS
Section 15.1.
References to Charter of the Corporation
Section 15.2.
Costs and Expenses
Section 15.3.
Ratification
Section 15.4.
Ambiguity
Section 15.5.
Inspection of Bylaws
Section 15.6.
Special Voting Provisions relating to Control Shares
38
38
38
38
38
38
39
ARTICLE XVI ARBITRATION
Section 16.1.
Procedures for Arbitration of Disputes
Section 16.2.
Arbitrators
Section 16.3.
Place of Arbitration
Section 16.4.
Discovery
Section 16.5.
Awards
Section 16.6.
Costs and Expenses
Section 16.7.
Final and Binding
Section 16.8.
Beneficiaries
39
39
40
40
40
40
40
40
40
FIVE STAR QUALITY CARE, INC.
AMENDED AND RESTATED BYLAWS
ARTICLE I
OFFICES
Section 1.1.
Directors may designate.
Principal Office . The principal office of the Corporation shall be located at such place or places as the Board of
Section 1.2.
Additional Offices . The Corporation may have additional offices at such places as the Board of Directors may
from time to time determine or the business of the Corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 2.1.
Place . All meetings of stockholders shall be held at the principal office of the Corporation or at such other place as
is designated by the Board of Directors or the chairman of the board or president.
Section 2.2.
Annual Meeting . An annual meeting of the stockholders for the election of Directors and the transaction of any
business within the powers of the Corporation shall be held at such times as the Board of Directors may designate. Failure to hold an annual
meeting does not invalidate the Corporation’s existence or affect any otherwise valid acts of the Corporation.
Section 2.3.
Special Meetings .
(a)
General . The president of the Corporation or a majority of the entire Board of Directors may call a special meeting of the
stockholders. Subject to Section 2.3(b), if at the time stockholders are entitled by law to cause a special meeting of the stockholders to be
called, a special meeting of stockholders shall also be called by the secretary of the Corporation upon the written request of stockholders
entitled to cast not less than the Special Meeting Percentage of all the votes entitled to be cast at such meeting. The “Special Meeting
Percentage” shall be a majority or, if greater from time to time, the largest portion which the Corporation is legally permitted to specify with
respect to stockholders entitled by law to cause a special meeting of the stockholders to be called.
1
(b)
Stockholder Requested Special Meetings .
Any stockholder of record seeking to have stockholders request a special meeting shall, by sending written
(i)
notice to the secretary of the Corporation (the “Record Date Request Notice”) by registered mail, return receipt requested, request the
Board of Directors to fix a record date to determine the stockholders entitled to request a special meeting (the “Request Record
Date”). No stockholder may make a Record Date Request Notice unless such stockholder (i) complies with the requirements set forth
in Section 2.14.1(c)(ii)(A) and (ii) holds certificates for all shares of stock of the Corporation owned by such stockholder during all
times described in Section 2.14.1(c), and a copy of each such certificate held by such stockholder at the time of giving such written
request shall accompany such stockholder’s written request to the secretary in order for such request to be effective. The Record Date
Request Notice shall set forth the purpose of the meeting and the matters proposed to be acted on at the meeting, shall be signed by
one or more stockholders of record as of the date of signature (or their duly authorized agents), shall bear the date of signature of each
such stockholder (or its duly authorized agent) signing the Record Date Request Notice and shall set forth all information that each
such stockholder would be required to disclose in solicitations of proxies for election of Directors in an election contest (even though
an election contest is not involved), or is otherwise required, in each case, pursuant to Section 14 (or any successor provision) of the
Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the rules and regulations promulgated thereunder, as well as
additional information required by Section 2.14. Upon receiving the Record Date Request Notice, the Board of Directors may in its
discretion fix a Request Record Date, which need not be the same date as that requested in the Record Date Request Notice. The
Request Record Date shall not precede, and shall not be more than 10 days after the close of business on the date on which the
resolution fixing the Request Record Date is adopted by the Board of Directors. If the Board of Directors, within 10 days after the
date on which a valid Record Date Request Notice is received, fails to adopt a resolution fixing the Request Record Date and make a
public announcement (as defined in Section 2.14.5(c)) of such Request Record Date, the Request Record Date shall be the close of
business on the 10th day after the date a valid Record Date Request Notice is received by the secretary.
(ii)
In order for any stockholder to request a special meeting, one or more written requests for a special
meeting signed by stockholders of record (or their duly authorized agents) as of the Request Record Date entitled to cast not less than
the Special Meeting Percentage (the “Special Meeting Request”) shall be delivered to the secretary. No stockholder may make a
Special Meeting Request unless such stockholder (i) complies with the requirements set forth in Section 2.14.1(c)(ii)(A) and (ii) holds
certificates for all shares of stock of the Corporation owned by such stockholder during all times described in Section 2.14.1(c), and a
copy of each such certificate held by such stockholder at the time of giving such written request shall accompany such stockholder’s
written request to the secretary in order for such request to be effective. In addition, the Special Meeting Request shall set forth the
purpose of the meeting and the matters proposed to be acted on at
2
the meeting (which shall be limited to the matters set forth in the Record Date Request Notice received by the secretary), shall bear the
date of signature of each such stockholder (or its duly authorized agent) signing the Special Meeting Request, shall set forth the name
and address, as they appear in the Corporation’s books, of each stockholder signing such request (or on whose behalf the Special
Meeting Request is signed) and the class and number of shares of stock of the Corporation which are owned of record and beneficially
by each such stockholder, shall be sent to the secretary by registered mail, return receipt requested, and shall be received by the
secretary within 10 days after the Request Record Date. Any requesting stockholder may revoke his, her or its request for a special
meeting at any time by written revocation delivered to the secretary.
(iii)
The secretary shall inform the requesting stockholders of the reasonably estimated cost of preparing,
mailing and filing the notice of meeting (including the Corporation’s proxy materials). The secretary shall not be required to call a
special meeting upon stockholder request and such meeting shall not be held unless, in addition to the documents and information
required by Section 2.3(b)(ii), the secretary receives payment of such reasonably estimated cost prior to the mailing of any notice of
the meeting.
(iv)
Except as provided in the next sentence, any special meeting shall be held at such place, date and time as
may be designated by the officer who called the meeting in accordance with Section 2.3(a), if any, and otherwise by the Board of
Directors. In the case of any special meeting called by the secretary upon the request of stockholders (a “Stockholder Requested
Meeting”), such meeting shall be held at such place, date and time as may be designated by the Board of Directors; provided,
however, that the date of any Stockholder Requested Meeting shall be not more than 90 days after the record date for such meeting
(the “Meeting Record Date”); and provided further that if the Board of Directors fails to designate, within 10 days after the date that a
valid Special Meeting Request is actually received by the secretary (the “Delivery Date”), a date and time for a Stockholder Requested
Meeting, then such meeting shall be held at 2:00 p.m. local time on the 90th day after the Meeting Record Date or, if such 90th day is
not a Business Day (as defined below), on the first Business Day preceding such 90th day; and provided further that in the event that
the Board of Directors fails to designate a place for a Stockholder Requested Meeting within 10 days after the Delivery Date, then
such meeting shall be held at the principal executive office of the Corporation. In fixing a date for any special meeting, the president
or Board of Directors may consider such factors as he, she or it deems relevant within the exercise of their business judgment,
including, without limitation, the nature of the matters to be considered, the facts and circumstances surrounding any request for
meeting and any plan of the Board of Directors to call an annual meeting or a special meeting. In the case of any Stockholder
Requested Meeting, if the Board of Directors fails to fix a Meeting Record Date that is a date within 30 days after the Delivery Date,
then
3
the close of business on the 30th day after the Delivery Date shall be the Meeting Record Date.
(v)
If at any time as a result of written revocations of requests for the special meeting, stockholders of record
(or their duly authorized agents) as of the Request Record Date entitled to cast less than the Special Meeting Percentage shall have
delivered and not revoked requests for a special meeting, the secretary may refrain from mailing the notice of the meeting or, if the
notice of the meeting has been mailed, the secretary may revoke the notice of the meeting at any time before 10 days before the
meeting if the secretary has sent to all other requesting stockholders written notice of such revocation and of the intention to revoke
the notice of the meeting and the Corporation may cancel and not hold such meeting. Any request for a special meeting received after
a revocation by the secretary of a notice of a meeting shall be considered a request for a new special meeting.
(vi)
The Board of Directors shall determine the validity of any purported Record Date Request Notice or
Special Meeting Request received by the secretary. For the purpose of permitting the Board of Directors to perform such review, no
such purported request shall be deemed to have been delivered to the secretary until the earlier of (A) five Business Days after receipt
by the secretary of such purported request and (B) such date as the Board of Directors may certify whether valid requests received by
the secretary represent at least a majority of the issued and outstanding shares of stock (or such larger portion which the Corporation is
legally permitted to specify with respect to stockholders entitled by law to cause a special meeting of the stockholders to be called)
that would be entitled to vote at such meeting.
(vii)
For purposes of these Bylaws, “Business Day” shall mean any day other than a Saturday, a Sunday or a
day on which banking institutions in the Commonwealth of Massachusetts are authorized or obligated by law or executive order to
close.
Section 2.4.
Notice of Regular or Special Meetings . In accordance with applicable law and the charter of the Corporation, the
secretary shall give to each stockholder entitled to vote at such meeting and to each stockholder not entitled to vote who is entitled to notice of
the meeting written or printed notice stating the time and place of the meeting and, in the case of a special meeting or as otherwise may be
required by any statute, the purpose for which the meeting is called, either by mail, by presenting it to such stockholder personally, by leaving
it at the stockholder’s residence or usual place of business, by electronic transmission or by any other means permitted by Maryland law. If
mailed, such notice shall be deemed to be given once deposited in the U.S. mail addressed to the stockholder at the stockholder’s address as it
appears on the records of the Corporation, with postage thereon prepaid.
4
Section 2.5.
Notice of Adjourned Meetings . It shall not be necessary to give notice of the time and place of any adjourned
meeting or of the business to be transacted thereat other than by announcement at the meeting at which such adjournment is taken.
Section 2.6.
Scope of Meetings . Except as otherwise expressly set forth elsewhere in these Bylaws, no business shall be
transacted at an annual or special meeting of stockholders except as specifically designated in the notice or otherwise properly brought before
the meeting of stockholders by or at the direction of the Board of Directors.
Section 2.7.
Organization of Stockholder Meetings . Every meeting of stockholders shall be conducted by an individual
appointed by the Board of Directors to be chairperson of the meeting or, in the absence of such appointment or the absence of the appointed
individual, by the chairman of the board or, in the case of a vacancy in the office or absence of the chairman of the board, by one of the
following officers present at the meeting in the following order: the vice chairman of the board, if there be one, the president, the vice
presidents in their order of seniority, or, in the absence of such officers, a chairperson chosen by the stockholders by the vote of a majority of
the votes cast on such appointment by stockholders present in person or represented by proxy. The secretary, an assistant secretary or a person
appointed by the Board of Directors or, in the absence of such appointment, a person appointed by the chairperson of the meeting shall act as
secretary of the meeting and record the minutes of the meeting. If the secretary presides as chairperson at a meeting of the stockholders, then
the secretary shall not also act as secretary of the meeting and record the minutes of the meeting. The order of business and all other matters of
procedure at any meeting of stockholders shall be determined by the chairperson of the meeting. The chairperson of the meeting may prescribe
such rules, regulations and procedures and take such action as, in the discretion of such chairperson, are appropriate for the proper conduct of
the meeting, including, without limitation: (a) restricting admission to the time set for the commencement of the meeting; (b) limiting
attendance at the meeting to stockholders of record of the Corporation, their duly authorized proxies or other such persons as the chairperson of
the meeting may determine; (c) limiting participation at the meeting on any matter to stockholders of record of the Corporation entitled to vote
on such matter, their duly authorized proxies or other such persons as the chairperson of the meeting may determine; (d) limiting the time
allotted to questions or comments by participants; (e) maintaining order and security at the meeting; (f) removing any stockholder or other
person who refuses to comply with meeting procedures, rules or guidelines as set forth by the chairperson of the meeting; (g) concluding a
meeting or recessing or adjourning the meeting to a later date and time and at a place announced at the meeting; and (h) complying with any
state and local laws and regulations concerning safety and security. Without limiting the generality of the powers of the chairperson of the
meeting pursuant to the foregoing provisions, the chairperson may adjourn any meeting of stockholders for any reason deemed necessary by
the chairperson, including, without limitation, if (i) no quorum is present for the transaction of the business, (ii) the Board of Directors or the
chairperson of the meeting determines that adjournment is necessary or appropriate to enable the stockholders to consider fully information that
the Board of Directors or the chairperson of the meeting determines has not been made sufficiently or timely available to stockholders or
(iii) the Board of Directors or the chairperson of the meeting determines that adjournment is otherwise in the best interests of the Corporation.
Unless otherwise determined by the chairperson of the meeting, meetings of stockholders shall not be required to be held in accordance with
the general rules of parliamentary procedure or any otherwise established rules of order.
5
Section 2.8.
Quorum . At any annual or special meeting of stockholders called by the Board of Directors or any authorized
officer of the Corporation, the presence in person or by proxy of stockholders entitled to cast one-third of all the votes entitled to be cast at such
meeting shall constitute a quorum. Notwithstanding the immediately preceding sentence, at any special meeting of stockholders called upon
the written request of stockholders pursuant to Section 2.3(b), the presence in person or by proxy of stockholders entitled to cast a majority of
all the votes entitled to be cast at such meeting shall constitute a quorum. This section shall not affect any requirement under any statute or the
charter of the Corporation for the vote necessary for the adoption of any measure. If, however, a quorum shall not be present at any meeting of
the stockholders, the chairperson of the meeting shall have the power to adjourn the meeting from time to time without the Corporation having
to set a new record date or provide any additional notice of such meeting, subject to any obligation of the Corporation to give notice pursuant to
Section 2.5. At such adjourned meeting at which a quorum shall be present, any business may be transacted which might have been transacted
at the meeting as originally notified. The stockholders present, either in person or by proxy, at a meeting of stockholders which has been duly
called and convened and at which a quorum was established may continue to transact business until adjournment, notwithstanding the
withdrawal of enough votes to leave less than a quorum then being present at the meeting.
Section 2.9.
Voting .
(a)
A majority of all the votes entitled to be cast for the election of a Director shall be required to elect a Director in a contested
election (which, for purposes of these Bylaws, is an election at which the number of nominees exceeds the number of Directors to be elected at
the meeting). A majority plurality of all the votes cast at a meeting of stockholders duly called and at which a quorum is present shall be
sufficient to elect a Director in an uncontested election. Each share of stock of the Corporation may be voted for as many individuals as there
are Directors to be elected and for whose election the share is entitled to be voted; provided, however, that there shall be no cumulative voting
in the election of Directors.
For all matters to be voted upon by stockholders other than the election of Directors, unless otherwise required by applicable
(b)
law, by the listing requirements of the principal exchange on which shares of the Corporation’s common stock are listed or by a specific
provision of the charter of the Corporation, the vote required for approval shall be the affirmative vote of 75% of the votes entitled to be cast
for each such matter unless such matter has been previously approved by the Board of Directors, in which case the vote required for approval
shall be a majority of the votes cast at a meeting of stockholders duly called and at which a quorum is present.
Section 2.10.
Proxies . A stockholder may cast the votes entitled to be cast by him or her either in person or by proxy executed
by the stockholder or by his or her duly authorized agent in any manner permitted by law. Such proxy shall be filed with such officer of the
Corporation or third party agent as the Board of Directors shall have designated for such purpose for verification at or prior to such meeting.
Any proxy relating to shares of stock of the Corporation shall be valid until the expiration date therein or, if no expiration is so indicated, for
such period as is permitted pursuant to Maryland law. At a meeting of stockholders, all questions concerning the qualification
6
of voters, the validity of proxies, and the acceptance or rejection of votes, shall be decided by or on behalf of the chairperson of the meeting,
subject to Section 2.13.
Section 2.11.
Record Date . The Board of Directors may fix the date for determination of stockholders entitled to notice of and
to vote at a meeting of stockholders. If no date is fixed for the determination of the stockholders entitled to vote at any meeting of
stockholders, only persons in whose names shares of stock entitled to vote are recorded on the stock records of the Corporation at the opening
of business on the day of any meeting of stockholders shall be entitled to vote at such meeting.
Section 2.12.
Voting of Stock by Certain Holders . Stock of the Corporation registered in the name of a corporation, partnership,
trust or other entity, if entitled to be voted, may be voted by the president or a vice president, a general partner or trustee thereof, as the case
may be, or a proxy appointed by any of the foregoing individuals, unless some other person who has been appointed to vote such stock
pursuant to a bylaw or a resolution of the governing body of such corporation or other entity or pursuant to an agreement of the partners of the
partnership presents a certified copy of such bylaw, resolution or agreement, in which case such person may vote such stock. Any director or
other fiduciary may vote stock registered in his or her name as such fiduciary, either in person or by proxy.
Section 2.13.
Inspectors .
(a)
Before or at any meeting of stockholders, the chairperson of the meeting may appoint one or more persons as inspectors for
such meeting. Such inspectors shall (i) ascertain and report the number of shares of stock represented at the meeting, in person or by proxy,
and the validity and effect of proxies, (ii) receive and tabulate all votes, ballots or consents, (iii) report such tabulation to the chairperson of the
meeting and (iv) perform such other acts as are proper to conduct the election or voting at the meeting.
(b)
Each report of an inspector shall be in writing and signed by him or her or by a majority of them if there is more than one
inspector acting at such meeting. If there is more than one inspector, the report of a majority shall be the report of the inspectors. The report of
the inspector or inspectors on the number of shares of stock represented at the meeting and the results of the voting shall be prima facie
evidence thereof.
Section 2.14.
Nominations and Other Proposals to be Considered at Meetings of Stockholders . Nominations of individuals for
election to the Board of Directors and the proposal of other business to be considered by the stockholders at meetings of stockholders may be
properly brought before the meeting only as set forth in this Section 2.14. All judgments and determinations made by the Board of Directors or
the chairperson of the meeting, as applicable, under this Section 2.14 (including, without limitation, judgments and determinations as
to the propriety of a proposed nomination or a proposal of other business for consideration by stockholders) shall be final and binding unless
determined by a court of competent jurisdiction to have been made in bad faith.
7
Section 2.14.1
Annual Meetings of Stockholders .
(a)
A stockholder of the Corporation may recommend to the Nominating and Governance Committee of the Board of Directors
an individual as a nominee for election to the Board of Directors. Such recommendation shall be made by written notice to the Chair of such
committee and the Secretary of the Corporation, which notice should contain or be accompanied by the information and documents with
respect to such recommended nominee and stockholder that such stockholder believes to be relevant or helpful to the Nominating and
Governance Committee’s deliberations. In considering such recommendation, the Nominating and Governance Committee may request
additional information concerning the recommended nominee or the stockholder making the recommendation. The Nominating and
Governance Committee of the Board of Directors will consider any such recommendation in its discretion. A stockholder seeking to make a
nomination of an individual for election to the Board of Directors must make such nomination in accordance with Section 2.14.1(b)(ii).
(b)
Nominations of individuals for election to the Board of Directors at an annual meeting of stockholders may be properly
brought before the meeting (i) pursuant to the Corporation’s notice of meeting by or at the direction of the Board of Directors or (ii) by any one
or more stockholders of the Corporation who (A) (1) at the date of the giving of the notice provided for in this Section 2.14.1, individually or in
the aggregate, hold at least 3% of the Corporation’s shares of common stock entitled to vote at the meeting on such election and have held such
shares continuously for at least three years, and (2) continuously hold such shares through and including the time of the annual meeting
(including any adjournment or postponement thereof), (B) are each a stockholder of record of the Corporation at the time of giving the notice
provided for in this Section 2.14.1 through and including the time of the annual meeting (including any adjournment or postponement thereof),
(C) are each entitled to make nominations and to vote at the meeting on such election and (D) comply with the notice procedures set forth in
this Section 2.14.1 as to such nomination. Section 2.14.1(b)(ii) shall be the exclusive means for any stockholder to make nominations of
individuals for election to the Board of Directors.
(c)
The proposal of business to be considered by the stockholders at an annual meeting of stockholders, other than the
nomination of individuals for election to the Board of Directors, may be properly brought before the meeting (i) pursuant to the Corporation’s
notice of meeting by or at the direction of the Board of Directors or (ii) by any stockholder of the Corporation who (A) has continuously held at
least $2,000 in market value, or 1%, of the Corporation’s shares of common stock entitled to vote at the meeting on the proposal for business
for at least one year from the date such stockholder gives the notice provided for in this Section 2.14.1, and continuously holds such shares
through and including the time of the annual meeting (including any adjournment or postponement thereof), (B) is a stockholder of record at
the time of giving the notice provided for in this Section 2.14.1 through and including the time of the annual meeting (including any
adjournment or postponement thereof), (C) is entitled to propose such business and to vote at the meeting on the proposal for such business and
(D) complies with the notice procedures set forth in this Section 2.14.1 as to such business. Section 2.14.1(c)(ii) shall be the exclusive means
for a stockholder to propose business before an annual meeting of stockholders, except (x) to the extent of matters which are required to be
presented to stockholders by applicable law which have been properly presented in accordance with the requirements of such law
8
and (y) nominations of individuals for election to the Board of Directors shall be made in accordance with Section 2.14.1(b). For purposes of
determining compliance with the requirement in subclause (A) of Section 2.14.1(c)(ii), the market value of the Corporation’s shares of common
stock held by the applicable stockholder shall be determined by multiplying the number of shares such stockholder continuously held for that
one-year period by the highest selling price of the Corporation’s shares of common stock as reported on the principal exchange on which shares
of the Corporation’s common stock are listed during the 60 calendar days before the date such notice was submitted.
(d)
For nominations for election to the Board of Directors or other business to be properly brought before an annual meeting by
one or more stockholders pursuant to Section 2.14.1, such stockholder(s) shall have given timely notice thereof in writing to the secretary of the
Corporation in accordance with this Section 2.14 and such other business shall otherwise be a proper matter for action by stockholders. To be
timely, the notice of such stockholder(s) shall set forth all information required under this Section 2.14 and shall be delivered to the secretary at
the principal executive offices of the Corporation not later than 5:00 p.m. (Eastern Time) on the 120th day nor earlier than the 150th day prior
to the first anniversary of the date of the proxy statement for the preceding year’s annual meeting; provided, however, that in the event that the
annual meeting is called for a date that is more than 30 days earlier or later than the first anniversary of the date of the preceding year’s annual
meeting, notice by such stockholder(s) to be timely shall be so delivered not later than 5:00 p.m. (Eastern Time) on the 10th day following the
earlier of the day on which (i) notice of the date of the annual meeting is mailed or otherwise made available or (ii) public announcement of the
date of the annual meeting is first made by the Corporation. Neither the postponement or adjournment of an annual meeting, nor the public
announcement of such postponement or adjournment, shall commence a new time period for the giving of a notice of one or more stockholders
as described above. No stockholder may give a notice to the secretary described in this Section 2.14.1(d) unless such stockholder holds a
certificate for all shares of stock of the Corporation owned by such stockholder during all times described in Section 2.14.1(b), in the case of a
nomination of one or more individuals for election to the Board of Directors, or Section 2.14.1(c), in the case of the proposal of other business,
and a copy of each such certificate held by such stockholder at the time of giving such notice shall accompany such stockholder’s notice to the
secretary in order for such notice to be effective.
A notice of one or more stockholders pursuant to this Section 2.14.1 shall set forth:
(A)
separately as to each individual whom such stockholder(s) propose to nominate for election or reelection as a
Director (a “Proposed Nominee”) and any Proposed Nominee Associated Person (as defined in Section 2.14.1(g)),
(1) the name, age, business address and residence address of such Proposed Nominee and the name and address of
such Proposed Nominee Associated Person, (2) a statement of whether such Proposed Nominee is proposed for
nomination as an Independent Director (as defined in Section 3.2) or a Managing Director (as defined in
Section 3.2) and a
9
description of such Proposed Nominee’s qualifications to be an Independent Director or Managing Director, as the
case may be, and such Proposed Nominee’s qualifications to be a Director pursuant to the criteria set forth in
Section 3.1, (3) the class, series and number of any shares of stock of the Corporation that are, directly or indirectly,
beneficially owned or owned of record by such Proposed Nominee or by such Proposed Nominee Associated
Person, (4) the date such shares were acquired and the investment intent of such acquisition, (5) a description of all
purchases and sales of securities of the Corporation by such Proposed Nominee or by such Proposed Nominee
Associated Person during the previous 36 month period, including the date of the transactions, the class, series and
number of securities involved in the transactions and the consideration involved, (6) a description of all Derivative
Transactions (as defined in Section 2.14.1(g)) by such Proposed Nominee or by such Proposed Nominee Associated
Person during the previous 36 month period, including the date of the transactions and the class, series and number
of securities involved in, and the material economic terms of, the transactions, such description to include, without
limitation, all information that such Proposed Nominee or Proposed Nominee Associated Person would be required
to report on an Insider Report (as defined in Section 2.14.1(g)) if such Proposed Nominee or Proposed Nominee
Associated Person were a Director of the Corporation or the beneficial owner of more than 10% of the shares of
stock of the Corporation at the time of the transactions, (7) any performance related fees (other than an asset based
fee) to which such Proposed Nominee or such Proposed Nominee Associated Person is entitled based on any
increase or decrease in the value of any shares of stock of the Corporation or instrument or arrangement of the type
contemplated within the definition of Derivative Transaction, if any, including, without limitation, any such interests
held by members of such Proposed Nominee’s or such Proposed Nominee Associated Person’s immediate family
sharing the same household with such Proposed Nominee or such Proposed Nominee Associated Person, (8) any
proportionate interest in shares of stock of the Corporation or instrument or arrangement of the type contemplated
within the definition of Derivative Transaction held, directly or indirectly, by a general or limited partnership in
which such Proposed Nominee or such Proposed Nominee Associated Person is a general partner or, directly or
indirectly, beneficially owns an
10
interest in a general partner, (9) a description of all direct and indirect compensation and other material monetary
agreements, arrangements and understandings during the past three years, and any other material relationships,
between or among any stockholder making the nomination, any Proposed Nominee Associated Person, or any of
their respective affiliates and associates, or others acting in concert therewith, on the one hand, and each Proposed
Nominee, or his or her respective affiliates and associates, or others acting in concert therewith, on the other hand,
including, without limitation, all information that would be required to be disclosed pursuant to Item 404 of
Regulation S-K promulgated by the U.S. Securities and Exchange Commission (the “S.E.C.”) (and any successor
regulation), if any stockholder making the nomination and any Proposed Nominee Associated Person on whose
behalf the nomination is made, or any affiliate or associate thereof or person acting in concert therewith, were the
“registrant” for purposes of such rule and the Proposed Nominee were a director or executive officer of such
registrant, (10) any rights to dividends on the shares of stock of the Corporation owned beneficially by such
Proposed Nominee or such Proposed Nominee Associated Person that are separated or separable from the
underlying shares of stock of the Corporation, (11) to the extent known by such Proposed Nominee or such
Proposed Nominee Associated Person, the name and address of any other person who owns, of record or
beneficially, any shares of stock of the Corporation and who supports the Proposed Nominee for election or
reelection as a Director, and (12) all other information relating to such Proposed Nominee or such Proposed
Nominee Associated Person that is required to be disclosed in solicitations of proxies for election of Directors in an
election contest (even if an election contest is not involved), or is otherwise required, in each case, pursuant to
Section 14 (or any successor provision) of the Exchange Act and the rules and regulations promulgated thereunder;
(B)
as to any other business that the stockholder proposes to bring before the meeting, (1) a description of such
business, (2) the reasons for proposing such business at the meeting and any material interest in such business of
such stockholder or any Stockholder Associated Person (as defined in Section 2.14.1(g)), including any anticipated
benefit to such stockholder or any Stockholder Associated Person therefrom, (3) a description of all agreements,
11
arrangements and understandings between such stockholder and Stockholder Associated Person amongst themselves
or with any other person or persons (including their names) in connection with the proposal of such business by such
stockholder and (4) a representation that such stockholder intends to appear in person or by proxy at the meeting to
bring the business before the meeting;
(C)
separately as to each stockholder giving the notice and any Stockholder Associated Person, (1) the class, series and
number of all shares of stock of the Corporation that are owned of record by such stockholder or by such
Stockholder Associated Person, if any, (2) the class, series and number of, and the nominee holder for, any shares of
stock of the Corporation that are owned, directly or indirectly, beneficially but not of record by such stockholder or
by such Stockholder Associated Person, if any, (3) with respect to the shares referenced in the foregoing clauses
(1) and (2), the date such shares were acquired and the investment intent of such acquisition, and (4) all information
relating to such stockholder and Stockholder Associated Person that is required to be disclosed in connection with
the solicitation of proxies for election of Directors in an election contest (even if an election contest is not involved),
or is otherwise required, in each case, pursuant to Section 14 (or any successor provision) of the Exchange Act and
the rules and regulations promulgated thereunder;
(D)
separately as to each stockholder giving the notice and any Stockholder Associated Person, (1) the name and
address of such stockholder, as they appear on the Corporation’s stock ledger and the current name and address, if
different, of such stockholder and Stockholder Associated Person and (2) the investment strategy or objective, if
any, of such stockholder or Stockholder Associated Person and a copy of the prospectus, offering memorandum or
similar document, if any, provided to investors or potential investors in such stockholder or Stockholder Associated
Person;
(E)
separately as to the stockholder giving the notice and any Stockholder Associated Person, (1) a description of all
purchases and sales of securities of the Corporation by such stockholder or Stockholder Associated Person during
the previous 36 month period, including the date of the
12
transactions, the class, series and number of securities involved in the transactions and the consideration involved,
(2) a description of all Derivative Transactions by such stockholder or Stockholder Associated Person during the
previous 36 month period, including the date of the transactions and the class, series and number of securities
involved in, and the material economic terms of, the transactions, such description to include, without limitation, all
information that such stockholder or Stockholder Associated Person would be required to report on an Insider
Report if such stockholder or Stockholder Associated Person were a Director of the Corporation or the beneficial
owner of more than 10% of the shares of stock of the Corporation at the time of the transactions, (3) any
performance related fees (other than an asset based fee) to which such stockholder or Stockholder Associated Person
is entitled based on any increase or decrease in the value of shares of stock of the Corporation or instrument or
arrangement of the type contemplated within the definition of Derivative Transaction, if any, as of the date of such
notice, including, without limitation, any such interests held by members of such stockholder’s or Stockholder
Associated Person’s immediate family sharing the same household with such stockholder or Stockholder Associated
Person, (4) any proportionate interest in shares of stock of the Corporation or instrument or arrangement of the type
contemplated within the definition of Derivative Transaction held, directly or indirectly, by a general or limited
partnership in which such stockholder or Stockholder Associated Person is a general partner or, directly or
indirectly, beneficially owns an interest in a general partner and (5) any rights to dividends on the shares of stock of
the Corporation owned beneficially by such stockholder or Stockholder Associated Person that are separated or
separable from the underlying shares of stock of the Corporation;
(F)
to the extent known by the stockholder giving the notice, the name and address of any other person who owns,
beneficially or of record, any shares of stock of the Corporation and who supports the nominee for election or
reelection as a Director or the proposal of other business; and
13
(G)
(e)
if more than one class or series of shares of capital stock of the Corporation is outstanding, the class and series of
shares of capital stock of the Corporation entitled to vote for such Proposed Nominee and/or stockholder’s proposal,
as applicable.
A notice of one or more stockholders making a nomination pursuant to Section 2.14.1(b)(ii) shall be accompanied by:
(A)
a signed and notarized statement of each stockholder giving the notice certifying that (1) all information
contained in the notice is true and complete in all respects, (2) the notice complies with this Section 2.14.1, and (3) such stockholder will
continue to hold all shares referenced in Section 2.14.1(b)(ii)(A) through and including the time of the annual meeting (including any
adjournment or postponement thereof); and
(B)
a signed and notarized certificate of each Proposed Nominee (1) certifying that the information contained
in the notice regarding such Proposed Nominee and any Proposed Nominee Associated Person is true and complete and complies with this
Section 2.14.1 and (2) consenting to being named in the stockholder’s proxy statement as a nominee and to serving as a Director if elected.
(f)
Notwithstanding anything in the second sentence of Section 2.14.1(d) to the contrary, in the event that the number of
Directors to be elected to the Board of Directors is increased and there is no public announcement of such action at least 130 days prior to the
first anniversary of the date of the proxy statement for the preceding year’s annual meeting, a stockholder’s notice required by this
Section 2.14.1 also shall be considered timely, but only with respect to nominees for any new positions created by such increase, if the notice is
delivered to the secretary at the principal executive offices of the Corporation not later than 5:00 p.m. (Eastern Time) on the 10th day
immediately following the day on which such public announcement is first made by the Corporation.
(g)
For purposes of this Section 2.14, (i) “Stockholder Associated Person” of any stockholder shall mean (A) any person acting
in concert with, such stockholder, (B) any direct or indirect beneficial owner of shares of capital stock of the Corporation owned of record or
beneficially by such stockholder and (C) any person controlling, controlled by or under common control with such stockholder or a
Stockholder Associated Person; (ii) “Proposed Nominee Associated Person” of any Proposed Nominee shall mean (A) any person acting in
concert with such Proposed Nominee, (B) any direct or indirect beneficial owner of shares of capital stock of the Corporation owned of record
or beneficially by such Proposed Nominee and (C) any person controlling, controlled by or under common control with such Proposed
Nominee or a Proposed Nominee Associated Person; (iii) “Derivative Transaction” by a person shall mean any (A) transaction in, or
arrangement, agreement or understanding with respect to, any option, warrant, convertible security, stock appreciation right or similar right
with an exercise, conversion or exchange privilege, or settlement payment or mechanism related to, any security of the Corporation, or similar
instrument
14
with a value derived in whole or in part from the value of a security of the Corporation, in any such case whether or not it is subject to
settlement in a security of the Corporation or otherwise or (B) any transaction, arrangement, agreement or understanding which included or
includes an opportunity for such person, directly or indirectly, to profit or share in any profit derived from any increase or decrease in the value
of any security of the Corporation, to mitigate any loss or manage any risk associated with any increase or decrease in the value of any security
of the Corporation or to increase or decrease the number of securities of the Corporation which such person was, is or will be entitled to vote,
in any such case whether or not it is subject to settlement in a security of the Corporation or otherwise; and (iv) “Insider Report” shall mean a
statement required to be filed pursuant to Section 16 of the Exchange Act (or any successor provisions) by a person who is a Director of the
Corporation or who is directly or indirectly the beneficial owner of more than 10% of the shares of stock of the Corporation.
Section 2.14.2
Stockholder Nominations or Other Proposals Causing Covenant Breaches or Defaults . At the
same time as the submission of any stockholder nomination or proposal of other business to be considered at a stockholders meeting that, if
approved and implemented by the Corporation, would cause the Corporation or any subsidiary (as defined in Section 2.14.5(c)) of the
Corporation to be in breach of any covenant of the Corporation or any subsidiary of the Corporation or otherwise cause a default (in any case,
with or without notice or lapse of time) in any existing debt instrument or agreement of the Corporation or any subsidiary of the Corporation or
other material contract or agreement of the Corporation or any subsidiary of the Corporation, the proponent stockholder or stockholders shall
submit to the secretary at the principal executive offices of the Corporation (a) evidence satisfactory to the Board of Directors of the lender’s or
contracting party’s willingness to waive the breach of covenant or default or (b) a detailed plan for repayment of the indebtedness to the lender
or curing the contractual breach or default and satisfying any resulting damage claim, specifically identifying the actions to be taken or the
source of funds, which plan must be satisfactory to the Board of Directors in its discretion, and evidence of the availability to the Corporation
of substitute credit or contractual arrangements similar to the credit or contractual arrangements which are implicated by the stockholder
nomination or other proposal that are at least as favorable to the Corporation, as determined by the Board of Directors in its discretion. As an
example and not as a limitation, at the time these Bylaws are being amended and restated, the Corporation is party to a bank credit facility that
contains covenants which prohibit certain changes in the management and policies of the Corporation without the approval of the lenders;
accordingly, a stockholder nomination or proposal which implicates these covenants shall be accompanied by a waiver of these covenants duly
executed by the banks or by evidence satisfactory to the Board of Directors of the availability of funding to the Corporation to repay
outstanding indebtedness under this credit facility and of the availability of a new credit facility on terms as favorable to the Corporation as the
existing credit facility. As a further example and not as a limitation, at the time these Bylaws are being amended and restated, the Corporation
is party to lease and related agreements with Senior Housing Properties Trust or its subsidiaries (“Senior Housing”). Those agreements contain
covenants which prohibit certain changes in the management and policies of the Corporation without the approval of Senior Housing.
Accordingly, a stockholder nomination or proposal which implicates these covenants shall be accompanied by a waiver of these covenants duly
executed by the applicable Senior Housing entity or by evidence satisfactory to the Board of Directors of the availability of alternative facilities
for lease and operation by the Corporation on
15
terms as favorable to the Corporation as the applicable arrangement and of funds for the payment by the Corporation of any amounts required
under the applicable agreement or otherwise as a result of any breach or termination of the agreement with Senior Housing.
Section 2.14.3
Stockholder Nominations or Other Proposals Requiring Governmental Action . If (a) submission
of any stockholder nomination or proposal of other business to be considered at a stockholders meeting that could not be considered or, if
approved, implemented by the Corporation without the Corporation, any subsidiary of the Corporation, the proponent stockholder, any
Proposed Nominee of such stockholder, any Proposed Nominee Associated Person of such Proposed Nominee, any Stockholder Associated
Person of such stockholder, the holder of proxies or their respective affiliates or associates filing with or otherwise notifying or obtaining the
consent, approval or other action of any federal, state, municipal or other governmental or regulatory body (a “Governmental Action”) or
(b) such stockholder’s ownership of shares of stock of the Corporation or any solicitation of proxies or votes or holding or exercising proxies
by such stockholder, any Proposed Nominee of such stockholder, any Proposed Nominee Associated Person of such Proposed Nominee, any
Stockholder Associated Person of such stockholder, or their respective affiliates or associates would require Governmental Action, then, at the
same time as the submission of any stockholder nomination or proposal of other business to be considered at a stockholders meeting, the
proponent stockholder or stockholders shall submit to the secretary at the principal executive offices of the Corporation (x) evidence
satisfactory to the Board of Directors that any and all Governmental Action has been given or obtained, including, without limitation, such
evidence as the Board of Directors may require so that any nominee may be determined to satisfy any suitability or other requirements or (y) if
such evidence was not obtainable from a governmental or regulatory body by such time despite the stockholder’s diligent and best efforts, a
detailed plan for making or obtaining the Governmental Action prior to the election of any such Proposed Nominee or the implementation of
such proposal, which plan must be satisfactory to the Board of Directors in its discretion. As an example and not as a limitation, at the time
these Bylaws are being amended and restated, the Corporation holds a controlling ownership position in a company formed and licensed as an
insurance company in the State of Indiana. The laws of the State of Indiana have certain regulatory requirements for any person who seeks to
control (as defined under Indiana law) a company which itself controls an insurance company domiciled in the State of Indiana, including by
exercising proxies representing 10% or more of its voting securities. Accordingly, a stockholder who seeks to exercise proxies for a
nomination or a proposal affecting the governance of the Corporation shall obtain any applicable approvals from the Indiana insurance
regulatory authorities prior to exercising such proxies. Similarly, as a further example and not as a limitation, at the time these Bylaws are
being amended and restated, the Corporation operates healthcare facilities in various states; such facilities are governed by and subject to the
regulatory and licensing requirements of the state in which such facility is located. The licensing terms or regulatory regime of certain states
with jurisdiction over the Corporation may require that certain consents or approvals be obtained prior to the Corporation considering or
implementing certain actions, including potentially requiring that a Proposed Nominee obtain regulatory approval or consent prior to being
nominated for or elected as a Director. Accordingly, a stockholder nomination or stockholder proposal that, if approved, would require the
Corporation to obtain the consent or approval of a state authority due to the fact that the Corporation operates licensed healthcare facilities in
such state, shall be accompanied by evidence that the stockholder or Proposed Nominee has either secured the required approvals or consents
16
from all applicable state regulatory authorities or if such required approvals have not been obtained, then the stockholder nomination or other
proposal shall be accompanied by a copy of any applications or forms required to be completed by the Proposed Nominee or stockholder as
submitted or to be submitted to the applicable state authorities so that the Board of Directors may determine the likelihood that the stockholder
or the Proposed Nominee, as applicable, will receive any such required approval.
Special Meetings of Stockholders . As set forth in Section 2.6, only business brought before the
Section 2.14.4
meeting pursuant to the Corporation’s notice of meeting shall be conducted at a special meeting of stockholders. Nominations of individuals
for election to the Board of Directors only may be made at a special meeting of stockholders at which Directors are to be elected: (a) pursuant
to the Corporation’s notice of meeting; (b) otherwise properly brought before the meeting by or at the direction of the Board of Directors; or
(c) provided that the Board of Directors has determined that Directors shall be elected at such special meeting, by any stockholder of the
Corporation who is a stockholder of record both at the time of giving of notice provided for in this Section 2.14.4 through and including the
time of the special meeting, who is entitled to vote at the meeting on such election and who has complied with the notice procedures and other
requirements set forth in this Section 2.14.4. In the event the Corporation calls a special meeting of stockholders for the purpose of electing
one or more Directors to the Board of Directors, any such stockholder may nominate an individual or individuals (as the case may be) for
election as a Director as specified in the Corporation’s notice of meeting, if the stockholder satisfies the holding period and certificate
requirements set forth in Section 2.14.1(b) and Section 2.14.1(d), the stockholder’s notice contains or is accompanied by the information and
documents required by Section 2.14 and the stockholder has given timely notice thereof in writing to the secretary of the Corporation at the
principal executive offices of the Corporation. To be timely, a stockholder’s notice shall be delivered to the secretary of the Corporation at the
principal executive offices of the Corporation not earlier than the 150th day prior to such special meeting and not later than 5:00 p.m. (Eastern
Time) on the later of (i) the 120th day prior to such special meeting or (ii) the 10th day following the day on which public announcement is first
made of the date of the special meeting and of the nominees proposed by the Board of Directors to be elected at such meeting. Neither the
postponement or adjournment of a special meeting, nor the public announcement of such postponement or adjournment, shall commence a new
time period for the giving of a stockholder’s notice as described above.
Section 2.14.5
General .
(a)
If information submitted pursuant to this Section 2.14 by any stockholder proposing a nominee for election as a Director or
any proposal for other business at a meeting of stockholders shall be deemed by the Board of Directors incomplete or inaccurate, any
authorized officer or the Board of Directors or any committee thereof may treat such information as not having been provided in accordance
with this Section 2.14. Any notice submitted by a stockholder pursuant to this Section 2.14 that is deemed by the Board of Directors
inaccurate, incomplete or otherwise fails to satisfy completely any provision of this Section 2.14 shall be deemed defective and shall thereby
render all proposals and nominations set forth in such notice defective. Upon written request by the secretary of the Corporation or
the Board of Directors or any committee thereof (which
17
may be made from time to time), any stockholder proposing a nominee for election as a Director or any proposal for other business at a meeting
of stockholders shall provide, within three Business Days after such request (or such other period as may be specified in such request),
(i) written verification, satisfactory to the secretary or any other authorized officer or the Board of Directors or any committee thereof, in his,
her or its discretion, to demonstrate the accuracy of any information submitted by the stockholder pursuant to this Section 2.14, (ii) written
responses to information reasonably requested by the secretary, the Board of Directors or any committee thereof and (iii) a written update, to a
current date, of any information submitted by the stockholder pursuant to this Section 2.14 as of an earlier date. If a stockholder fails to
provide such written verification, information or update within such period, the secretary or any other authorized officer or the Board of
Directors may treat the information which was previously provided and to which the verification, request or update relates as not having been
provided in accordance with this Section 2.14; provided, however, that no such written verification, response or update shall cure any
incompleteness, inaccuracy or failure in any notice provided by a stockholder pursuant to this Section 2.14. It is the responsibility of a
stockholder who wishes to make a nomination or other proposal to comply with the requirements of Section 2.14; nothing in this Section 2.14.5
(a) or otherwise shall create any duty of the Corporation, the Board of Directors or any committee thereof nor any officer of the Corporation to
inform a stockholder that the information submitted pursuant to this Section 2.14 by or on behalf of such stockholder is incomplete or
inaccurate or not otherwise in accordance with this Section 2.14 nor require the Corporation, the Board of Directors, any committee of the
Board of Directors or any officer of the Corporation to request clarification or updating of information provided by any stockholder, but the
Board of Directors, a committee thereof or the secretary acting on behalf of the Board of Directors or a committee, may do so in its, his or her
discretion.
(b)
Only such individuals who are nominated in accordance with this Section 2.14 shall be eligible for election by stockholders
as Directors and only such business shall be conducted at a meeting of stockholders as shall have been properly brought before the meeting in
accordance with this Section 2.14. The chairperson of the meeting and the Board of Directors shall each have the power to determine whether
a nomination or any other business proposed to be brought before the meeting was made or proposed, as the case may be, in accordance with
this Section 2.14 and, if any proposed nomination or other business is determined not to be in compliance with this Section 2.14, to declare that
such defective nomination or proposal be disregarded.
(c)
For purposes of this Section 2.14: (i) “public announcement” shall mean disclosure in (A) a press release reported by the
Dow Jones News Service, Associated Press, Business Wire, PR Newswire or any other widely circulated news or wire service or (B) a
document publicly filed by the Corporation with the S.E.C. pursuant to the Exchange Act; and (ii) “subsidiary” shall include, with respect to a
person, any corporation, partnership, joint venture or other entity of which such person (A) owns, directly or indirectly, 10% or more of the
outstanding voting securities or other interests or (B) has a person designated by such person serving on, or a right, contractual or otherwise, to
designate a person, so to serve on, the board of directors (or analogous governing body).
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(d)
Notwithstanding the foregoing provisions of this Section 2.14, a stockholder shall also comply with all applicable legal
requirements, including, without limitation, applicable requirements of state law and the Exchange Act and the rules and regulations
thereunder, with respect to the matters set forth in this Section 2.14. Nothing in this Section 2.14 shall be deemed to require that a stockholder
nomination of an individual for election to the Board of Directors or a stockholder proposal relating to other business be included in the
Corporation’s proxy statement, except as may be required by law.
The Board of Directors may from time to time require any individual nominated to serve as a Director to agree in writing
(e)
with regard to matters of business ethics and confidentiality while such nominee serves as a Director, such agreement to be on the terms and in
a form (the “Agreement”) determined satisfactory by the Board of Directors, as amended and supplemented from time to time in the discretion
of the Board of Directors. The terms of the Agreement may be substantially similar to the Code of Business Conduct and Ethics of the
Corporation or any similar code promulgated by the Corporation (the “Code of Business Conduct”) or may differ from or supplement the Code
of Business Conduct.
(f)
Determinations required or permitted to be made under this Section 2.14 by the Board of Directors may be delegated by the
Board of Directors to a committee of the Board of Directors, subject to applicable law.
Section 2.15.
Voting by Ballot . Voting on any question or in any election may be voice vote unless the chairperson of the
meeting or any stockholder shall demand that voting be by ballot.
Proposals of Business Which Are Not Proper Matters For Action By Stockholders . Notwithstanding anything in
Section 2.16.
these Bylaws to the contrary, subject to applicable law, any stockholder proposal for business the subject matter or effect of which would be
within the exclusive purview of the Board of Directors, shall be deemed not to be a matter upon which the stockholders are entitled to vote.
The Board of Directors in its discretion shall be entitled to determine whether a stockholder proposal for business is not a matter upon which
the stockholders are entitled to vote pursuant to this Section 2.16, and its decision shall be final and binding unless determined by a court of
competent jurisdiction to have been made in bad faith.
ARTICLE III
DIRECTORS
Section 3.1.
General Powers; Qualifications; Directors Holding Over . The business and affairs of the Corporation shall be
managed under the direction of its Board of Directors. A Director shall be an individual at least 21 years of age who is not under legal
disability. To qualify for nomination or election as a Director, an individual, at the time of nomination and election, shall, without limitation,
(a) have substantial expertise or experience relevant to the business of the Corporation and its subsidiaries, (b) not have been convicted of a
felony, (c) meet the qualifications of an Independent Director or a Managing Director, each as defined in Section 3.2,
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as the case may be, depending upon the position for which such individual may be nominated and elected and (d) have been nominated for
election to the Board of Directors in accordance with Section 2.14.1(b). In case of failure to elect Directors at an annual meeting of the
stockholders, the incumbent Directors shall hold over and continue to direct the management of the business and affairs of the Corporation
until they may resign or until their successors are elected and qualify.
Section 3.2.
Independent Directors and Managing Directors . A majority of the Directors holding office shall at all times be
Independent Directors; provided, however, that upon a failure to comply with this requirement as a result of the creation of a temporary
vacancy which shall be filled by an Independent Director, whether as a result of enlargement of the Board of Directors or the resignation,
removal or death of a Director who is an Independent Director, such requirement shall not be applicable. An “Independent Director” is one
who is not an employee of the Corporation or Reit Management & Research LLC (or its permitted successors or assigns under the Shared
Services Agreement between the Corporation and Reit Management & Research LLC), who is not involved in the Corporation’s day to day
activities and who meets the qualifications of an independent director (not including the specific independence requirements applicable only to
members of the Audit Committee of the Board of Directors) under the applicable rules of each stock exchange upon which shares of stock of
the Corporation are listed for trading and the S.E.C., as those requirements may be amended from time to time. If the number of Directors, at
any time, is set at less than five, at least one Director shall be a Managing Director. So long as the number of Directors shall be five or greater,
at least two Directors shall be Managing Director. “Managing Directors” shall mean Directors who are not Independent Directors and who
have been employees of the Corporation or Reit Management & Research LLC (or its permitted successors or assigns under the Shared
Services Agreement between the Corporation and Reit Management & Research LLC) or involved in the day to day activities of the
Corporation for at least one year prior to their election. If at any time the Board of Directors shall not be comprised of a majority of
Independent Directors, the Board of Directors shall take such actions as will cure such condition; provided that the fact that the Board of
Directors does not have a majority of Independent Directors or has not taken such action at any time or from time to time shall not affect the
validity of any action taken by the Board of Directors. If at any time the Board of Directors shall not be comprised of a number of Managing
Directors as is required under this Section 3.2, the Board of Directors shall take such actions as will cure such condition; provided that the fact
that the Board of Directors does not have the requisite number of Managing Directors or has not taken such action at any time or from time to
time shall not affect the validity of any action taken by the Board of Directors.
Section 3.3.
Number and Tenure . The Board of Directors may establish, increase or decrease the number of Directors;
provided, that the number thereof shall never be less than the minimum number required by the Maryland General Corporation Law, nor more
than seven; and further, provided, that the tenure of office of a Director shall not be affected by any decrease in the number of Directors. The
number of Directors shall be five until increased or decreased by the Board of Directors.
Section 3.4.
Annual and Regular Meetings . An annual meeting of the Board of Directors shall be held immediately after the
annual meeting of stockholders, no notice other than this Bylaw being necessary. The time and place of the annual meeting of the Board of
Directors may be changed by the Board of Directors. The Board of Directors may provide, by resolution, the
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time and place, either within or without the State of Maryland, for the holding of regular meetings of the Board of Directors without other
notice than such resolution. In the event any such regular meeting is not so provided for, the meeting may be held at such time and place as
shall be specified in a notice given as hereinafter provided for special meetings of the Board of Directors.
Section 3.5.
Special Meetings . Special meetings of the Board of Directors may be called at any time by any Managing
Director, the president or pursuant to the request of any two Directors then in office. The person or persons authorized to call special meetings
of the Board of Directors may fix any place, either within or without the State of Maryland, as the place for holding any special meeting of the
Board of Directors called by them.
Section 3.6.
Notice . Notice of any special meeting shall be given by written notice delivered personally or by electronic mail,
telephoned, facsimile transmitted, overnight couriered (with proof of delivery) or mailed to each Director at his or her business or residence
address. Personally delivered, telephoned, facsimile transmitted or electronically mailed notices shall be given at least 24 hours prior to the
meeting. Notice by mail shall be deposited in the U.S. mail at least 72 hours prior to the meeting. If mailed, such notice shall be deemed to be
given when deposited in the U.S. mail properly addressed, with postage thereon prepaid. Electronic mail notice shall be deemed to be given
upon transmission of the message to the electronic mail address given to the Corporation by the Director. Telephone notice shall be deemed
given when the Director is personally given such notice in a telephone call to which he is a party. Facsimile transmission notice shall be
deemed given upon completion of the transmission of the message to the number given to the Corporation by the Director and receipt of a
completed answer back indicating receipt. If sent by overnight courier, such notice shall be deemed given when delivered to the courier.
Neither the business to be transacted at, nor the purpose of, any annual, regular or special meeting of the Board of Directors need be stated in
the notice, unless specifically required by statute or these Bylaws.
Section 3.7.
Quorum . A majority of the Directors shall constitute a quorum for transaction of business at any meeting of the
Board of Directors, provided that, if less than a majority of such Directors are present at a meeting, a majority of the Directors present may
adjourn the meeting from time to time without further notice, and provided further that if, pursuant to the charter of the Corporation or these
Bylaws, the vote of a majority of a particular group of Directors is required for action, a quorum for that action shall also include a majority of
such group. The Directors present at a meeting of the Board of Directors which has been duly called and convened and at which a quorum was
established may continue to transact business until adjournment, notwithstanding the withdrawal of a number of Directors resulting in less than
a quorum then being present at the meeting.
Voting . The action of the majority of the Directors present at a meeting at which a quorum is or was present shall
Section 3.8.
be the action of the Board of Directors, unless the concurrence of a greater proportion is required for such action by specific provision of an
applicable statute, the charter of the Corporation or these Bylaws. If enough Directors have withdrawn from a meeting to leave fewer than are
required to establish a quorum, but the meeting is not adjourned, the action of the majority of that number of Directors necessary to constitute a
quorum at such meeting shall be the action of the Board of Directors, unless the concurrence of a
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greater proportion is required for such action by applicable law, the charter of the Corporation or these Bylaws.
Section 3.9.
Telephone Meetings . Directors may participate in a meeting by means of a conference telephone or similar
communications equipment if all persons participating in the meeting can hear each other at the same time. Participation in a meeting by these
means shall constitute presence in person at the meeting. Such meeting shall be deemed to have been held at a place designated by the
Directors at the meeting.
Section 3.10.
Action by Written Consent of Board of Directors . Unless specifically otherwise provided in the charter of the
Corporation, any action required or permitted to be taken at any meeting of the Board of Directors may be taken without a meeting, if a consent
in writing to such action is signed by each Director and such written consent is filed with the minutes of proceedings of the Board of Directors.
Section 3.11.
Waiver of Notice . The actions taken at any meeting of the Board of Directors, however called and noticed or
wherever held, shall be as valid as though taken at a meeting duly held after regular call and notice if a quorum is present and if, either before
or after the meeting, each of the Directors not present waives notice, consents to the holding of such meeting or approves the minutes thereof.
Section 3.12.
Vacancies . If for any reason any or all the Directors cease to be Directors, such event shall not terminate the
Corporation or affect these Bylaws or the powers of the remaining Directors hereunder (even if fewer than three Directors remain). Except as
may be provided by the Board of Directors in setting the terms of any class or series of preferred stock, any vacancy on the Board of Directors
may be filled only by a majority of the remaining Directors, even if the remaining Directors do not constitute a quorum. Any Director elected
to fill a vacancy, whether occurring due to an increase in size of the Board of Directors or by the death, resignation or removal of any Director,
shall hold office for the remainder of the full term of the class in which the vacancy occurred or was created and until a successor is elected and
qualifies.
Section 3.13.
Compensation . Directors shall be entitled to receive such reasonable compensation for their services as Directors
as the Board of Directors may determine from time to time. Directors may be reimbursed for expenses of attendance, if any, at each annual,
regular or special meeting of the Board of Directors or of any committee thereof; and for their expenses, if any, in connection with each
property visit and any other service or activity performed or engaged in as Directors. The Directors shall be entitled to receive remuneration
for services rendered to the Corporation in any other capacity, and such services may include, without limitation, services as an officer of the
Corporation, legal, accounting or other professional services, or services as a broker, transfer agent or underwriter, whether performed by a
Director or any person affiliated with a Director.
Section 3.14.
Surety Bonds . Unless specifically required by law, no Director shall be obligated to give any bond or surety or
other security for the performance of any of his or her duties.
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Section 3.15.
Reliance . Each Director, officer, employee and agent of the Corporation shall, in the performance of his or her
duties with respect to the Corporation, be entitled to rely on any information, opinion, report or statement, including any financial statement or
other financial data, prepared or presented by an officer or employee of the Corporation or by the advisers, accountants, appraisers or other
experts or consultants selected by the Board of Directors or officers of the Corporation, regardless of whether such counsel or expert may also
be a Director.
Section 3.16.
Qualifying Shares of Stock Not Required . Directors need not be stockholders of the Corporation.
Section 3.17.
Certain Rights of Directors, Officers, Employees and Agents . A Director shall have no responsibility to devote his
or her full time to the affairs of the Corporation. Any Director or officer, employee or agent of the Corporation, in his or her personal capacity
or in a capacity as an affiliate, employee or agent of any other person, or otherwise, may have business interests and engage in business
activities similar or in addition to those of or relating to the Corporation.
Emergency Provisions . Notwithstanding any other provision in the charter of the Corporation or these Bylaws,
Section 3.18.
this Section 3.18 shall apply during the existence of any catastrophe, or other similar emergency condition, as a result of which a quorum of the
Board of Directors under ARTICLE III cannot readily be obtained (an “Emergency”). During any Emergency, unless otherwise provided by
the Board of Directors, (a) a meeting of the Board of Directors may be called by any Managing Director or officer of the Corporation by any
means feasible under the circumstances and (b) notice of any meeting of the Board of Directors during such an Emergency may be given less
than 24 hours prior to the meeting to as many Directors and by such means as it may be feasible at the time, including publication, television or
radio.
ARTICLE IV
COMMITTEES
Section 4.1.
Number; Tenure and Qualifications . The Board of Directors shall appoint an Audit Committee, a Compensation
Committee and a Nominating and Governance Committee. Each of these committees shall be composed of three or more Directors, to serve at
the pleasure of the Board of Directors. The Board of Directors may also appoint other committees from time to time composed of one or more
Directors, to serve at the pleasure of the Board of Directors. The Board of Directors shall adopt a charter with respect to the Audit Committee,
the Compensation Committee and the Nominating and Governance Committee, which charter shall specify the purposes, the criteria for
membership and the responsibility and duties and may specify other matters with respect to each committee. The Board of Directors may also
adopt a charter with respect to other committees.
Section 4.2.
Powers . The Board of Directors may delegate any of the powers of the Board of Directors to committees
appointed under Section 4.1, except as prohibited by law. In the event that a charter has been adopted with respect to a committee, the charter
shall constitute a delegation by the Board of Directors of the powers of the Board of Directors necessary to carry out
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the purposes, responsibilities and duties of a committee provided in the charter or reasonably related to those purposes, responsibilities and
duties, to the extent permitted by law.
Section 4.3.
Meetings . Notice of committee meetings shall be given in the same manner as notice for special meetings of the
Board of Directors. A majority of the members of any committee shall be present in person at any meeting of a committee in order to
constitute a quorum for the transaction of business at a meeting, and the act of a majority present at a meeting at the time of a vote if a quorum
is then present shall be the act of a committee. The Board of Directors or, if authorized by the Board in a committee charter or otherwise, the
committee members may designate a chairman of any committee, and the chairman or, in the absence of a chairman, a majority of any
committee may fix the time and place of its meetings unless the Board shall otherwise provide. In the absence or disqualification of any
member of any committee, the members thereof present at any meeting and not disqualified from voting, whether or not they constitute a
quorum, may unanimously appoint another Director to act at the meeting in the place of absent or disqualified members.
Each committee shall keep minutes of its proceedings and shall periodically report its activities to the full Board of Directors and,
except as otherwise provided by law or under the rules of the S.E.C. and applicable stock exchanges on which the Corporation’s shares of stock
are listed, any action by any committee shall be subject to revision and alteration by the Board of Directors, provided that no rights of third
persons shall be affected by any such revision or alteration.
Section 4.4.
Telephone Meetings . Members of a committee may participate in a meeting by means of a conference telephone
or similar communications equipment and participation in a meeting by these means shall constitute presence in person at the meeting.
Section 4.5.
Action by Written Consent of Committees . Any action required or permitted to be taken at any meeting of a
committee of the Board of Directors may be taken without a meeting, if a consent in writing to such action is signed by each member of the
committee and such written consent is filed with the minutes of proceedings of such committee.
Section 4.6.
Vacancies . Subject to the provisions hereof, the Board of Directors shall have the power at any time to change the
membership of any committee, to fill all vacancies, to designate alternate members to replace any absent or disqualified member or to dissolve
any such committee.
ARTICLE V
OFFICERS
Section 5.1.
General Provisions . The officers of the Corporation shall include a president, a secretary and a treasurer and may
include a chairman of the board, a vice chairman of the board, a chief executive officer, a chief operating officer, a chief financial officer, one
or more vice presidents, one or more assistant secretaries and one or more assistant treasurers. In addition, the Board of Directors may from
time to time elect such other officers with such powers and duties as they shall deem necessary or desirable. The officers of the Corporation
shall be elected
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annually by the Board of Directors, except that the chief executive officer or president may from time to time appoint one or more vice
presidents, assistant secretaries and assistant treasurers or other officers. Each officer shall hold office until his or her successor is elected and
qualifies or until his or her death, or his or her resignation or removal in the manner hereinafter provided. Any two or more offices except
president and vice president may be held by the same person. In its discretion, the Board of Directors may leave unfilled any office except that
of president, secretary and treasurer. Election of an officer or agent shall not of itself create contract rights between the Corporation and such
officer or agent.
Section 5.2.
Removal and Resignation . Any officer or agent of the Corporation may be removed by the Board of Directors if
in its judgment the best interests of the Corporation would be served thereby, but the removal shall be without prejudice to the contract rights,
if any, of the person so removed. Any officer of the Corporation may resign at any time by giving written notice of his or her resignation to the
Board of Directors, the chairman of the board, the president or the secretary. Any resignation shall take effect at any time specified therein or,
if the time when it shall become effective is not specified therein, immediately upon its receipt. The acceptance of a resignation shall not be
necessary to make it effective unless otherwise stated in the resignation. A resignation shall be without prejudice to the contract rights, if any,
of the Corporation.
Section 5.3.
Vacancies . A vacancy in any office may be filled by the Board of Directors for the balance of the term.
Section 5.4.
Chief Executive Officer . The Board of Directors may designate a chief executive officer from among the
Directors or elected officers. The chief executive officer shall have responsibility for implementation of the policies of the Corporation, as
determined by the Board of Directors, and for the administration of the business affairs of the Corporation. In Unless the Board of Directors
determines otherwise: in the absence of both the a chairman and a vice chairman of the board, the chief executive officer a Managing Director
shall preside over the at all meetings of the Board of Directors at which he shall be present. In , and in the absence of a different designation,
the Managing Directors, or any of them, shall function as any Managing Director, the chief executive officer of the Corporation shall preside .
Section 5.5.
Chief Operating Officer . The Board of Directors may designate a chief operating officer from among the elected
officers. Said officer will have the responsibilities and duties as set forth by the Board of Directors or the chief executive officer.
Chief Financial Officer . The Board of Directors may designate a chief financial officer from among the elected
Section 5.6.
officers. Said officer will have the responsibilities and duties as set forth by the Board of Directors or the chief executive officer.
Section 5.7.
Chairman and Vice Chairman of the Board . The chairman of the board, if any, and the vice chairman of the board,
if any, shall perform such duties as may be assigned to him, her or them by the Board of Directors. In the absence of a chairman and vice
chairman of the board or if none are appointed, the Managing Directors, or any of them, shall preside at meetings of the Board of Directors.
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Section 5.8.
President . The president may execute any deed, mortgage, bond, lease, contract or other instrument, except in
cases where the execution thereof shall be expressly delegated by the Board of Directors or by these Bylaws to some other officer or agent of
the Corporation or shall be required by law to be otherwise executed, and in general shall perform all duties incident to the office of president
and such other duties as may be prescribed by the chief executive officer or the Board of Directors.
Vice Presidents . In the absence or unavailability of the president, the vice president (or in the event there be more
Section 5.9.
than one vice president, any vice president) shall perform the duties of the president and when so acting shall have all the powers of the
president; and shall perform such other duties as from time to time may be assigned to him or her by the president, the chief executive officer
or by the Board of Directors. The Board of Directors may designate one or more vice presidents as executive vice presidents, senior vice
presidents or as vice presidents for particular areas of responsibility.
Section 5.10.
Secretary . The secretary (or his or her designee) shall (a) keep the minutes of the proceedings of the stockholders,
the Board of Directors and committees of the Board of Directors in one or more books provided for that purpose; (b) see that all notices are
duly given in accordance with the provisions of these Bylaws or as required by law; (c) be custodian of the corporate records and of the seal of
the Corporation, if any; (d) maintain a share register, showing the ownership and transfers of ownership of all shares of stock of the
Corporation, unless a transfer agent is employed to maintain and does maintain such a share register; and (e) in general perform such other
duties as from time to time may be assigned to the secretary by the chief executive officer or the Board of Directors.
Section 5.11.
Treasurer . The treasurer shall have the custody of the funds and securities of the Corporation and shall keep full
and accurate accounts of receipts and disbursements in books belonging to the Corporation and shall deposit all moneys and other valuable
effects in the name and to the credit of the Corporation in such depositories as may be authorized by the Board of Directors. The treasurer shall
also have such other responsibilities as may be assigned to him or her by the chief executive officer or the Board of Directors.
Section 5.12.
Assistant Secretaries and Assistant Treasurers . The assistant secretaries and assistant treasurers, in general, shall
perform such duties as shall be assigned to them by the secretary or treasurer, respectively, or by the chief executive officer or the Board of
Directors.
ARTICLE VI
CONTRACTS, LOANS, CHECKS AND DEPOSITS
Section 6.1.
Contracts . The Board of Directors may authorize any Director, officer or agent to enter into any contract or to
execute and deliver any instrument in the name of and on behalf of the Corporation and such authority may be general or confined to specific
instances. Any agreement, deed, mortgage, lease or other document executed by an authorized Director, officer or agent shall be valid and
binding upon the Corporation when authorized or ratified by action of the Board of Directors.
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Section 6.2.
Checks and Drafts . All checks, drafts or other orders for the payment of money, notes or other evidences of
indebtedness issued in the name of the Corporation shall be signed by such officer or agent of the Corporation in such manner as shall from
time to time be determined by the treasurer, the chief executive officer or the Board of Directors.
Section 6.3.
Deposits . All funds of the Corporation not otherwise employed shall be deposited from time to time to the credit
of the Corporation in such banks, trust companies or other depositories as the treasurer, the chief executive officer or the Board of Directors
may designate.
ARTICLE VII
STOCK
Section 7.1.
Certificates . Except as otherwise provided in these Bylaws, this Section 7.1 shall not be interpreted to limit the
authority of the Board of Directors to issue some or all of the shares of any or all of its classes or series without certificates. Each certificate
issued shall be signed by the chairman of the board, the president or a vice president and countersigned by the secretary or an assistant
secretary or the treasurer or an assistant treasurer and may be sealed with the seal, if any, of the Corporation. The signatures may be either
manual or facsimile. Certificates shall be consecutively numbered and if the Corporation shall from time to time issue several classes of stock,
each class may have its own number series. A certificate is valid and may be issued whether or not an officer who signed it is still an officer
when it is issued. At the election of the stockholder, a certificate may be in book entry form.
Section 7.2.
Transfers .
(a)
Shares of capital stock of the Corporation shall be transferable in the manner provided by applicable law, the charter of the
Corporation and these Bylaws. Upon surrender to the Corporation or the transfer agent of the Corporation of a stock certificate duly endorsed
or accompanied by proper evidence of succession, assignment or authority to transfer, the Corporation shall issue a new certificate to the
person entitled thereto, cancel the old certificate and record the transaction upon its books.
(b)
The Corporation shall be entitled to treat the holder of record of any share of stock as the holder in fact thereof and,
accordingly, shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other
person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of the State of Maryland.
Section 7.3.
Lost Certificates . For shares of stock evidenced by certificates, any officer designated by the Board of Directors
may direct a new certificate to be issued in place of any certificate previously issued by the Corporation alleged to have been lost, stolen or
destroyed upon the making of an affidavit of that fact by the person claiming the certificate to be lost, stolen or destroyed. When authorizing
the issuance of a new certificate, an officer designated by the Board of Directors may, in such officer’s discretion and as a condition precedent
to the issuance thereof, require the owner of such lost, stolen or destroyed certificate or the owner’s legal representative to advertise the same in
such manner as he shall require and/or to give bond, with sufficient surety, to
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the Corporation to indemnify it against any loss or claim which may arise as a result of the issuance of a new certificate.
Section 7.4.
Closing of Transfer Books or Fixing of Record Date .
The Board of Directors may set, in advance, a record date for the purpose of determining stockholders entitled to notice of or
(a)
to vote at any meeting of stockholders or determining stockholders entitled to receive payment of any dividend or the allotment of any other
rights, or in order to make a determination of stockholders for any other proper purpose.
(b)
In lieu of fixing a record date, the Board of Directors may provide that the stock transfer books shall be closed for a stated
period but not longer than 20 days. If the stock transfer books are closed for the purpose of determining stockholders entitled to notice of or to
vote at a meeting of stockholders, such books shall be closed for at least 10 days before the date of such meeting.
(c)
If no record date is fixed and the stock transfer books are not closed for the determination of stockholders, (i) the record date
for the determination of stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day on
which the notice of meeting is mailed or the 30th day before the meeting, whichever is the closer date to the meeting; and (ii) the record date
for the determination of stockholders entitled to receive payment of a dividend or an allotment of any other rights shall be the close of business
on the day on which the resolution of the Board of Directors, declaring the dividend or allotment of rights, is adopted.
(d)
When a determination of stockholders entitled to vote at any meeting of stockholders has been made as provided in this
section, such determination shall apply to any adjournment thereof unless the Board of Directors shall set a new record date with respect
thereto.
Section 7.5.
Stock Ledger . The Corporation shall maintain at its principal office or at the office of its counsel, accountants or
transfer agent a stock ledger containing the name and address of each stockholder and the number of shares of each class of stock held by such
stockholder.
Section 7.6.
Fractional Stock; Issuance of Units . The Board of Directors may issue fractional stock or provide for the issuance
of scrip, all on such terms and under such conditions as they may determine. Notwithstanding any other provision of the charter of the
Corporation or these Bylaws, the Board of Directors may issue units consisting of different securities of the Corporation. Any security issued
in a unit shall have the same characteristics as any identical securities issued by the Corporation, except that the Board of Directors may
provide that for a specified period securities of the Corporation issued in such unit may be transferred on the books of the Corporation only in
such unit.
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ARTICLE VIII
REGULATORY COMPLIANCE AND DISCLOSURE
Section 8.1.
Actions Requiring Regulatory Compliance Implicating the Corporation . If any stockholder (whether individually
or constituting a group, as determined by the Board of Directors), by virtue of such stockholder’s ownership interest in the Corporation or
actions taken by the stockholder affecting the Corporation, triggers the application of any requirement or regulation of any federal, state,
municipal or other governmental or regulatory body on the Corporation or any subsidiary (for purposes of this ARTICLE VIII, as defined in
Section 2.14.5(c)) of the Corporation or any of their respective businesses, assets or operations, including, without limitation, any obligations to
make or obtain a Governmental Action (as defined in Section 2.14.3), such stockholder shall promptly take all actions necessary and fully
cooperate with the Corporation to ensure that such requirements or regulations are satisfied without restricting, imposing additional obligations
on or in any way limiting the business, assets, operations or prospects of the Corporation or any subsidiary of the Corporation. If the
stockholder fails or is otherwise unable to promptly take such actions so to cause satisfaction of such requirements or regulations, the
stockholder shall promptly divest a sufficient number of shares of stock of the Corporation necessary to cause the application of such
requirement or regulation to not apply to the Corporation or any subsidiary of the Corporation. If the stockholder fails to cause such
satisfaction or divest itself of such sufficient number of shares of stock of the Corporation by not later than the 10th day after triggering such
requirement or regulation referred to in this Section 8.1, the acquisition of any shares of stock of the Corporation beneficially owned by such
stockholder at and in excess of the level triggering the application of such requirement or regulation shall, to the fullest extent permitted by law,
be deemed to constitute shares held in violation of the ownership limitations set forth in Article VI of the charter of the Corporation and be
subject to Article VI of the charter of the Corporation and any actions triggering the application of such a requirement or regulation may be
deemed by the Corporation to be of no force or effect. Moreover, if the stockholder who triggers the application of any regulation or
requirement fails to satisfy the requirements or regulations or to take curative actions within such 10 day period, the Corporation may take all
other actions which the Board of Directors deems appropriate to require compliance or to preserve the value of the Corporation’s assets; and
the Corporation may charge the offending stockholder for the Corporation’s costs and expenses as well as any damages which may result to the
Corporation.
As an example and not as a limitation, at the time these Bylaws are being amended and restated, the Corporation holds a controlling
ownership position in a company formed and licensed as an insurance company in the State of Indiana. The laws of the State of Indiana have
certain regulatory requirements for any person who seeks to control (as defined under Indiana law) a company which itself controls an
insurance company domiciled in the State of Indiana, including by exercising proxies representing 10% or more of the Corporation’s voting
securities. Accordingly, if a stockholder seeks to exercise proxies for a matter to be voted upon at a meeting of the Corporation’s stockholders
without having obtained any applicable approvals from the Indiana insurance regulatory authorities, such proxies representing 10% or more of
the Corporation’s voting securities will, subject to Section 8.3, be void and of no further force or effect.
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As a further example and not as a limitation, at the time these Bylaws are being amended and restated, the Corporation operates
healthcare facilities in various states which are subject to state regulatory and licensing requirements in each such state. Under the licensing
terms or regulatory regime of certain states with jurisdiction over the Corporation, a stockholder which acquires a controlling equity position in
the Corporation may be required to obtain regulatory approval or consent prior to or as a result of obtaining such ownership. Accordingly, if a
stockholder which acquires a controlling equity position in the Corporation that would require the stockholder or the Corporation to obtain the
consent or approval of a state authority due to the fact that the Corporation operates licensed healthcare facilities in such state, and the
stockholder refuses to provide the Corporation with information required to be submitted to the applicable state authority or if the state
authority declines to approve the stockholder’s ownership of the Corporation, then, in either event, shares of stock of the Corporation owned by
the stockholder necessary to reduce its ownership to an amount so that the stockholder’s ownership of Corporation shares of stock would not
require it to provide any such information to, or for consent to be obtained from, the state authority, may be deemed by the Board of Directors
to be shares of stock held in violation of the ownership limitation in Article VI of the charter of the Corporation and shall be subject to the
provisions of Article VI of the charter of the Corporation.
Compliance With Law . Stockholders shall comply with all applicable requirements of federal and state laws,
Section 8.2.
including all rules and regulations promulgated thereunder, in connection with such stockholder’s ownership interest in the Corporation and all
other laws which apply to the Corporation or any subsidiary of the Corporation or their respective businesses, assets or operations and which
require action or inaction on the part of the stockholder.
Section 8.3.
Limitation on Voting Shares of Stock or Proxies . Without limiting the provisions of Section 8.1, if a stockholder
(whether individually or constituting a group, as determined by the Board of Directors), by virtue of such stockholder’s ownership interest in
the Corporation or its receipt or exercise of proxies to vote shares of stock owned by other stockholders, would not be permitted to vote the
stockholder’s shares of stock of the Corporation or proxies for shares of stock of the Corporation in excess of a certain amount pursuant to
applicable law (including by way of example, applicable state insurance regulations) but the Board of Directors determines that the excess
shares or shares represented by the excess proxies are necessary to obtain a quorum, then such stockholder shall not be entitled to vote any such
excess shares or proxies, and instead such excess shares or proxies may, to the fullest extent permitted by law, be voted by the Board of
Directors (or by another person designated by the Board of Directors) in proportion to the total shares otherwise voted on such matter.
Representations, Warranties and Covenants Made to Governmental or Regulatory Bodies . To the fullest extent
Section 8.4.
permitted by law, any representation, warranty or covenant made by a stockholder with any governmental or regulatory body in connection
with such stockholder’s interest in the Corporation or any subsidiary of the Corporation shall be deemed to be simultaneously made to, for the
benefit of and enforceable by, the Corporation and any applicable subsidiary of the Corporation.
Section 8.5.
Board of Directors’ Determinations . The Board of Directors shall be empowered to make all determinations
regarding the interpretation, application,
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enforcement and compliance with any matters referred to or contemplated by this ARTICLE VIII.
ARTICLE IX
RESTRICTIONS ON TRANSFER OF SHARES
Section 9.1.
Definitions . As used in this ARTICLE IX, the following terms have the following meanings (and any
references to any portions of Treasury Regulation Sections 1.382-2T, 1.382-3 and 1.382-4 shall include any successor provisions):
(a)
“5-percent Stockholder” means a Person or group of Persons that is a “5-percent shareholder” of the Corporation
pursuant to Treasury Regulation Section 1.382-2T(g).
(b)
“5-percent Transaction” means any Transfer described in clause (a) or (b) of Section 9.2.
(c)
“Code” means the United States Internal Revenue Code of 1986, as amended from time to time, and the rulings
issued thereunder.
(d)
“Corporation Security” or “Corporation Securities” means (i) shares of common stock of the Corporation,
(ii) shares of preferred stock of the Corporation (other than preferred stock described in Section 1504(a)(4) of the Code), (iii) warrants, rights,
or options (including options within the meaning of Treasury Regulation Sections 1.382-2T(h)(4)(v) and 1.382-4) to purchase Securities issued
by the Corporation, and (iv) any Shares not included within the preceding clauses (i) through (iii) of this definition.
(e)
“Effective Date” means November 10, 2009.
(f)
“Excess Securities” has the meaning given such term in Section 9.4.
(g)
“Expiration Date” means the earlier of (i) the repeal of Section 382 of the Code or any successor statute if the
Board of Directors determines that this ARTICLE IX is no longer necessary for the preservation of Tax Benefits, (ii) the beginning of a taxable
year of the Corporation to which the Board of Directors determines that no Tax Benefits may be carried forward, or (iii) such date as the Board
of Directors shall fix in accordance with Section 9.10.
(h)
“Grandfathered Owner” has the meaning given such term in Section 9.2.
(i)
“Percentage Share Ownership” means the percentage Share Ownership interest of any Person or group (as the
context may require) for purposes of
31
Section 382 of the Code as determined in accordance with the Treasury Regulation Sections 1.382-2T(g), (h), (j) and (k) and 1.382-4.
(j)
“Person” means any individual, firm, corporation, company, limited liability company, partnership, joint venture,
estate, trust, or other legal entity, including a group of persons treated as an entity pursuant to Treasury Regulation Section 1.382-3(a)(1)(i).
(k)
“Prohibited Transfer” means any Transfer or purported Transfer of Corporation Securities to the extent that such
Transfer is prohibited and/or void under this ARTICLE IX.
(l)
“Public Group” has the meaning set forth in Treasury Regulation Section 1.382-2T(f)(13), excluding any “direct
public group” with respect to the Corporation, as that term is used in Treasury Regulation Section 1.382-2T(j)(2)(ii).
(m)
“Purported Transferee” has the meaning set forth in Section 9.4.
(n)
“Securities” and “Security” each has the meaning set forth in Section 9.5.
(o)
Section 1.382-2T(f)(18).
“Shares” means any interest that would be treated as “stock” of the Corporation pursuant to Treasury Regulation
(p)
“Share Ownership” means any direct or indirect ownership of Shares, including any ownership by virtue of
application of constructive ownership rules, with such direct, indirect, and constructive ownership determined under the provisions of
Section 382 of the Code and the Treasury Regulations.
(q)
“Tax Benefits” means the net operating loss carryforwards, capital loss carryforwards, general business credit
carryforwards, alternative minimum tax credit carryforwards and foreign tax credit carryforwards, as well as any loss or deduction attributable
to a “net unrealized built-in loss” of the Corporation or any direct or indirect subsidiary thereof, within the meaning of Section 382 of the Code.
(r)
“Transfer” means, any direct or indirect (by operation of law or otherwise) sale, transfer, assignment, conveyance,
pledge, devise or other disposition or other action taken by a Person, other than the Corporation, that alters the Percentage Share Ownership of
any Person. A Transfer also shall include the creation or grant of an option (including an option within the meaning of Treasury Regulation
Sections 1.382-2T(h)(4)(v) and 1.382-4). For the avoidance of doubt, a Transfer shall not include the creation or grant by the Corporation of an
option to purchase securities of the Corporation, nor shall a Transfer include the issuance of Shares by the Corporation.
(s)
“Transferee” means any Person to whom Corporation Securities are Transferred.
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(t)
“Treasury Regulations” means the regulations, including temporary regulations or any successor regulations
promulgated under the Code, as amended from time to time.
Section 9.2.
Transfer And Ownership Restrictions . From and after the Effective Date, any attempted Transfer of
Corporation Securities prior to the Expiration Date and any attempted Transfer of Corporation Securities pursuant to an agreement entered into
prior to the Expiration Date shall be prohibited and void ab initio to the extent that, as a result of such Transfer (or any series of Transfers of
which such Transfer is a part), either (a) any Person or Persons would become a 5-percent Stockholder or (b) the Percentage Share Ownership
of any 5-percent Stockholder would be increased. Any 5-percent Stockholder as of the Effective Date (the “Grandfathered Owner”) shall not
be required, solely as a result of the adoption of this ARTICLE IX and the occurrence of the Effective Date, pursuant to this ARTICLE IX, to
reduce or dispose of any Corporation Securities owned by such Grandfathered Owner as of the Effective Date and none of such Corporation
Securities owned by such Grandfathered Owner as of the Effective Date shall be deemed, solely as a result of the adoption of this ARTICLE IX
and the occurrence of the Effective Date, to be Excess Securities; provided, however, that such Grandfathered Owner may not acquire any
additional Corporation Securities at any time such Grandfathered Owner remains a 5-percent Stockholder and, upon such Grandfathered Owner
no longer being a 5-percent Stockholder, the provisions of this ARTICLE IX shall apply in their entirety to such Grandfathered Owner.
Section 9.3.
Exceptions .
(a)
Notwithstanding anything to the contrary herein, Transfers to a Public Group (including a new Public Group
created under Treasury Regulation Section 1.382-2T(j)(3)(i)) shall be permitted.
(b)
The restrictions set forth in Section 9.2 shall not apply to an attempted Transfer that is a 5-percent Transaction if the
transferor or the Transferee obtains the written approval of the Board of Directors or a duly authorized committee thereof. The Board of
Directors may impose conditions in connection with such approval, including, without limitation, restrictions on the ability or right of any
Transferee to Transfer Shares acquired through a Transfer. Approvals of the Board of Directors hereunder may be given prospectively or
retroactively.
Section 9.4.
Excess Securities .
(a)
No employee or agent of the Corporation shall record any Prohibited Transfer in the share register for the
Corporation, and the purported transferee of such a Prohibited Transfer (the “Purported Transferee”) shall not be recognized as a stockholder of
the Corporation for any purpose whatsoever in respect of the Corporation Securities which are the subject of the Prohibited Transfer (the
“Excess Securities”). The Purported Transferee shall not be entitled with respect to such Excess Securities to any rights of stockholders of the
Corporation, including, without limitation, the right to vote such Excess Securities or to receive dividends or distributions, whether liquidating
or
33
otherwise, in respect thereof, if any, and the Excess Securities shall be deemed to constitute shares of the Corporation in excess of the
Ownership Limit (as defined in Section 6.1 of the charter of the Corporation) and be subject to ARTICLE VI of the charter of the Corporation.
Any Transfer of Excess Securities in accordance with the provisions of this ARTICLE IX shall cease to be Excess Securities upon
consummation of such Transfer.
(b)
The Corporation may require as a condition to the registration of the Transfer of any Corporation Securities in the
share register of the Corporation or the payment of any distribution on any Corporation Securities that the proposed Transferee or payee furnish
to the Corporation all information reasonably requested by the Corporation with respect to its direct or indirect ownership interests in such
Corporation Securities. The Corporation may make such arrangements or issue such instructions to its employees or agents as may be
determined by the Board of Directors to be necessary or advisable to implement this ARTICLE IX, including, without limitation, authorizing
its employees or agents to require, as a condition to registering any Transfer in the share register of the Corporation, an affidavit from a
Purported Transferee regarding such Person’s actual and constructive ownership of shares and other evidence that a Transfer will not be
prohibited by this ARTICLE IX.
Section 9.5.
Modification Of Remedies For Certain Indirect Transfers . In the event of any Transfer which does not
involve a transfer of securities of the Corporation within the meaning of Maryland law ( “ Securities,” and individually, a “Security”) but
which would cause a 5-percent Stockholder to violate a restriction on Transfers provided for in this ARTICLE IX, a sufficient amount of
Securities of such 5-percent Stockholder and/or any Person whose ownership of Securities is attributed to such 5-percent Stockholder shall be
deemed to be Excess Securities and shall be treated as provided in Section 9.4, including, without limitation, being deemed to constitute shares
of the Corporation in excess of the Ownership Limit (as defined in Section 6.1 of the charter of the Corporation) and be subject to
ARTICLE VI of the charter of the Corporation. For the avoidance of doubt, no such 5-percent Stockholder shall be required, pursuant to this
Section 9.5, to dispose of any interest that is not a Security. The purpose of this Section 9.5 is to extend the restrictions in Section 9.2 to
situations in which there is a 5-percent Transaction without a direct Transfer of Securities, and this Section 9.5, along with the other provisions
of this ARTICLE IX, shall be interpreted to produce the same results, with such differences as the context requires or as determined by the
Board of Directors, as a direct Transfer of Corporation Securities.
Section 9.6.
Legal Proceedings; Prompt Enforcement . The Board of Directors may authorize such additional actions,
beyond those provided for or contemplated by this ARTICLE IX, to give effect to or in furtherance of the provisions of this ARTICLE IX.
Nothing in this Section 9.6 shall (a) be deemed inconsistent with any Transfer of the Excess Securities provided in this ARTICLE IX being
void ab initio , (b) preclude the Corporation in the sole discretion of the Board of Directors from immediately bringing legal proceedings
without a prior demand, or (c) cause any failure of the Corporation to act within any particular time period to constitute a waiver or loss of any
right of the Corporation under this ARTICLE IX.
Section 9.7.
Liability . To the fullest extent permitted by law and without limiting any other remedies of the
Corporation and related matters provided elsewhere in these Bylaws or in the charter of the Corporation, any stockholder subject to the
provisions of this
34
ARTICLE IX who knowingly violates the provisions of this ARTICLE IX and any Persons controlling, controlled by or under common control
with such stockholder shall be jointly and severally liable to the Corporation for, and shall indemnify and hold the Corporation harmless
against, any and all damages suffered as a result of such violation, including but not limited to damages resulting from a reduction in, or
elimination of, the Corporation’s ability or right to utilize its Tax Benefits, and attorneys’ and auditors’ fees incurred in connection with such
violation.
Obligation To Provide Information . As a condition to the registration of the Transfer of any Shares in the
Section 9.8.
share register for the Corporation, any Person who is a beneficial, legal or record holder of Shares, and any proposed Transferee and any Person
controlling, controlled by or under common control with the proposed Transferee, shall provide such information as the Corporation may
request from time to time in order to determine compliance with this ARTICLE IX or the status of the Tax Benefits of the Corporation.
Section 9.9.
Legend . Unless otherwise provided by the Board of Directors, each certificate or account statement
evidencing or representing Shares (or securities exercisable for or convertible into Shares) shall bear a legend with respect to the restrictions
contained in this ARTICLE IX in such form as shall be prescribed by the Board of Directors. Instead of the foregoing legend, the certificate or
account statement may state that the Corporation will furnish a full statement about certain restrictions on transferability to a stockholder on
request and without charge.
Section 9.10.
Authority Of Board Of Directors .
The Board of Directors shall have the power to determine all matters necessary for assessing compliance with this
(a)
ARTICLE IX, including, without limitation, (i) the identification of 5-percent Stockholders, (ii) whether a Transfer is a 5-percent Transaction
or a Prohibited Transfer, (iii) the Percentage Share Ownership of any 5-percent Stockholder, (iv) whether an instrument constitutes a
Corporation Security, (v) the application of Section 9.4, including, without limitation, the application of ARTICLE VI of the charter of the
Corporation to Excess Securities, and Section 9.5, and (vi) any other matters which the Board of Directors determines to be relevant; and the
determination of the Board of Directors on such matters shall be conclusive and binding for all the purposes of this ARTICLE IX.
(b)
Nothing contained in this ARTICLE IX shall limit the authority of the Board of Directors to take such other action
to the extent permitted by law as it deems necessary or advisable to protect the Corporation and its stockholders in preserving the Tax Benefits.
Without limiting the generality of the foregoing, the Board of Directors may, by adopting a written resolution, (i) accelerate or extend the
Expiration Date, (ii) modify the ownership interest percentage in the Corporation or the Persons or groups covered by this ARTICLE IX,
(iii) modify the definitions of any terms set forth in this ARTICLE IX or (iv) modify the terms of this ARTICLE IX as appropriate, in each
case, in order to prevent an ownership change for purposes of Section 382 of the Code as a result of any changes in applicable Treasury
Regulations or otherwise. Stockholders of the Corporation may be notified of such determination through a filing with the S.E.C. or such other
method of notice as the Board of Directors may determine. All actions, calculations, interpretations
35
and determinations which are done or made by the Board of Directors shall be conclusive and binding on the Corporation and all other parties
for all other purposes of this ARTICLE IX.
(c)
The Board of Directors may delegate all or any portion of its duties and powers under this ARTICLE IX to a
committee of the Board of Directors as it deems necessary or advisable and, to the fullest extent permitted by law, may exercise the authority
granted by this ARTICLE IX through duly authorized officers or agents of the Corporation.
Section 9.11.
Transactions on a National Securities Exchange . Nothing in this ARTICLE IX shall preclude the
settlement of any transaction entered into through the facilities of a national securities exchange or any automated inter-dealer quotation
system. The fact that the settlement of any transaction takes place shall not negate the effect of any other provision of this ARTICLE IX and
any transferor and transferee in such a transaction shall be subject to all of the provisions and limitations set forth in this ARTICLE IX.
Reliance . For purposes of determining the existence, identity and amount of any Corporation Securities
Section 9.12.
owned by any stockholder, the Corporation is entitled to rely on the existence and absence of filings of Schedule 13D or 13G under the
Exchange Act (or similar filings), as of any date, subject to its actual knowledge of the ownership of Corporation Securities.
Section 9.13.
Benefits Of This Article IX . Nothing in this ARTICLE IX shall be construed to give to any Person, other
than the Corporation and the Charitable Trustee (as defined in the charter of the Corporation) any legal or equitable right, remedy or claim
under this ARTICLE IX. This ARTICLE IX shall be for the sole and exclusive benefit of the Corporation and the Charitable Trustee.
Section 9.14.
Severability . If any provision of this ARTICLE IX or the application of any such provision to any Person
or under any circumstance shall be held invalid, illegal or unenforceable in any respect by a court of competent jurisdiction, such invalidity,
illegality or unenforceability shall not affect any other provision of this ARTICLE IX.
Section 9.15.
Waiver . With regard to any power, remedy or right provided herein or otherwise available to the
Corporation under this ARTICLE IX, (a) no waiver will be effective unless authorized by the Board of Directors and expressly contained in a
writing signed by the Corporation; and (b) no alteration, modification or impairment will be implied by reason of any previous waiver,
extension of time, delay or omission in exercise, or other indulgence.
Conflict . If there shall be any conflict between the provisions of this ARTICLE IX or the application
Section 9.16.
thereof and the provisions of ARTICLE VI of the charter of the Corporation or the application thereof to the matters addressed in this
ARTICLE IX, as contemplated by this ARTICLE IX, the provisions of this ARTICLE IX and the application thereof shall control.
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ARTICLE X
ACCOUNTING YEAR
Section 10.1.
Accounting Year . The Board of Directors shall have the power, from time to time, to fix the fiscal year of the
Corporation by a duly adopted resolution.
ARTICLE XI
DIVIDENDS AND OTHER DISTRIBUTIONS
Section 11.1.
Dividends and Other Distributions . Dividends and other distributions upon the stock of the Corporation may be
authorized and declared by the Board of Directors. Dividends and other distributions may be paid in cash, property or stock of the Corporation.
ARTICLE XII
SEAL
Section 12.1.
Seal . The Board of Directors may authorize the adoption of a seal by the Corporation. The seal shall contain the
name of the Corporation and the year of its incorporation and the words “Incorporated Maryland.” The Board of Directors may authorize one
or more duplicate seals.
Section 12.2.
Affixing Seal . Whenever the Corporation is permitted or required to affix its seal to a document, it shall be
sufficient to meet the requirements of any law, rule or regulation relating to a seal to place the word “(SEAL)” adjacent to the signature of the
person authorized to execute the document on behalf of the Corporation.
ARTICLE XIII
WAIVER OF NOTICE
Section 13.1.
Waiver of Notice . Whenever any notice is required to be given pursuant to the charter of the Corporation, these
Bylaws or applicable law, a waiver thereof in writing, signed by the person or persons entitled to such notice, or a waiver by electronic
transmission by the person or persons entitled to such notice, whether before or after the time stated therein, shall be deemed equivalent to the
giving of such notice. Neither the business to be transacted at nor the purpose of any meeting need be set forth in the waiver of notice or
waiver by electronic transmission, unless specifically required by statute. The attendance of any person at any meeting shall constitute a
waiver of notice of such meeting, except where such person attends a meeting for the express purpose of objecting to the transaction of any
business on the ground that the meeting is not lawfully called or convened.
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ARTICLE XIV
AMENDMENT OF BYLAWS
Section 14.1.
Amendment of Bylaws . The Board of Directors shall have the exclusive power to adopt, alter or repeal any
provision of these Bylaws and to make new Bylaws.
ARTICLE XV
MISCELLANEOUS
Section 15.1.
amendments thereto.
References to Charter of the Corporation . All references to the charter of the Corporation shall include any
Section 15.2.
Costs and Expenses . To the fullest extent permitted by law, each stockholder will be liable to the Corporation
(and any subsidiaries or affiliates thereof) for, and indemnify and hold harmless the Corporation (and any subsidiaries or affiliates thereof)
from and against, all costs, expenses, penalties, fines or other amounts, including without limitation, reasonable attorneys’ and other
professional fees, whether third party or internal, arising from such stockholder’s breach of or failure to fully comply with any covenant,
condition or provision of these Bylaws or the charter of the Corporation (including Section 2.14 of these Bylaws) or any action by or against
the Corporation (or any subsidiaries or affiliates thereof) in which such stockholder is not the prevailing party, and shall pay such amounts to
such indemnitee on demand, together with interest on such amounts, which interest will accrue at the lesser of the Corporation’s highest
marginal borrowing rate, per annum compounded, and the maximum amount permitted by law, from the date such costs or the like are incurred
until the receipt of payment.
Section 15.3.
Ratification . The Board of Directors or the stockholders may ratify and make binding on the Corporation any
action or inaction by the Corporation or its officers to the extent that the Board of Directors or the stockholders could have originally
authorized the matter. Moreover, any action or inaction questioned in any stockholder’s derivative proceeding or any other proceeding on the
ground of lack of authority, defective or irregular execution, adverse interest of a Director, officer or stockholder, non-disclosure,
miscomputation, the application of improper principles or practices of accounting, or otherwise, may be ratified, before or after judgment, by
the Board of Directors or by the stockholders and, if so ratified, shall have the same force and effect as if the questioned action or inaction had
been originally duly authorized, and such ratification shall be binding upon the Corporation and its stockholders and shall constitute a bar to
any claim or execution of any judgment in respect of such questioned action or inaction.
Section 15.4.
Ambiguity . In the case of an ambiguity in the application of any provision of these Bylaws or any definition
contained in these Bylaws, the Board of Directors shall have the sole power to determine the application of such provisions with respect to any
situation based on the facts known to it and such determination shall be final and binding unless determined by a court of competent
jurisdiction to have been made in bad faith.
Section 15.5.
Inspection of Bylaws . The Board of Directors shall keep at the principal office for the transaction of business of
the Corporation the original or a copy of the Bylaws as
38
amended or otherwise altered to date, certified by the secretary, which shall be open to inspection by the stockholders at all reasonable times
during office hours.
Section 15.6.
Special Voting Provisions relating to Control Shares . Notwithstanding any other provision contained herein or in
the charter of the Corporation or these Bylaws, Title 3, Subtitle 7 of the Maryland General Corporation Law (or any successor statute) shall not
apply to any acquisition by any person of shares of stock of the Corporation. This section may be repealed, in whole or in part, at any time,
whether before or after an acquisition of control shares and, upon such repeal, may, to the extent provided by any successor bylaw, apply to any
prior or subsequent control share acquisition.
ARTICLE XVI
ARBITRATION
Section 16.1.
Procedures for Arbitration of Disputes . Any disputes, claims or controversies brought by or on behalf of any
stockholder of the Corporation (which, for purposes of this ARTICLE XVI, shall mean any stockholder of record or any beneficial owner of
shares of stock of the Corporation, or any former stockholder of record or beneficial owner of shares of stock of the Corporation), either on his,
her or its own behalf, on behalf of the Corporation or on behalf of any series or class of shares of stock of the Corporation or stockholders of
the Corporation against the Corporation or any Director, officer, manager (including Reit Management & Research LLC or its successor), agent
or employee of the Corporation, including disputes, claims or controversies relating to the meaning, interpretation, effect, validity, performance
or enforcement of the charter of the Corporation or these Bylaws (all of which are referred to as “Disputes”) or relating in any way to such a
Dispute or Disputes shall, on the demand of any party to such Dispute, be resolved through binding and final arbitration in accordance with the
Commercial Arbitration Rules (the “Rules”) of the American Arbitration Association (“AAA”) then in effect, except as those Rules may be
modified in this ARTICLE XVI. For the avoidance of doubt, and not as a limitation, Disputes are intended to include derivative actions against
Directors, officers or managers of the Corporation and class actions by stockholders against those individuals or entities and the Corporation.
For the avoidance of doubt, a Dispute shall include a Dispute made derivatively on behalf of one party against another party.
Section 16.2.
Arbitrators . There shall be three arbitrators. If there are only two parties to the Dispute, each party shall select
one arbitrator within 15 days after receipt by respondent of a copy of the demand for arbitration. Such arbitrators may be affiliated or
interested persons of such parties. If either party fails to timely select an arbitrator, the other party to the Dispute shall select the second
arbitrator who shall be neutral and impartial and shall not be affiliated with or an interested person of either party. If there are more than two
parties to the Dispute, all claimants, on the one hand, and all respondents, on the other hand, shall each select, by the vote of a majority of the
claimants or the respondents, as the case may be, one arbitrator. Such arbitrators may be affiliated or interested persons of the claimants or the
respondents, as the case may be. If either all claimants or all respondents fail to timely select an arbitrator then such arbitrator (who shall be
neutral, impartial and unaffiliated with any party) shall be appointed by the parties who have appointed the first arbitrator. The two arbitrators
so appointed shall jointly appoint the third and
39
presiding arbitrator (who shall be neutral, impartial and unaffiliated with any party) within 15 days of the appointment of the second arbitrator.
If the third arbitrator has not been appointed within the time limit specified herein, then the AAA shall provide a list of proposed arbitrators in
accordance with the Rules, and the arbitrator shall be appointed by the AAA in accordance with a listing, striking and ranking procedure, with
each party having a limited number of strikes, excluding strikes for cause.
Section 16.3.
Place of Arbitration . The place of arbitration shall be Boston, Massachusetts unless otherwise agreed by the
parties.
Section 16.4.
Discovery . There shall be only limited documentary discovery of documents directly related to the issues in
dispute, as may be ordered by the arbitrators.
Section 16.5.
Awards . In rendering an award or decision (the “Award”), the arbitrators shall be required to follow the laws of
the State of Maryland. Any arbitration proceedings or Award rendered hereunder and the validity, effect and interpretation of this arbitration
agreement shall be governed by the Federal Arbitration Act, 9 U.S.C. §1 et seq. The Award shall be in writing and may, but shall not be
required to, briefly state the findings of fact and conclusions of law on which it is based. Any monetary award shall be made and payable in
U.S. dollars free of any tax, deduction or offset. The party against which the Award assesses a monetary obligation shall pay that obligation on
or before the 30th day following the date of the Award or such other date as the Award may provide.
Section 16.6.
Costs and Expenses . Except as otherwise set forth in the charter of the Corporation or these Bylaws, including
Section 15.2 of these Bylaws, or as otherwise agreed between the parties, each party involved in a Dispute shall bear its own costs and
expenses (including attorneys’ fees), and the arbitrators shall not render an award that would include shifting of any such costs or expenses
(including attorneys’ fees) or, in a derivative case or class action, award any portion of the Corporation’s award to the claimant or the
claimant’s attorneys. Each party (or, if there are more than two parties to the Dispute, all claimants, on the one hand, and all respondents, on
the other hand, respectively) shall bear the costs and expenses of its (or their) selected arbitrator and the parties (or, if there are more than two
parties to the Dispute, all claimants, on the one hand, and all respondents, on the other hand) shall equally bear the costs and expenses of the
third appointed arbitrator.
Section 16.7.
Final and Binding . An Award shall be final and binding upon the parties thereto and shall be the sole and
exclusive remedy between such parties relating to the Dispute, including any claims, counterclaims, issues or accounting presented to the
arbitrators. Judgment upon the Award may be entered in any court having jurisdiction. To the fullest extent permitted by law, no application
or appeal to any court of competent jurisdiction may be made in connection with any question of law arising in the course of arbitration or with
respect to any award made except for actions relating to enforcement of this agreement to arbitrate or any arbitral award issued hereunder and
except for actions seeking interim or other provisional relief in aid of arbitration proceedings in any court of competent jurisdiction.
Section 16.8.
Beneficiaries . This ARTICLE XVI is intended to benefit and be enforceable by the shareholders, Directors,
officers, managers (including Reit Management &
40
Research LLC or its successor), agents or employees of the Corporation and the Corporation and shall be binding on the stockholders of the
Corporation and the Corporation, as applicable, and shall be in addition to, and not in substitution for, any other rights to indemnification or
contribution that such individuals or entities may have by contract or otherwise.
41
Exhibit 10.3
INDEMNIFICATION AGREEMENT
THIS INDEMNIFICATION AGREEMENT (this “Agreement”) is made and entered March 10, 2004 (the “Effective Date”), by and
between Five Star Quality Care, Inc., a Maryland Corporation (the “Company”), and Rosemary Esposito, R.N. (“Indemnitee”).
WHEREAS Indemnitee currently serves as an officer of the Company and may, in connection therewith, be subjected to claims, suits
or proceedings arising from such service; and
WHEREAS, as an inducement to Indemnitee to continue to serve as such officer, the Company has agreed to indemnify and to
advance expenses and costs incurred by Indemnitee in connection with any such claims, suits or proceedings, to the fullest extent permitted by
law as hereinafter provided; and
NOW, THEREFORE, in consideration of the premises and the covenants contained herein, the Company and Indemnitee do hereby
covenant and agree as follows:
Section 1.
Definitions . For purposes of this Agreement:
“Change in Control” means a change in control of the Company occurring after the Effective Date of a nature that would be
(a)
required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A (or in response to any similar item on any similar
schedule or form) promulgated under the Securities Exchange Act of 1934, as amended (the “Act”), whether or not the Company is then
subject to such reporting requirement; provided, however, that, without limitation, such a Change in Control shall be deemed to have occurred
if after the Effective Date (i) any “person” (as such term is used in Sections 13(d) and 14(d) of the Act) is or becomes the “beneficial
owner” (as defined in Rule 13d-3 under the Act), directly or indirectly, of securities of the Company representing 10% or more of the combined
voting power in the election of directors of the Company’s then outstanding securities without the prior approval of at least two-thirds of the
members of the Board of Directors in office immediately prior to such person attaining such percentage interest; (ii) there occurs a proxy
contest, or the Company is a party to a merger, consolidation, sale of assets, plan of liquidation or other reorganization not approved by at least
two-thirds of the members of the Board of Directors then in office, as a consequence of which members of the Board of Directors in office
immediately prior to such transaction or event constitute less than a majority of the Board of Directors thereafter; or (iii) during any period of
two consecutive years, other than as a result of an event described in clause (a)(ii) of this Section 1 , individuals who at the beginning of such
period constituted the Board of Directors (including for this purpose any new director whose election or nomination for election by the
Company’s stockholders was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of
such period) cease for any reason to constitute at least a majority of the Board of Directors.
(b)
“Corporate Status” means the status of a person who is or was a director, trustee, officer or agent of the Company.
(c)
“Disinterested Director” means a director of the Company who is not and was not a party to the Proceeding in respect of
which indemnification is sought by Indemnitee.
(d)
“Expenses” means all expenses, including, but not limited to, all reasonable attorneys’ fees, retainers, court costs, transcript
costs, fees of experts, witness fees, travel expenses, duplicating costs, printing and binding costs, telephone charges, postage, delivery service
fees, and all other disbursements or expenses of the types customarily incurred in connection with prosecuting, defending, preparing to
prosecute or defend, investigating, or being or preparing to be a witness in a Proceeding.
(e)
“Independent Counsel” means a law firm, or a member of a law firm, that is retained by Indemnitee and is not serving as
counsel to the Company.
(f)
“Proceeding” means any threatened, pending or completed action, suit, arbitration, alternate dispute resolution mechanism,
investigation, administrative hearing or any other proceeding, whether civil, criminal, administrative or investigative (including on appeal),
except one initiated by an Indemnitee pursuant to Section 9 .
Section 2.
Indemnification - General . The Company shall indemnify, and advance Expenses to, Indemnitee (a) as provided in
this Agreement and (b) otherwise to the fullest extent permitted by Maryland law in effect on the date hereof and as amended from time to
time; provided , however , that no change in Maryland law shall have the effect of reducing the benefits available to Indemnitee hereunder
based on Maryland law as in effect on the date hereof. The rights of Indemnitee provided in this Section 2 shall include, without limitation, the
rights set forth in the other sections of this Agreement, including any additional indemnification permitted by Section 2-418(g) of the Maryland
General Corporation Law (“MGCL”).
Proceedings Other Than Proceedings by or in the Right of the Company . Indemnitee shall be entitled to the rights
Section 3.
of indemnification provided in this Section 3 if, by reason of his Corporate Status, he is, or is threatened to be, made a party to any threatened,
pending, or completed Proceeding, other than a Proceeding by or in the right of the Company. Pursuant to this Section 3 , Indemnitee shall be
indemnified against all judgments, penalties, fines and amounts paid in settlement and all Expenses incurred by him or on his behalf in
connection with a Proceeding by reason of Indemnitee’s Corporate Status unless it is established that (i) the act or omission of Indemnitee was
material to the matter giving rise to the Proceeding and (a) was committed in bad faith or (b) was the result of active and deliberate dishonesty,
(ii) Indemnitee actually received an improper personal benefit in money, property or services, or (iii) in the case of any criminal Proceeding,
Indemnitee had reasonable cause to believe that his conduct was unlawful.
Section 4.
Proceedings by or in the Right of the Company . Indemnitee shall be entitled to the rights of indemnification
provided in this Section 4 if, by reason of his Corporate Status, he is, or is threatened to be, made a party to any threatened, pending or
completed Proceeding brought by or in the right of the Company to procure a judgment in its favor. Pursuant to this Section 4 , Indemnitee
shall be indemnified against all amounts paid in settlement and all Expenses incurred by him or on his behalf in connection with such
Proceeding unless it is established that (i) the act or omission of Indemnitee was material to the matter giving rise to such a Proceeding and
(a) was committed in bad faith or (b) was the result of active and
2
deliberate dishonesty or (ii) Indemnitee actually received an improper personal benefit in money, property or services.
Section 5.
Indemnification for Expenses of a Party Who is Partly Successful . Without limitation on Section 3 and Section 4 ,
if Indemnitee is not wholly successful in any Proceeding covered by this Agreement, but is successful, on the merits or otherwise, as to one or
more but less than all claims, issues or matters in such Proceeding, the Company shall indemnify Indemnitee under this Section 5 for all
Expenses incurred by him or on his behalf in connection with each successfully resolved claim, issue or matter, allocated on a reasonable and
proportionate basis. For purposes of this Section and without limitation, the termination of any claim, issue or matter in such a Proceeding by
dismissal, with or without prejudice, shall be deemed to be a successful result as to such claim, issue or matter.
Section 6.
Advance of Expenses . The Company shall advance all Expenses incurred by or on behalf of Indemnitee in
connection with any Proceeding to which Indemnitee is, or is threatened to be, made a party or a witness, within ten days after the receipt by
the Company of a statement or statements from Indemnitee requesting such advance or advances from time to time, whether prior to or after
final disposition of such Proceeding. Such statement or statements shall reasonably evidence the Expenses incurred by Indemnitee and shall
include or be preceded or accompanied by a written affirmation by Indemnitee of Indemnitee’s good faith belief that the standard of conduct
necessary for indemnification by the Company as authorized by law and by this Agreement has been met and a written undertaking by or on
behalf of Indemnitee, in substantially the form attached hereto as Exhibit A or in such form as may be required under applicable law as in effect
at the time of the execution thereof, to reimburse the portion of any Expenses advanced to Indemnitee relating to claims, issues or matters in the
Proceeding as to which it shall ultimately be established that the standard of conduct has not been met and which have not been successfully
resolved as described in Section 5 . To the extent that Expenses advanced to Indemnitee do not relate to a specific claim, issue or matter in the
Proceeding, such Expenses shall be allocated on a reasonable and proportionate basis. The undertaking required by this Section 6 shall be an
unlimited general obligation by or on behalf of Indemnitee and shall be accepted without reference to Indemnitee’s financial ability to repay
such advanced Expenses and without any requirement to post security therefor.
Section 7.
Procedure for Determination of Entitlement to Indemnification .
(a)
To obtain indemnification under this Agreement, Indemnitee shall submit to the Company a written request, including such
documentation and information as is reasonably available to Indemnitee and is reasonably necessary to determine whether and to what extent
Indemnitee is entitled to indemnification. The Secretary of the Company shall, promptly upon receipt of such a request for indemnification,
advise the Board of Directors in writing that Indemnitee has requested indemnification.
(b)
Upon written request by Indemnitee for indemnification pursuant to the first sentence of Section 7(a) hereof, a
determination, if required by applicable law, with respect to Indemnitee’s entitlement thereto shall promptly be made in the specific case: (i) if
a Change in Control shall have occurred, by Independent Counsel in a written opinion to the Board of
3
Directors, a copy of which shall be delivered to Indemnitee; or (ii) if a Change of Control shall not have occurred or if after a Change of
Control Indemnitee shall so request, (A) by the Board of Directors (or a duly authorized committee thereof) by a majority vote of a quorum
consisting of Disinterested Directors (as herein defined), or (B) if a quorum of the Board of Directors consisting of Disinterested Directors is
not obtainable or, even if obtainable, such quorum of Disinterested Directors so directs, by Independent Counsel in a written opinion to the
Board of Directors, a copy of which shall be delivered to Indemnitee, or (C) if so directed by a majority of the members of the Board of
Directors, by the stockholders of the Company; and, if it is so determined that Indemnitee is entitled to indemnification, payment to Indemnitee
shall be made within ten days after such determination. Indemnitee shall cooperate with the person, persons or entity making such
determination with respect to Indemnitee’s entitlement to indemnification, including providing to such person, persons or entity upon
reasonable advance request any documentation or information which is not privileged or otherwise protected from disclosure and which is
reasonably available to Indemnitee and reasonably necessary to such determination. Any Expenses incurred by Indemnitee in so cooperating
with the person, persons or entity making such determination shall be borne by the Company (irrespective of the determination as to
Indemnitee’s entitlement to indemnification) and the Company shall indemnify and hold Indemnitee harmless therefrom.
Section 8.
Presumptions and Effect of Certain Proceedings .
(a)
In making a determination with respect to entitlement to indemnification hereunder, the person or persons or entity making
such determination shall presume that Indemnitee is entitled to indemnification under this Agreement if Indemnitee has submitted a request for
indemnification in accordance with Section 7(a) of this Agreement, and the Company shall have the burden of proof to overcome that
presumption in connection with the making of any determination contrary to that presumption.
(b)
The termination of any Proceeding by judgment, order, settlement, conviction, a plea of nolo contendere or its equivalent, or
an entry of an order of probation prior to judgment, does not create a presumption that Indemnitee did not meet the requisite standard of
conduct described herein for indemnification.
Section 9.
Remedies of Indemnitee .
(a)
If (i) a determination is made pursuant to Section 7 that Indemnitee is not entitled to indemnification under this Agreement,
(ii) advance of Expenses is not timely made pursuant to Section 6 , (iii) no determination of entitlement to indemnification shall have been
made pursuant to Section 7(b) within 30 days after receipt by the Company of the request for indemnification, (iv) payment of indemnification
is not made pursuant to Section 5 within ten days after receipt by the Company of a written request therefor, or (v) payment of indemnification
is not made within ten days after a determination has been made that Indemnitee is entitled to indemnification, Indemnitee shall be entitled to
an adjudication in an appropriate court of the State of Maryland, or in any other court of competent jurisdiction, of his entitlement to such
indemnification or advance of Expenses. Alternatively, Indemnitee, at his option, may seek an award in arbitration to be conducted by a single
arbitrator pursuant to the commercial
4
Arbitration Rules of the American Arbitration Association. Indemnitee shall commence such proceeding seeking an adjudication or an award
in arbitration within 180 days following the date on which Indemnitee first has the right to commence such proceeding pursuant to this
Section 9(a) ; provided , however , that the foregoing clause shall not apply in respect of a proceeding brought by Indemnitee to enforce his
rights under Section 5 .
(b)
In any judicial proceeding or arbitration commenced pursuant to this Section 9 , the Company shall have the burden of
proving that Indemnitee is not entitled to indemnification or advance of Expenses, as the case may be.
(c)
If a determination shall have been made pursuant to Section 7(b) that Indemnitee is entitled to indemnification, the
Company shall be bound by such determination in any judicial proceeding or arbitration commenced pursuant to this Section 9 , absent a
misstatement by Indemnitee of a material fact, or an omission of a material fact necessary to make Indemnitee’s statement not materially
misleading, in connection with the request for indemnification.
(d)
In the event that Indemnitee, pursuant to this Section 9 , seeks a judicial adjudication of or an award in arbitration to enforce
his rights under, or to recover damages for breach of, this Agreement, Indemnitee shall be entitled to recover from the Company, and shall be
indemnified by the Company for, any and all Expenses incurred by him in such judicial adjudication or arbitration. If it shall be determined in
such judicial adjudication or arbitration that Indemnitee is entitled to receive part but not all of the indemnification or advance of Expenses
sought, the Expenses incurred by Indemnitee in connection with such judicial adjudication or arbitration shall be appropriately prorated.
Section 10.
Defense of the Underlying Proceeding .
(a)
Indemnitee shall notify the Company promptly upon being served with or receiving any summons, citation, subpoena,
complaint, indictment, information, notice, request or other document relating to any Proceeding which may result in the right to
indemnification or the advance of Expenses hereunder; provided , however , that the failure to give any such notice shall not disqualify
Indemnitee from the right, or otherwise affect in any manner any right of Indemnitee, to indemnification or the advance of Expenses under this
Agreement unless the Company’s ability to defend in such Proceeding or to obtain proceeds under any insurance policy is materially and
adversely prejudiced thereby, and then only to the extent the Company is thereby actually so prejudiced.
(b)
Subject to the provisions of the last sentence of this Section 10(b) and of Section 10(c) below, the Company shall have the
right to defend Indemnitee in any Proceeding which may give rise to indemnification hereunder; provided , however , that the Company shall
notify Indemnitee of any such decision to defend within 15 calendar days following receipt of notice of any such Proceeding under Section 10
(a) above. The Company shall not, without the prior written consent of Indemnitee, which shall not be unreasonably withheld or delayed,
consent to the entry of any judgment against Indemnitee or enter into any settlement or compromise which (i) includes an admission of fault of
Indemnitee or (ii) does not include, as an unconditional term thereof, the full release of Indemnitee from all liability in respect of such
Proceeding, which
5
release shall be in form and substance reasonably satisfactory to Indemnitee. This Section 10(b) shall not apply to a Proceeding brought by
Indemnitee under Section 9 above or Section 14 .
(c)
Notwithstanding the provisions of Section 10(b) , if in a Proceeding to which Indemnitee is a party by reason of
Indemnitee’s Corporate Status, (i) Indemnitee reasonably concludes, based upon an opinion of counsel approved by the Company, which
approval shall not be unreasonably withheld, that he may have separate defenses or counterclaims to assert with respect to any issue which may
not be consistent with other defendants in such Proceeding, (ii) Indemnitee reasonably concludes, based upon an opinion of counsel approved
by the Company, which approval shall not be unreasonably withheld, that an actual or apparent conflict of interest or potential conflict of
interest exists between Indemnitee and the Company, or (iii) the Company fails to assume the defense of such Proceeding in a timely manner,
Indemnitee shall be entitled to be represented by separate legal counsel of Indemnitee’s choice, subject to the prior approval of the Company,
which shall not be unreasonably withheld, at the expense of the Company. In addition, if the Company fails to comply with any of its
obligations under this Agreement or in the event that the Company or any other person takes any action to declare this Agreement void or
unenforceable, or institutes any Proceeding to deny or to recover from Indemnitee the benefits intended to be provided to Indemnitee
hereunder, Indemnitee shall have the right to retain counsel of Indemnitee’s choice, subject to the prior approval of the Company, which shall
not be unreasonably withheld, at the expense of the Company (subject to Section 9(d)) , to represent Indemnitee in connection with any such
matter.
Section 11.
Non-Exclusivity; Survival of Rights .
(a)
The rights of indemnification and advance of Expenses as provided by this Agreement shall not be deemed exclusive of any
other rights to which Indemnitee may at any time be entitled under applicable law, the Articles of Incorporation or Bylaws of the Company,
any agreement or a resolution of the stockholders entitled to vote generally in the election of directors or of the Board of Directors, or
otherwise. No amendment, alteration or repeal of this Agreement or of any provision hereof shall limit or restrict any right of Indemnitee under
this Agreement in respect of any action taken or omitted by such Indemnitee in his Corporate Status prior to such amendment, alteration or
repeal.
(b)
In the event of any payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of
the rights of recovery of Indemnitee, who shall execute all papers required and take all action necessary to secure such rights, including
execution of such documents as are necessary to enable the Company to bring suit to enforce such rights.
(c)
The Company shall not be liable under this Agreement to make any payment of amounts otherwise indemnifiable hereunder
if and to the extent that Indemnitee has otherwise actually received such payment under any insurance policy, contract, agreement or otherwise.
Section 12.
Duration of Agreement; Binding Effect .
(a)
This Agreement shall continue until and terminate ten years after the date that Indemnitee shall have ceased to serve as a
director, trustee, officer, employee, or agent of the
6
Company or of any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise which Indemnitee served at the
request of the Company; provided , however , that the rights of Indemnitee hereunder shall continue until the final termination of any
Proceeding then pending in respect of which Indemnitee is granted rights of indemnification or advance of Expenses hereunder and of any
proceeding commenced by Indemnitee pursuant to Section 9 relating thereto.
(b)
The indemnification and advance of Expenses provided by, or granted pursuant to, this Agreement shall be binding upon and
be enforceable by the parties hereto and their respective successors and assigns (including any direct or indirect successor by purchase, merger,
consolidation or otherwise to all or substantially all of the business or assets of the Company), shall continue as to an Indemnitee who has
ceased to be a director, trustee, officer, employee or agent of the Company or of any other corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise which such person is or was serving at the written request of the Company, and shall inure to the
benefit of Indemnitee and his or her spouse, assigns, heirs, devisees, executors and administrators and other legal representatives.
(c)
The Company shall require and cause any successor (whether direct or indirect by purchase, merger, consolidation or
otherwise) to all, substantially all or a substantial part, of the business and/or assets of the Company, by written agreement in form and
substance satisfactory to Indemnitee, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that
the Company would be required to perform if no such succession had taken place.
Section 13.
Severability . If any provision or provisions of this Agreement shall be held to be invalid, illegal or unenforceable
for any reason whatsoever: (a) the validity, legality and enforceability of the remaining provisions of this Agreement (including, without
limitation, each portion of any section of this Agreement containing any such provision held to be invalid, illegal or unenforceable that is not
itself invalid, illegal or unenforceable) shall not in any way be affected or impaired thereby; and (b) to the fullest extent possible, the provisions
of this Agreement (including, without limitation, each portion of any section of this Agreement containing any such provision held to be
invalid, illegal or unenforceable, that is not itself invalid, illegal or unenforceable) shall be construed so as to give effect to the intent
manifested thereby.
Section 14.
Limitation and Exception to Right of Indemnification or Advance of Expenses . Notwithstanding any other
provision of this Agreement, (a) any indemnification or advance of Expenses to which Indemnitee is otherwise entitled under the terms of this
Agreement shall be made only to the extent such indemnification or advance of Expenses does not conflict with applicable Maryland law and
(b) Indemnitee shall not be entitled to indemnification or advance of Expenses under this Agreement with respect to any Proceeding brought by
Indemnitee, unless (i) the Proceeding is brought to enforce indemnification under this Agreement or otherwise or (ii) the Company’s Bylaws,
as amended, the Articles of Incorporation, a resolution of the stockholders entitled to vote generally in the election of directors or of the Board
of Directors or an agreement approved by the Board of Directors to which the Company is a party expressly provide otherwise.
7
Section 15.
Counterparts . This Agreement may be executed in one or more counterparts, each of which shall for all purposes
be deemed to be an original but all of which together shall constitute one and the same Agreement. One such counterpart signed by the party
against whom enforceability is sought shall be sufficient to evidence the existence of this Agreement.
Section 16.
Headings . The headings of the paragraphs of this Agreement are inserted for convenience only and shall not be
deemed to constitute part of this Agreement or to affect the construction thereof.
Section 17.
Modification and Waiver . No supplement, modification or amendment of this Agreement shall be binding unless
executed in writing by both of the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a
waiver of any other provisions hereof (whether or not similar) nor shall such waiver constitute a continuing waiver.
Section 18.
Notices . Any notice, report or other communication required or permitted to be given hereunder shall be in
writing unless some other method of giving such notice, report or other communication is accepted by the party to whom it is given, and shall
be given by being delivered at the following addresses to the parties hereto:
(a)
If to Indemnitee, to: The address set forth on the signature page hereto.
(b)
If to the Company to:
Five Star Quality Care, Inc.
400 Centre Street
Newton, Massachusetts 02458
Attn: Secretary
or to such other address as may have been furnished to Indemnitee by the Company or to the Company by Indemnitee, as the case may be.
Section 19.
Governing Law . The parties agree that this Agreement shall be governed by, and construed and enforced in
accordance with, the laws of the State of Maryland, without regard to its conflicts of laws rules.
[SIGNATURE PAGE FOLLOWS]
8
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the day and year first above written.
ATTEST:
FIVE STAR QUALITY CARE, INC.
/s/ Jennifer B. Clark
By:
/s/ Bruce J. Mackey Jr.
(SEAL)
Name: Bruce J. Mackey Jr.
Title: Treasurer, Chief Financial Officer and Assistant Secretary
WITNESS:
INDEMNITEE
/s/ Judith A. Stapleton
/s/ Rosemary Esposito, R.N.
Name: Rosemary Esposito, R.N.
Address: [address omitted]
9
EXHIBIT A
FORM OF UNDERTAKING TO REPAY EXPENSES ADVANCED
The Board of Directors of Five Star Quality Care, Inc.
Re: Undertaking to Repay Expenses Advanced
Ladies and Gentlemen:
This undertaking is being provided pursuant to that certain Indemnification Agreement dated
, 2004, by and between
Five Star Quality Care, Inc. (the “Company”) and the undersigned Indemnitee (the “Indemnification Agreement”), pursuant to which I am
entitled to advance of expenses in connection with [Description of Proceeding] (the “Proceeding”).
Terms used herein and not otherwise defined shall have the meanings specified in the Indemnification Agreement.
I am subject to the Proceeding by reason of my Corporate Status or by reason of alleged actions or omissions by me in such capacity.
I hereby affirm that at all times, insofar as I was involved as [a director] [an officer] of the Company, in any of the facts or events giving rise
to the Proceeding, I (1) acted in good faith and honestly, (2) did not receive any improper personal benefit in money, property or services and
(3) in the case of any criminal proceeding, had no reasonable cause to believe that any act or omission by me was unlawful.
In consideration of the advance of expenses by the Company for reasonable attorney’s fees and related expenses incurred by me in
connection with the Proceeding (the “Advanced Expenses”), I hereby agree that if, in connection with the Proceeding, it is established that
(1) an act or omission by me was material to the matter giving rise to the Proceeding and (a) was committed in bad faith or (b) was the result of
active and deliberate dishonesty or (2) I actually received an improper personal benefit in money, property or services or (3) in the case of any
criminal proceeding, I had reasonable cause to believe that the act or omission was unlawful, then I shall promptly reimburse the portion of the
Advanced Expenses relating to the claims, issues or matters in the Proceeding as to which the foregoing findings have been established and
which have not been successfully resolved as described in Section 5 of the Indemnification Agreement. To the extent that Advanced Expenses
do not relate to a specific claim, issue or matter in the Proceeding, I agree that such Expenses shall be allocated on a reasonable and
proportionate basis.
IN WITNESS WHEREOF, I have executed this Affirmation and Undertaking on this
day of
, 200
.
WITNESS:
(SEAL)
Schedule to Exhibit 10. 3
The following individuals are parties to Indemnification Agreements with the Company which are substantially identical in all material respects
to the representative Indemnification Agreement filed herewith and are dated as of the respective dates listed below. The other Indemnification
Agreements are omitted pursuant to Instruction 2 to Item 601 of Regulation S-K.
Name of Signatory
Evrett W. Benton
Rosemary Esposito, R.N.
Bruce M. Gans, M.D.
Barbara D. Gilmore
Maryann Hughes
Arthur G. Koumantzelis
Bruce J. Mackey Jr.
Gerard M. Martin
Barry M. Portnoy
William J. Sheehan
Travis K. Smith
Francis R. Murphy III
Paul V. Hoagland
Donna D. Fraiche
Vern D. Larkin
Date
March 10, 2004
March 10, 2004
March 10, 2004
March 10, 2004
March 10, 2004
March 10, 2004
March 10, 2004
March 10, 2004
March 10, 2004
May 7, 2004
February 27, 2008
May 1, 2008
November 11, 2009
November 22, 2010
September 6, 2011
Exhibit 10.57
ACCESSION AGREEMENT
THIS ACCESSION AGREEMENT, dated as of December 1, 2011, is entered into by SNH CALI TENANT LLC, a Delaware limited
liability company (the “ Company ”).
RECITALS :
The Company has entered into a Management Agreement (the “ Management Agreement ”) with FVE Managers, Inc., a Maryland
corporation (“ Manager ”), dated as of December 1, 2011, with respect to the assisted living facility known as Tiffany Court and located at
1866 San Miguel Drive, Walnut Creek, California (“ Tiffany Court ”).
Manager and certain affiliates of the Company are parties to that certain Pooling Agreement, dated as of May 12, 2011, by and among
the Manager and the parties listed on Schedule A thereto (the “ Pooling Agreement ”). Capitalized terms used in this Accession Agreement
without definition shall have the meanings given to such terms in the Pooling Agreement.
The Company desires to become a party to the Pooling Agreement with respect to Tiffany Court.
NOW, THEREFORE:
The Company hereby accedes and becomes a party to the Pooling Agreement as an Additional TRS, agrees to be bound by the
provisions of the Pooling Agreement with respect to Tiffany Court, and acknowledges that provisions of the Management Agreement will be
superseded as provided therein, on and after the date first above written.
IN WITNESS WHEREOF, this Accession Agreement has been duly executed and delivered by the Company with the intention of
creating an instrument under seal.
COMPANY:
SNH CALI TENANT LLC,
a Delaware limited liability company
By: /s/ Richard A. Doyle
Richard A. Doyle
President
ACCEPTED:
FVE MANAGERS, INC.,
a Maryland corporation
By: /s/ Bruce J. Mackey Jr.
Bruce J. Mackey Jr.
President
Schedule to Exhibit 10.57
There are nine accession agreements to the Pooling Agreement with FVE Managers, Inc., a representative form of which is filed herewith. The
other eight accession agreements, with the respective parties and applicable to the respective communities listed below, are substantially
identical in all material respects to the representative form of accession agreement filed herewith.
Entity
Community
Date
SNH BRFL Tenant LLC
22601 Camino Del Mar, Boca Raton, Florida 33433
December 15, 2011
SNH CCMD Tenant LLC
8100 Connecticut Avenue, Chevy Chase, Maryland 20815
December 15, 2011
SNH PLFL Tenant LLC
8500 West Sunrise Boulevard, Plantation, Florida 33322
December 15, 2011
SNH Teaneck Tenant LLC
655 Pomander Walk, Teaneck, New Jersey 07666
December 15, 2011
SNH SE Tenant TRS, Inc.
1371 South Ocean Boulevard, Pompano Beach, Florida 33062
December 15, 2011
SNH SE Tenant TRS, Inc.
2480 North Park Road, Hollywood, Florida 33021
December 15, 2011
SNH SE Tenant TRS, Inc.
3201 Plumas Street, Reno, Nevada 89509
December 15, 2011
SNH SE Tenant TRS, Inc.
200 Terrace Lane, Priceville, Alabama 35603
February 1, 2012
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Exhibit 12.1
FIVE STAR QUALITY CARE, INC.
Computation of Ratio of Earnings to Fixed Charges
(in thousands except ratios)
2011
Consolidated earnings
Consolidated fixed charges
$ 193,475
175,752
Ratio of consolidated earnings
to fixed charges
Calculation of consolidated
earnings:
Consolidated income from
continuing operations
before income tax
Consolidated fixed charges
Consolidated earnings
Calculation of consolidated
fixed charges:
Interest expense
Estimated interest
component of rent
expense
Amortization of debt
discounts / premium
Amortization of capitalized
deferred finance costs
Fixed charges
2010
Year ended December 31,
2009
2008
$ 192,623
165,613
1.1x
$ 176,220
133,604
1.2x
2007
$ 128,500
127,010
1.3x
$ 133,746
106,428
1.0x
1.3x
$ 17,723
175,752
$ 193,475
$ 27,010
165,613
$ 192,623
$ 42,616
133,604
$ 176,220
$
1,490
127,010
$ 128,500
$ 27,318
106,428
$ 133,746
$
$
$
$
$
3,711
2,496
3,800
5,629
5,685
171,835
163,017
129,674
121,114
100,285
83
—
—
34
49
123
$ 175,752
100
$ 165,613
130
$ 133,604
233
$ 127,010
409
$ 106,428
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Exhibit 12.1
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Exhibit 21.1
FIVE STAR QUALITY CARE, INC.
SUBSIDIARIES OF THE REGISTRANT
Name
Affiliates Insurers Limited
Alliance Pharmacy Services, LLC
Annapolis Heritage Partners, LLC
CCC Boynton Beach, Inc.
Columbia Heritage Partners, LLC
Encinitas Heritage Partners, LLC
Five Star Aspenwood LLC
Five Star Brookside LLC
Five Star Cary Heartfields LLC
Five Star Coral Oaks LLC
Five Star Coral Springs LLC
Five Star Covington LLC
Five Star Crossing LLC
Five Star Desert Harbor LLC
Five Star Easton Heartfields LLC
Five Star Ellicott City LLC
Five Star Forest Creek LLC
Five Star Foulk Manor North LLC
Five Star Frederick Heartfields LLC
Five Star Gables LLC
Five Star Home Health, Inc.
Five Star Insurance, Inc.
Five Star Knightsbridge LLC
Five Star Lincoln Heights LLC
Five Star Memorial Woods LLC
Five Star Montebello LLC
Five Star Morningside Bellgrade LLC
Five Star Morningside Charlottesville LLC
Five Star Newport News LLC
Five Star Northshore LLC
Five Star Northwoods LLC
Five Star Overland Park LLC
Five Star Quality Care—AZ, LLC
Five Star Quality Care—BW Club, LLC
Five Star Quality Care—BW Club Holdings, LLC
Five Star Quality Care—CA II, Inc.
Five Star Quality Care—CA II, LLC
Five Star Quality Care—CA, Inc.
Five Star Quality Care—CA, LLC
Five Star Quality Care—CO, Inc.
Five Star Quality Care—Colorado, LLC
Five Star Quality Care—CT, LLC
Five Star Quality Care—Farmington, LLC
Five Star Quality Care—FL, LLC
Five Star Quality Care—GA, Inc.
Five Star Quality Care—GA, LLC
Five Star Quality Care—GHV, LLC
Five Star Quality Care—Granite Gate, LLC
Name
Five Star Quality Care—Howell, LLC
Five Star Quality Care—IA, Inc.
Five Star Quality Care—IA, LLC
Five Star Quality Care—IL, LLC
State of Formation,
Organization or Incorporation
Bermuda
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Maryland
Maryland
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Kansas
Delaware
Maryland
Delaware
Delaware
Delaware
Maryland
Delaware
Delaware
Delaware
Delaware
Maryland
Delaware
Maryland
Delaware
State of Formation,
Organization or Incorporation
Delaware
Delaware
Delaware
Maryland
Five Star Quality Care—IN, LLC
Five Star Quality Care—KS, LLC
Five Star Quality Care—MD, LLC
Five Star Quality Care—MI, Inc.
Five Star Quality Care—MI, LLC
Five Star Quality Care—MN, LLC
Five Star Quality Care—MO, LLC
Five Star Quality Care—MS, LLC
Five Star Quality Care—NE, Inc.
Five Star Quality Care—NE, LLC
Five Star Quality Care—NJ, LLC
Five Star Quality Care—North Carolina, LLC
Five Star Quality Care—NS Operator, LLC
Five Star Quality Care—NS Owner, LLC
Five Star Quality Care—NS Tenant, LLC
Five Star Quality Care—OBX Operator, LLC
Five Star Quality Care—OBX Owner, LLC
Five Star Quality Care—RMI, LLC
Five Star Quality Care—Savannah, LLC
Five Star Quality Care—Somerford, LLC
Five Star Quality Care—TX, LLC
Five Star Quality Care—VA, LLC
Five Star Quality Care—WI, Inc.
Five Star Quality Care—WI, LLC
Five Star Quality Care—WY, LLC
Five Star Quality Care Trust
Five Star Rehabilitation and Wellness Services, LLC
Five Star Remington Club LLC
Five Star Rio Las Palmas LLC
Five Star Savannah Square LLC
Five Star Severna Park LLC
Five Star Tucson Forum LLC
Five Star Woodlands LLC
Frederick Heritage Partners, LLC
Fresno Heritage Partners, a California Limited Partnership
FS Commonwealth LLC
FS Lafayette Tenant Trust
FS Leisure Park Tenant Trust
FS Lexington Tenant Trust
FS Patriot LLC
FS Tenant Holding Company Trust
FS Tenant Pool I Trust
FS Tenant Pool II Trust
FS Tenant Pool III Trust
FS Tenant Pool IV Trust
FSQ Pharmacy Holdings, LLC
FSQ The Palms at Fort Myers Business Trust
FSQ Villa at Riverwood Business Trust
Name
FSQ, Inc.
FSQ/LTA Holdings Inc.
FSQC Tellico Village LLC
FSQC-AL, LLC
FVE EC LLC
FVE FM Financing, Inc.
FVE IL Managers, Inc.
FVE Managers, Inc.
FVE MW LLC
FVE SE Home Place New Bern LLC
FVE SE McCarthy New Bern LLC
FVE SE Wilson LLC
FVEST.JOE, INC.
Hagerstown Heritage Partners, LLC
Hamilton Place, LLC
Heartland Pharmacy Care, Inc.
Maryland
Delaware
Delaware
Delaware
Delaware
Maryland
Delaware
Maryland
Delaware
Delaware
Maryland
Maryland
Maryland
Maryland
Maryland
Maryland
Maryland
Maryland
Delaware
Maryland
Maryland
Delaware
Maryland
Delaware
Delaware
Maryland
Maryland
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
California
Maryland
Maryland
Maryland
Maryland
Maryland
Maryland
Maryland
Maryland
Maryland
Maryland
Delaware
Maryland
Maryland
State of Formation,
Organization or Incorporation
Delaware
Delaware
Maryland
Maryland
Maryland
Maryland
Maryland
Maryland
Maryland
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Nebraska
LifeTrust America, Inc.
LifeTrust Properties, LLC
Morningside Holdings of Concord, LLC
Morningside Holdings of Gastonia, LLC
Morningside Holdings of Greensboro, LLC
Morningside Holdings of Raleigh, LLC
Morningside Holdings of Williamsburg, LLC
Morningside of Alabama, L.P.
Morningside of Anderson, L.P.
Morningside of Athens, Limited Partnership
Morningside of Beaufort, LLC
Morningside of Bellgrade, Richmond, LLC
Morningside of Belmont, LLC
Morningside of Bowling Green, LLC
Morningside of Camden, LLC
Morningside of Charlottesville, LLC
Morningside of Cleveland, LLC
Morningside of Columbus, L.P.
Morningside of Concord, LLC
Morningside of Conyers, LLC
Morningside of Cookeville, LLC
Morningside of Cullman, LLC
Morningside of Dalton, Limited Partnership
Morningside of Decatur, L.P.
Morningside of Evans, Limited Partnership
Morningside of Fayette, L.P.
Morningside of Franklin, LLC
Morningside of Gainesville, LLC
Morningside of Gallatin, LLC
Morningside of Gastonia, LLC
Morningside of Georgia, L.P.
Morningside of Greensboro, LLC
Morningside of Greenwood, L.P.
Morningside of Hartsville, LLC
Morningside of Hopkinsville, Limited Partnership
Morningside of Jackson, LLC
Name
Morningside of Kentucky, Limited Partnership
Morningside of Knoxville, LLC
Morningside of Lexington, LLC
Morningside of Macon, LLC
Morningside of Madison, LLC
Morningside of Newport News, LLC
Morningside of Orangeburg, LLC
Morningside of Paducah, LLC
Morningside of Paris, L.P.
Morningside of Raleigh, LLC
Morningside of Seneca, L.P.
Morningside of Sheffield, LLC
Morningside of Skipwith-Richmond, LLC
Morningside of South Carolina, L.P.
Morningside of Springfield, LLC
Morningside of Tennessee, LLC
Morningside of Williamsburg, LLC
National LTC Pharmacy Services LLC
Newark Heritage Partners I, LLC
Newark Heritage Partners II, LLC
O.F.C. Properties, LLC
Orthopedic Rehabilitation Systems LLC
Progress Pharmacy LTD
Redlands Heritage Partners, LLC
Roseville Heritage Partners, a California Limited Partnership
Senior Living Insurance Co., Ltd
Senior Living of Boynton Beach Limited Partnership
Somerford Place LLC
Tennessee
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
State of Formation,
Organization or Incorporation
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Indiana
Maryland
Delaware
Delaware
California
Cayman Islands
Delaware
Delaware
Stockton Heritage Partners, LLC
The Heartlands Retirement Community—Ellicott City I, Inc.
The Heartlands Retirement Community—Ellicott City II, Inc.
Delaware
Maryland
Maryland
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Exhibit 21.1
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Exhibit 23.1
Consent Of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the Registration Statements (Forms S-3 No. 333-138926 and No. 333-163060 and
Form S-8 No. 333-161186) of Five Star Quality Care, Inc. and in the related prospectuses of our reports dated February 17, 2012, with respect
to the consolidated financial statements of Five Star Quality Care, Inc. and the effectiveness of internal control over financial reporting of Five
Star Quality Care, Inc., included in this Annual Report (Form 10-K) for the year ended December 31, 2011.
/s/ Ernst & Young LLP
Boston, Massachusetts
February 17, 2012
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Exhibit 23.1
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Exhibit 31.1
CERTIFICATION PURSUANT TO EXCHANGE ACT RULES 13a-14(a) AND 15d-14(a)
I, Bruce J. Mackey Jr., certify that:
1.
I have reviewed this Annual Report on Form 10-K of Five Star Quality Care, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4.
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined
in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
5.
a.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared;
b.
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c.
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
d.
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting;
and
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons
performing the equivalent functions):
a.
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial
information; and
b.
Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: February 17, 2012
/s/ BRUCE J. MACKEY JR.
Bruce J. Mackey Jr.
President and Chief Executive Officer
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Exhibit 31.1
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Exhibit 31.2
CERTIFICATION PURSUANT TO EXCHANGE ACT RULES 13a-14(a) AND 15d-14(a)
I, Paul V. Hoagland, certify that:
1.
I have reviewed this Annual Report on Form 10-K of Five Star Quality Care, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4.
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined
in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
5.
a.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared;
b.
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c.
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
d.
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting;
and
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons
performing the equivalent functions):
a.
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial
information; and
b.
Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: February 17, 2012
/s/ PAUL V. HOAGLAND
Paul V. Hoagland
Treasurer and Chief Financial Officer
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Exhibit 31.2
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Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SEC. 1350
(Section 906 of the Sarbanes—Oxley Act of 2002)
In connection with the filing by Five Star Quality Care, Inc. (the "Company") of the Annual Report on Form 10-K for the year ended
December 31, 2011 (the "Report"), each of the undersigned hereby certifies, to the best of his knowledge:
1.
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2.
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations
of the Company.
/s/ BRUCE J. MACKEY JR.
Bruce J. Mackey Jr.
President and Chief Executive Officer
/s/ PAUL V. HOAGLAND
Paul V. Hoagland
Treasurer and Chief Financial Officer
Date: February 17, 2012
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Exhibit 32.1
Exhibit 99.39
MANAGEMENT AGREEMENT
FOR
SNH IL PROPERTIES TRUST
DECEMBER 15, 2011
Table of Contents
Page
ARTICLE I DEFINITIONS
ARTICLE II APPOINTMENT OF MANAGER
Section 2.01. Appointment of Manager
ARTICLE III PAYMENTS TO MANAGER; WORKING CAPITAL; CAPITAL REPLACEMENTS; INSUFFICIENT FUNDS
Section 3.01. Management Fees
Section 3.02. Working Capital
Section 3.03. Capital Replacements
Section 3.04. Insufficient Funds
ARTICLE IV MANAGEMENT SERVICES
Section 4.01. Authority of Manager and Management Services
Section 4.02. Hiring and Training of Staff
Section 4.03. Manager’s Home Office Personnel
Section 4.04. Tenant Leases
Section 4.05. Contracts with Affiliates
Section 4.06. Legal Requirements
ARTICLE V COLLECTIONS AND PAYMENTS
Section 5.01. Collection and Priorities for Distribution of Gross Revenues
Section 5.02. Timing of Payments
Section 5.03. Credits and Collections
Section 5.04. Depositories for Funds
Section 5.05. Impositions
ARTICLE VI ACCOUNTING; FINANCIAL STATEMENTS; AUDIT
Section 6.01. Accounting
Section 6.02. Financial Statements and Reports
Section 6.03. Audit Rights
ARTICLE VII ANNUAL OPERATING BUDGET
Section 7.01. Annual Operating Budget
ARTICLE VIII TAX MATTERS; REIT QUALIFICATION
Section 8.01. Tax Matters
Section 8.02. REIT Qualification
Section 8.03. Further Compliance with Section 856(d) of the Code
ARTICLE IX FINANCING; INSPECTION
Section 9.01. Financing of the Community
Section 9.02. Owner’s Right To Inspect
ARTICLE X REPAIRS AND MAINTENANCE
Section 10.01. Repairs, Maintenance and Capital Replacements
Section 10.02. Emergency Repairs
Section 10.03. Liens
Section 10.04. Ownership
Section 10.05. Casualty or Condemnation
ARTICLE XI INSURANCE
Section 11.01. General Insurance Requirements
Section 11.02. Waiver of Subrogation
Section 11.03. Risk Management
ARTICLE XII TERM AND TERMINATION
i
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7
7
8
8
8
8
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10
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Table of Contents
Page
Section 12.01. Term
Section 12.02. Early Termination
ARTICLE XIII TRANSITION ON TERMINATION
Section 13.01. Termination
ARTICLE XIV DEFAULTS
Section 14.01. Default by Manager
Section 14.02. Default by Owner
Section 14.03. Remedies of Owner
Section 14.04. Remedies of Manager
Section 14.05. No Waiver of Default
ARTICLE XV GOVERNING LAW, ARBITRATION, LIABILITY OF MANAGER AND INDEMNITY
Section 15.01. Governing Law, Etc.
Section 15.02. Arbitration
Section 15.03. Consent to Jurisdiction and Forum
Section 15.04. Standard of Care
Section 15.05. Indemnity
Section 15.06. Limitation of Liability
ARTICLE XVI PROPRIETARY MARKS; INTELLECTUAL PROPERTY
Section 16.01. Proprietary Marks
Section 16.02. Ownership of Proprietary Marks
Section 16.03. Intellectual Property
ARTICLE XVII MISCELLANEOUS PROVISIONS
Section 17.01. Notices
Section 17.02. Severability
Section 17.03. Gender and Number
Section 17.04. Headings and Interpretation
Section 17.05. Estoppel Certificates
Section 17.06. Confidentiality of Business Information
Section 17.07. Assignment
Section 17.08. Entire Agreement/Amendment
Section 17.09. Third Party Beneficiaries
Section 17.10. Survival
Section 17.11. Relationship Between the Parties
ii
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18
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20
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21
21
21
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23
24
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24
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27
MANAGEMENT AGREEMENT
THIS MANAGEMENT AGREEMENT (“Agreement”) is entered into as of December 15, 2011, by and between FVE IL
Managers, Inc., a Maryland corporation (“Manager”), and SNH IL Properties Trust, a Maryland real estate investment trust (“Owner”).
RECITALS:
WHEREAS Owner intends to acquire certain real estate and personal property described in Exhibit A, attached hereto (the
“Community”), which will be operated as an independent living community; and
WHEREAS, Owner wishes to appoint Manager as manager of the Community and Manager desires to accept such appointment and
manage the Community effective upon Owner’s acquisition thereof, all on the terms and conditions herein provided;
NOW, THEREFORE, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
The following terms shall have the following meanings when used in this Agreement:
Section 1.01.
“Accountants” means Ernst & Young LLP, or such other firm of independent certified public accountants as may
be approved by Owner and Manager.
Section 1.02.
“Adverse Regulatory Event” is defined in Section 8.04(b).
Section 1.03.
“Affiliate” means with respect to any Person, (i) any Person who directly or indirectly through one or more
intermediaries controls, is controlled by or is under common control with a Person or (ii) any Person of which a Person is the beneficial owner
of a twenty-five percent (25%) or greater interest or (iii) any Person who acquires all or substantially all of the assets of a Person. A Person
shall be deemed to control another Person if such Person, directly or indirectly, has the power to direct the management, operations or business
of such Person. The term “beneficial owner” for this and other definitions, having the meaning given such term in Rule 13d-3 under the
Securities Exchange Act of 1934, as amended.
Section 1.04.
“Agreement” means this Management Agreement between Owner and Manager, and any amendments hereto.
Section 1.05.
“Annual Operating Budget” is defined in Section 7.01.
Section 1.06.
“Approved Budget” is defined in Section 7.01.
Section 1.07.
“Bankruptcy” means, with reference to either party:
(a)
the filing by a party of a voluntary petition in bankruptcy or insolvency or a petition for reorganization under any
bankruptcy law, or the admission by a party that it is
1
unable to pay its debts as they become due, or the institution of any proceeding by a party for its dissolution;
(b)
the consent by a party to an involuntary petition in bankruptcy or the party’s failure to vacate, within ninety (90)
days from the date of entry thereof, any order approving an involuntary petition with respect to such party; or
(c)
the entering of an order, judgment or decree by any court of competent jurisdiction, on the application of a creditor,
adjudicating a party as bankrupt or insolvent or approving a petition seeking reorganization or appointing a receiver, trustee, or liquidator of all
or a substantial part of a party’s assets, and such order, judgment or decree’s continuing unstayed and in effect for an aggregate of sixty (60)
days (whether or not consecutive) in any 12 month period.
Section 1.08.
“Base Fee” is defined in Section 3.01.
“Business Day” means any day other than a Saturday, Sunday or other day on which commercial banks in the
Section 1.09.
Commonwealth of Massachusetts are authorized to close.
Section 1.10.
“Capital Replacements” means replacements and renewals of FF&E at the Community and such repairs,
maintenance, alterations, improvements, renewals and replacements to the Community building and its mechanical systems which are
classified as capital expenditures under GAAP.
Section 1.11.
“Change in Control” means (a) the acquisition by any Person, or two or more Persons acting in concert, of
beneficial ownership (within the meaning of Rule 13d-3 of the Securities and Exchange Commission) of 9.8% or more, or rights, options or
warrants to acquire 9.8% or more, of the outstanding shares of voting stock or other voting interests of Manager or Owner, as the case may be
(either, a “Relevant Person”) or of any direct or indirect parent of a Relevant Person (“Parent”), or the power to direct the management and
policies of a Relevant Person or Parent, directly or indirectly, (b) the merger or consolidation of a Relevant Person or Parent with and into any
Person or the merger or consolidation of any Person with and into a Relevant Person or any Parent (other than the merger or consolidation of
any Person into a Relevant Person or Parent that does not result in a Change in Control of a Relevant Person or Parent under clauses (a), (c),
(d), (e) or (f) of this definition), (c) any one or more sales, conveyances, dividends or distributions to any Person of all or any material portion
of the assets (including capital stock or other equity interests) or business of a Relevant Person or Parent, whether or not otherwise a Change in
Control, (d) the cessation, for any reason, of the individuals who at the beginning of any twenty-four (24) consecutive month period
(commencing on the date hereof) constituted the board of directors of a Relevant Person or any Parent (together with any new directors whose
election by such board or whose nomination for election by the shareholders of a Relevant Person or any Parent was approved by a vote of a
majority of the directors then still in office who were either directors at the beginning of any such period or whose election or nomination for
election was previously so approved, but excluding any individual whose initial nomination for, or assumption of, office as a member of such
board of directors occurs as a result of an actual or threatened solicitation of proxies or consents for the election or removal of one or more
directors by any Person other than a
2
solicitation for the election of one or more directors by or on behalf of the board of directors) to constitute a majority of the board of directors
of a Relevant Person or any Parent then in office, or (e) the adoption of any proposal (other than a precatory proposal) by a Relevant Person or
any Parent not approved by vote of a majority of the directors of a Relevant Person or any Parent, as the case may be, in office immediately
prior to the making of such proposal, or (f) the election to the board of directors of a Relevant Person or any Parent of any individual not
nominated or appointed by vote of a majority of the directors of a Relevant Person or any Parent in office immediately prior to the nomination
or appointment of such individual.
Section 1.12.
“Code” means the Internal Revenue Code of 1986, as amended.
Section 1.13.
“Community” is defined in the recitals to this Agreement.
“Community Expenses” means all costs and expenses related to the maintenance, operation, repair, renovation,
Section 1.14.
replacement and staffing of the Community that are normally charged as operating expense under GAAP, including: (a) costs of inventory and
supplies (including Household Replacements) used in the operation of the Community; (b) amounts payable to third parties or expenses
otherwise incurred with respect to the marketing, advertising, leasing, use, repair or maintenance of the Community and any expense incurred
in order to obtain or maintain any operating permits, licenses, approvals or certifications, including any licensing or registration fees and
expenses associated therewith; (c) amounts payable to third parties for billing and collections of amounts due for goods and services provided
to patients and Tenants, including for the collection of delinquent rentals and other costs required in connection with the enforcement of any
lease or resident agreement; (d) amounts payable to third parties under service contracts; (e) amounts payable to third parties for auditing
(including any audits that may be required pursuant to Section 6.02), tax preparation, accounting and risk management services and legal fees;
(f) all Personnel Costs incurred by Manager for all personnel employed, and independent contractors who provide services, at the Community
or whose services are entirely allocable to the Community (or a pro rata share of such Personnel Costs in the case of services provided by a
regional business manager or a Shared Employee (defined below)); (g) costs of all utilities serving the Community; (h) costs of insurance
premiums for insurance at the Community; (i) the Base Fee payable to Manager; (j) costs incurred by Manager for electronic data processing
equipment, systems, software or services used at the Community; (k) all Impositions and all related costs (subject to the requirements of
Section 5.05); (l) all expenses, including settlement payments, penalties, fines, repayments, consultant or legal fees and any other costs
incurred, related to audits, investigations, inquiries or reviews of the Community or Owner by a Governmental Authority, accreditation body or
a contractor of a Governmental Authority; (m) any other recoupments, repayments, adjustments, reconciliations or other payments made or
returned to Tenants and any related consultant and legal fees; (n) costs payable to prevent, cure or correct any violation of Legal Requirements
with respect to the Community or Owner; and (o) costs incurred to litigate, negotiate and/or settle any civil claim, action or litigation, including
any amounts payable pursuant to a settlement, judgment or damages award and related legal fees.
If any Community Expenses (e.g., advertising, information technology, reporting and other systems for the operation of the
Community and personnel training), but not including Personnel Costs, are shared with other senior housing facilities managed or operated by
Manager
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or its Affiliates (the “Shared Expenses”), whether owned by Owner or its Affiliates or other parties, Manager shall identify such Shared
Expenses in the Annual Operating Budget and the basis for allocation. In addition, Manager may allocate as a Community Expense a pro rata
share of the Personnel Costs Manager incurs with respect to any employee or independent contractor, including for Home Office Personnel to
the extent allowed by Section 4.03, who provides services at the Community and at other independent living communities managed or operated
by Manager (a “Shared Employee”) in accordance with an allocation formula approved by Owner, which approval shall not be unreasonably
withheld, conditioned or delayed.
Community Expenses shall not include, unless otherwise approved by Owner: costs for Home Office Personnel (except as allowed by
Section 4.03), costs for Manager’s in-house accounting and reporting systems, software or services to the extent used exclusively at Manager’s
home office, other home office and corporate level expenses and travel expenses of personnel assigned to work exclusively at the Community,
except for such Community related travel expenses as are generally reimbursed or paid pursuant to the Community’s policies and procedures.
Section 1.15.
“Condemnation” means a taking by Governmental Authority in an eminent domain, condemnation, compulsory
acquisition or similar proceeding for any public or quasi-public use or purpose.
Section 1.16.
“Discount Rate” means the yield reported as of 10:00 A.M. on the Business Day prior to the date of termination of
this Agreement on the display designated as “Page PX1” (or such other display as may replace Page PX1 on Bloomberg Financial Markets
(“Bloomberg”) or, if Page PX1 (or its successor screen on Bloomberg) is unavailable, the Telerate Access Service screen which corresponds
most closely to Page PX1) for the most recently issued actively traded U.S. Treasury securities having a maturity equal to the number of years
between the date of termination and the scheduled expiration date of the Term (including any extension of the Term, but not in excess of
twenty (20) years in any event), plus 300 basis points, or if such yields shall not be reported as of such time or the yields reported as of such
time shall not be ascertainable (including by way of interpolation), the Treasury Constant Maturity Series Yields reported for the latest day for
which such yields shall have been so reported as of the Business Day prior to the date of termination of this Agreement in Federal Reserve
Statistical Release H.15 (519) (or any comparable successor publication) for actively traded U.S. Treasury securities having the same maturity,
plus 300 basis points. If necessary, U.S. Treasury bill quotations shall be converted to bond equivalent yields in accordance with accepted
financial practice and interpolating linearly between reported yields.
Section 1.17.
“Event of Default” is defined in Section 14.01, as to Manager, and in Section 14.02, as to Owner.
Section 1.18.
“FF&E” means furniture, fixtures, furnishings, soft goods, case goods, vehicles, systems and equipment.
Section 1.19.
“GAAP” means generally accepted accounting principles as adopted by the Financial Accounting Standards Board.
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Section 1.20.
“Governmental Authority” means any United States federal, state or local government or political subdivision
thereof, or any court, administrative agency or commission or other quasi-governmental authority or instrumentality or any subdivision thereof.
Section 1.21.
“Gross Revenues” means all revenues derived from operating the Community, determined in accordance with
GAAP, including: income (from both cash and credit transactions, net of any fee therefor and from rents and other community fees, monthly
occupancy fees or payments and any and all other fees and payments received from or on behalf of Tenants; income from food and beverage
and catering sales; income from vending machines, and proceeds, if any, from business interruption insurance and all other revenues from the
operation of the Community; provided that, Gross Revenues shall not include: (i) gratuities to employees at the Community, (ii) federal, state
or municipal excise, sales or use taxes or similar taxes imposed at the point of sale and collected directly from Tenants or guests of the
Community or included as part of the sales price of any goods or services, (iii) proceeds from the sale of FF&E and any other capital asset,
(iv) interest received or accrued with respect to the monies in any accounts referred to in Section 5.04, (v) proceeds of any financing or
refinancing of the Community, (vi) proceeds of any insurance policy (except business interruption insurance) or condemnation or other taking,
(vii) any cash refunds, rebates or discounts to Tenants of the Community, cash discounts and credits of a similar nature, given, paid or returned
in the course of obtaining Gross Revenues or components thereof to the extent not reflected in contractual allowances, (viii) proceeds from any
sale of the Community or any other capital transaction, (ix) Tenant funds on deposit or security deposits until such time and to the extent as the
same are applied to current rent or any fees due for services rendered, (x) awards of damages, settlement proceeds and other payments received
by Owner in respect of any litigation other than litigation to collect rent and any fees due for services rendered at the Community and
(xi) payments under any policy of title insurance. Any community fees or deposits that are refunded to a Tenant shall be deducted from Gross
Revenues during the month in which such refunds are made, if previously included in Gross Revenues.
Section 1.22.
“Home Office Personnel” is defined in Section 4.03.
Section 1.23.
“Household Replacements” means supply items including linen, china, glassware, silver, uniforms, and similar
items.
Section 1.24.
“Impositions” means all levies, assessments and similar charges, including: all water, sewer or similar fees, rents,
rates, charges, excises or levies, vault license fees or rentals; license and regulatory approval fees; inspection fees and other authorization fees
and other governmental charges of any kind or nature whatsoever (and all interest and penalties thereon), which at any time during or in respect
of the Term may be assessed, levied, confirmed or imposed on the Community, Owner or Manager with respect to the Community or the
operation thereof, or otherwise in respect of or be a lien upon the Community (including, on any of the inventories or Household Replacements
now or hereafter located therein). Impositions shall not include (i) any income or franchise taxes payable by Owner or Manager or (ii) any
franchise, corporate, capital levy or transfer tax imposed on Owner or Manager.
Section 1.25.
“Incentive Fee” is defined in Section 3.01.
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Section 1.26.
“Intellectual Property” means (i) all software developed and owned by Manager or an Affiliate of Manager; and
(ii) all written manuals, instructions, policies, procedures and directives issued by Manager to its employees at the Community regarding the
procedures and techniques to be used in operation of the Community.
Section 1.27.
“Interest Rate” means an annual rate of 8%, but not higher than the highest rate permitted by law.
Section 1.28.
“Invested Capital” means an amount equal to the purchase price of the Community paid by Owner (including
acquisition expenses and the principal amount of any indebtedness secured by a Mortgage and any refinancing thereof), increased by any
amounts paid by Owner for Capital Replacements and excluding amounts funded by Owner for Working Capital, as reflected on the books and
records of Owner, less any amounts representing proceeds from the sale of Capital Replacements or any other capital asset, and in all events,
subject to adjustment based on any audit conducted pursuant to Section 6.03(b).
Section 1.29.
“Legal Requirements” means any permit, license, certificate, law, code, rule, ordinance, regulation or order of any
Governmental Authority, Board of Fire Underwriters or any body similar to any of the foregoing having jurisdiction over the business or
operation of the Community or the matters which are the subject of this Agreement, including any building, zoning or use laws, ordinances,
regulations or orders, environmental protection laws and fire department rules.
Section 1.30.
“Manager” is defined in the initial paragraph of this Agreement.
Section 1.31.
“Management Fees” means the Base Fee and the Incentive Fee.
Section 1.32.
“Mortgage” means any mortgage or deed of trust recorded against the Community.
Section 1.33.
accrual basis.
“Net Operating Income” means the excess (if any) of Gross Revenues over Community Expenses, calculated on an
Section 1.34.
“Owner” is defined in the initial paragraph of this Agreement.
Section 1.35.
“Owner Priority Return” means an amount equal to eight percent (8%) of Invested Capital.
Section 1.36.
“Owner Residual Payment” means an amount equal to the Net Operating Income remaining after payment of the
Owner Priority Return and the Incentive Fee.
Section 1.37.
“Person” means any natural person, corporation, limited liability company, trust, joint venture, partnership,
Governmental Authority or other entity.
“Personnel Costs” means total cash compensation, costs of training programs, hiring expenses, severance
Section 1.38.
payments, payroll taxes, workers’ compensation, travel expenses, incentive programs (e.g., workers’ compensation and risk management
related incentive programs) and employee fringe benefits payable to such personnel.
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Section 1.39.
“Proprietary Marks” means all trademarks, trade names, symbols, logos, slogans, designs, insignia, emblems,
devices and service marks which are used by Manager to identify the Community, whether they are now or hereafter owned by Manager or any
of its Affiliates, and whether or not they are registered under the laws of the United States.
Section 1.40.
“Tenants” mean the individuals residing at the Community.
Section 1.41.
“Term” is defined in Section 12.01.
Section 1.42.
“Termination Fee” means, if this Agreement is terminated under Section 12.02(i) or 14.04, an amount equal to the
present value of the payments that would have been made to Manager between the date of termination and the scheduled expiration date of the
Term (including any extension of the Term, but not for a period in excess of twenty (20) years in any event) as Management Fees if this
Agreement had not been terminated, calculated based upon the average of the Management Fees earned in each of the three (3) calendar years
ended prior to the Termination Date, discounted at an annual rate equal to the Discount Rate.
Section 1.43.
“Unsuitable for Use” means, as a result of damage, destruction or partial Condemnation, the Community cannot be
reasonably expected to be restored to its prior condition within nine (9) months and/or, in the good faith judgment of Manager, or partial
Condemnation the Community cannot be operated on a commercially practicable basis.
Section 1.44.
“Working Capital” means funds used in the day-to-day operation of the Community.
ARTICLE II
APPOINTMENT OF MANAGER
Section 2.01.
Appointment of Manager . Effective on Owner’s acquisition of the Community, subject to the terms and
conditions of this Agreement, Owner hereby appoints Manager as the sole and exclusive Manager for the daily operation and management of
the Community. Manager accepts such appointment and further agrees to:
(a)
perform the duties of Manager under this Agreement in compliance with this Agreement, including Section 4.06;
(b)
(i) supervise and direct the management and operation of the Community in a financially sound, cost-effective and
efficient manner; and (ii) establish and maintain programs to promote the most effective utilization of the Community’s services and maximize
occupancy and Gross Revenues;
(c)
provide quality services to Tenants in a manner complying with all Legal Requirements and the form of Tenant
lease in use at the Community;
(d)
establish appropriate marketing programs;
(e)
maintain well trained, quality staff, in sufficient number, at the Community;
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(f)
institute (i) a sound financial accounting system for the Community, (ii) adequate internal fiscal controls through
proper budgeting, accountant procedures and timely financial performance, and (iii) sound billing and collection procedures and methods; and
(g)
living community.
diligently monitor and assure physical plant maintenance and housekeeping consistent with a first class independent
ARTICLE III
PAYMENTS TO MANAGER; WORKING CAPITAL; CAPITAL REPLACEMENTS; INSUFFICIENT FUNDS
Section 3.01.
Management Fees . As compensation for the services to be rendered by Manager under this Agreement, Manager
shall receive a management fee (“Base Fee”) during the Term equal to three percent (3%) of the Gross Revenues of the Community and an
additional fee (“Incentive Fee”) equal to thirty-five percent (35%) of Net Operating Income after payment of the Owner Priority Return. No
amount paid hereunder is intended to be, nor shall it be construed to be, an inducement or payment for referral of Tenants by either party or any
of its Affiliates to the other party or any of its Affiliates. The compensation being paid constitutes the fair market value of the services being
provided in light of the costs being incurred and the time, energy, training, expertise and skills required therefor, and is consistent with amounts
that would result from arm’s-length negotiations between unrelated parties.
Section 3.02.
Working Capital . Upon execution of this Agreement, Owner will advance to Manager, as Working Capital, an
amount equal to $1,500, multiplied by the number of units at the Community. Manager may, from time to time, request Owner to fund
additional amounts as Working Capital to pay Community Expenses, and if the parties do not agree on such additional amounts, the matter
shall be referred to arbitration.
Capital Replacements . The cost of all Capital Replacements in an Approved Budget shall be funded by Owner.
Section 3.03.
Funding will be made by Owner from time to time, after receipt by Owner of such information from Manager regarding the acquisition,
initiation or implementation of any Capital Replacements and the progress and performance thereof as Owner may reasonably require.
Section 3.04.
Insufficient Funds . If at any time available Working Capital is insufficient to pay Community Expenses and
Owner has not timely funded additional amounts for such purpose or Owner has not timely funded Capital Replacements, Manager shall have
no obligation to advance its own funds therefor and is relieved of any obligation to pay Community Expenses or the cost of Capital
Replacements to such extent. If Manager does advance its own funds, at such time as Owner advances funds to reimburse Manager, whether
by agreement or pursuant to an Award, Owner shall pay Manager interest on such amounts at the Interest Rate from the date of Manager’s
advance of funds to the date of reimbursement. If the Award includes interest, Owner shall be entitled to offset such interest against its
obligation under this Section 3.04.
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ARTICLE IV
MANAGEMENT SERVICES
Section 4.01.
Authority of Manager and Management Services . Subject to the terms of this Agreement, Manager shall have
discretion and control, free from interference, interruption or disturbance from Owner or those claiming by, through or under Owner, in all
matters relating to the day-to-day management and operation of the Community. Such discretion and control shall include the authority to
negotiate and execute contracts its own name, in the name of and on behalf of Owner and/or the Community, in each case, subject to the terms
of this Agreement. Manager shall implement all aspects of the operation of the Community in accordance with the terms of this Agreement,
and shall have responsibility and commensurate authority for all such activities. Without limiting the generality of the foregoing, in addition to
any other services set forth in this Agreement, Manager shall, consistent with the Approved Budget:
(a)
enter into all contracts, leases and agreements required in the ordinary course of business for the supply, operation,
maintenance of and provision of services to the Community (including food procurement, building services (including cleaning, trash removal,
snow plowing, landscaping, carpet cleaning and pest control), utilities and licenses and concessions for commercial space in the Community);
provided that, unless specifically set forth in the Approved Budget, Manager shall obtain the written consent of Owner before entering into any
contract, lease or agreement not terminable on ninety (90) days notice without payment of premium or penalty, which consent shall not be
unreasonably withheld, conditioned or delayed;
(b)
purchase such inventories, provisions, food, supplies, Household Replacements and other expendable items as are
necessary to operate and maintain the Community in the manner required pursuant to this Agreement;
(c)
provide services to Tenants in compliance with the Tenant leases in use at the Community and set all Tenants fees
and charges including those for accommodation, food and other services;
(d)
in its own name and on behalf of and, with the consent of Owner, in the name of Owner, which consent shall not be
unreasonably withheld, conditioned or delayed, to institute and/or defend, as the case may be, any and all legal actions or proceedings relating
to the management and operation of the Community;
(e)
prepare a marketing plan and direct all the marketing efforts; and
(f)
oversee, manage and direct all day-to-day operations.
Section 4.02.
Hiring and Training of Staff . Manager shall have in its employ or under contract at all times a sufficient number
of capable employees or independent contractors meeting all Legal Requirements, to enable it to properly, adequately, safely and economically
manage, operate, maintain and account for the Community. All matters pertaining to the retention, employment, supervision, compensation,
training, promotion and discharge of such employees or independent contractors are the responsibility of Manager. All such individuals shall
be employees or independent contractors of Manager. Manager shall comply with all applicable Legal Requirements having to do with
employers including, worker’s compensation,
9
unemployment insurance, hours of labor, wages, working conditions and withholding of taxes from employee wages. Manager shall have the
power to hire, dismiss or transfer the executive director at the Community, provided Manager shall keep Owner informed with respect to
Manager’s intentions to transfer or terminate the executive director and shall consult with Owner with respect to the hiring of a replacement, it
being understood that any final decision shall be made by Manager. If Owner becomes dissatisfied with the performance of the executive
director, Owner shall have the right to confer with representatives of Manager to discuss the replacement of the executive director or other
action, which shall be within the discretion of Manager.
Section 4.03.
Manager’s Home Office Personnel . Manager may, in its discretion, provide its services under this Agreement
through its Home Office Personnel, provided that the Personnel Costs for such Home Office Personnel shall not be a Community Expense
unless agreed to in advance by Owner. Manager shall further make its Home Office Personnel available for consultation and advice related to
the Community without charge other than its Management Fees. If Owner requests a type, form or level of service from Manager’s Home
Office Personnel of a nature that would otherwise be a Community Expense, Manager shall provide such services by Home Office Personnel
for an additional cost to be agreed to in advance by Manager and Owner, which shall be a Community Expense. The term “Home Office
Personnel” shall include Manager’s home office staff with experience in areas such as accounting, budgeting, finance, legal, human resources,
construction, development, marketing, food service and purchasing, among other areas.
Section 4.04.
Tenant Leases . Manager shall submit any forms of Tenant leases or other occupancy agreements used in
conjunction with the Community for Owner’s approval before they are used. Manager shall act as an authorized representative of Owner in
executing Tenant leases and occupancy agreements, but Manager shall not enter into such leases for a duration of more than one year without
the prior consent of Owner, which consent shall not be unreasonably withheld, conditioned or delayed.
Contracts with Affiliates . Except for those Affiliates listed on Schedule 4.05, Manager shall not engage or pay
Section 4.05.
any compensation to any Affiliate of Manager for the provision of services in connection with this Agreement unless (a) such party is fully
qualified and experienced to provide the required services, (b) both the scope of services and the compensation payable to such Affiliate for the
services are consistent with then current market standards or comparable arm’s-length transactions, and (c) Manager discloses such engagement
to Owner as a transaction with an Affiliate of Manager.
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Section 4.06.
Legal Requirements .
Subject to Owner’s discharge of its obligations under Section 4.06(b), Manager shall obtain and maintain on behalf
(a)
of and in the name of the Community and/or Owner (as applicable) all permits, licenses and certificates required by any Governmental
Authority for the use, operation or management of the Community as a residential independent living community.
(b)
Owner agrees: (i) to sign promptly all applications for permits, licenses, and certificates necessary for the use,
operation and management of the Community required by any Governmental Authority and (ii) to provide promptly such information and
perform such acts as are required in order for Manager to complete any such application and/or obtain and/or maintain any such permits,
licenses, or certificates.
(c)
Manager shall cause all things to be done in and about the Community as may be reasonably necessary to comply
with all applicable Legal Requirements respecting the use, operation and management of the Community. Manager shall keep its corporate
organization in good standing in the state in which the Community is located and shall maintain all corporate permits and licenses required by
such state.
(d)
If either party receives any written notice, report or other correspondence from a Governmental Authority which
asserts a deficiency relating to the operation of the Community or otherwise relates to the actual or threatened suspension, revocation, or any
other action adverse to any permit, license or certificate required or necessary to use, operate or maintain the Community, such party shall give
the other party prompt notice thereof and not later than three (3) Business Days after receipt.
ARTICLE V
COLLECTIONS AND PAYMENTS
Section 5.01.
Collection and Priorities for Distribution of Gross Revenues . Manager shall collect all Gross Revenues and shall
apply the Gross Revenues in the following order of priority:
First, to pay all Community Expenses (excluding the Base Fee),
Second, to pay Manager all accrued but unpaid Base Fee,
Third, to pay Owner all accrued but unpaid Owner Priority Return,
Fourth, to pay Manager the Incentive Fee, and
Fifth, to pay Owner the Owner Residual Payment.
Section 5.02.
Timing of Payments . Payment of the Community Expenses, excluding the Base Fee, shall be made in the ordinary
course of business to the extent of available Gross Revenues and Working Capital. The Base Fee shall be paid on the first Business Day of
each calendar month, in advance, based upon Manager’s then estimate of the prior month’s Gross
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Revenues. The Owner Priority Return shall be paid on the first Business Day of each calendar month, in advance in approximately equal
monthly installments, based upon Invested Capital most recently reported to Manager by Owner. The Base Fee and the Owner Priority Return
shall be subject to adjustment by increasing or decreasing the payment due in the following month based upon the Gross Revenues reflected in
the monthly financial statements and the increases in Capital Replacements reported to Manager by Owner for the month just ended. If any
installment of the Base Fee or the Owner Priority Return is not paid when due, it shall accrue interest at the Interest Rate. The Incentive Fee
and the Owner Residual Payment shall be paid on the last Business Day of the calendar month following the month to which such Incentive
Fee and Owner Residual Payment relate, in arrears, and based upon the monthly financial statements. Additional adjustments to all payments
will be made on an annual basis based upon the financial statements for the full calendar year and any audits conducted pursuant to
Section 6.03.
Section 5.03.
Credits and Collections . Manager shall adopt credit and collection policies and procedures. Manager shall
institute monthly billing by the Community and take all steps necessary to collect accounts and monies owed to the Community, which may
include the institution of legal proceedings.
Section 5.04.
Depositories for Funds . Manager shall maintain one or more accounts in the name of Owner in one or more banks
selected by Manager and approved by Owner and may deposit therein all Gross Revenues and other funds collected or received by Manager
and due to Owner as owner of the Community. Manager shall be authorized to access the accounts without the approval of Owner, subject to
any limitation on the maximum amount of any check, if any, established between Manager and Owner as part of the Annual Operating Budget.
Owner shall be a signatory on all accounts maintained with respect to the Community, and Owner shall have the right to require that Owner’s
signature be required on all checks/withdrawals after the occurrence of an Event of Default by Manager under this Agreement. Owner shall
provide such instructions to the applicable bank(s) as are necessary to permit Manager to implement Manager’s rights and obligations under
this Agreement; provided, the failure of Owner to provide such instructions shall relieve Manager of its obligations hereunder until such time
as such failure is cured.
Section 5.05.
Impositions . All Impositions which accrue during the Term (or are properly allocable to such Term under GAAP)
shall be paid by Manager before any fine, penalty or interest is added thereto or lien placed upon the Community or this Agreement, unless
payment thereof is stayed. Owner shall within five (5) Business Days after the receipt of any invoice, bill, assessment, notice or other
correspondence relating to any Imposition, furnish Manager with a copy thereof. Either Owner or Manager may initiate proceedings to contest
any Imposition (in which case each party agrees to sign the required applications and otherwise cooperate with the other party in expediting the
matter). Unless part of an Approved Budget, incurrence of all costs by Manager of any negotiations or proceedings with respect to any such
contest shall be subject to Owner’s prior consent, which shall not be unreasonably withheld, conditioned or delayed. Nothing in this
Agreement is intended to modify the respective responsibility that the parties would otherwise have to pay such Impositions as may be due and
payable.
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ARTICLE VI
ACCOUNTING; FINANCIAL STATEMENTS; AUDIT
Section 6.01.
Accounting . Manager shall establish and administer accounting procedures and controls and systems for the
development, preparation and safekeeping of records and books of accounting relating to the business and financial affairs of the Community,
including payroll, accounts receivable and accounts payable.
Section 6.02.
Financial Statements and Reports . Not later than ten (10) Business Days after the end of each calendar month,
Manager shall prepare and deliver to Owner a balance sheet and related statement of income and expense for such calendar month and for the
then current calendar year to date, certified by Manager’s Controller on a monthly basis and by Manager’s Chief Financial Officer on a
quarterly basis as being true and correct to the best of his/her knowledge, with a comparison to the Approved Budget.
The monthly financial statements shall be in such format as Owner may reasonably require. Manager shall provide such other
financial statements as Owner may from time to time reasonably request. In addition, at the request of Owner, any or all of the financial
statements shall be audited by the Accountants as soon as practicable after such request.
Upon request, Manager shall also provide Owner with information relating to the Community, Manager and its Affiliates that (i) may
be required in order for Owner or its Affiliates to prepare financial statements and to comply with any applicable tax and securities laws and
regulations, (ii) may be required for Owner or any of its Affiliates to prepare federal, state, provincial or local tax returns or (iii) is of the type
that Manager customarily prepares for other owners of facilities it manages, and such other or special reports as Manager may from time to
time determine are necessary or as Owner may reasonably request.
Section 6.03.
Audit Rights .
(a)
Owner and its representatives shall have the right at all reasonable times during usual business hours to audit,
examine, and make copies of books of account (including copying any records contained in electronic media) maintained by Manager with
respect to the Community, which audit or examination may cover any time period during the Term at Owner’s discretion. Such right may be
exercised through any agent or employee designated by Owner or by an independent public accountant designated by Owner.
Manager and its representatives shall have the right at all reasonable times during usual business hours to audit,
(b)
examine and make copies of books of account (including copying any records contained in electronic media) maintained by Owner with respect
to the Invested Capital and Capital Requirements, which audit or examination may cover any time period during the Term at Manager’s
discretion. Such right may be exercised through any agent or employee designated by Manager or by an independent public accountant
designated by Manager.
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ARTICLE VII
ANNUAL OPERATING BUDGET
Section 7.01.
Annual Operating Budget . Manager shall, on or before December 20 in each calendar year during the Term,
deliver to Owner for Owner’s approval, an annual operating budget for the Community for the next calendar year (the “Annual Operating
Budget”) which shall include separate line items for Capital Replacements and set forth an estimate, on a monthly basis, of Gross Revenues
and Community Expenses, together with an explanation of anticipated changes to Tenants charges, payroll rates and positions, non-wage cost
increases, the proposed methodology and formula employed by Manager in allocating shared Community Expenses, and all other factors
differing from the then current calendar year. The Annual Operating Budget shall be accompanied by a narrative description of operating
objectives and assumptions. If Owner does not approve an Annual Operating Budget or any portion thereof, it shall do so, to the extent
practicable, on a line item basis. Manager and Owner shall cooperate to resolve disputed items, provided if the Annual Operating Budget is not
approved by Owner within thirty (30) days of Owner’s receipt, Manager shall operate under the expired Annual Operating Budget until a new
Annual Operating Budget is approved, provided that line items for Impositions, insurance premiums and utilities shall be the amounts actually
incurred for such items. If agreement on the Annual Operating Budget cannot be reached within forty-five (45) days of Owner’s receipt (which
time may be extended upon mutual agreement of the parties), the matter shall be resolved by arbitration. The Annual Operating Budget as
approved by Owner, or as resolved by arbitration, will be the “Approved Budget” for the applicable calendar year. Manager will obtain
Owner’s prior approval for any expenditure which will, or is reasonably expected to, result in a variance of 5% or more of any Approved
Budget.
ARTICLE VIII
TAX MATTERS; REIT QUALIFICATION
Section 8.01.
Tax Matters . Manager shall use commercially reasonable efforts to operate the Community in a manner to best
assure that Owner and the Community receive all benefits of applicable tax exemptions and/or credits available thereto from any Governmental
Authority. Manager will prepare or cause to be prepared all tax returns required in the operation of the Community, which include payroll,
sales and use tax returns, personal property tax returns and business, professional and occupational license tax returns. Manager shall timely
file or cause to be filed such returns as required by the State; provided that Owner shall promptly provide all relevant information to Manager
upon request, and any late fees or penalties resulting from delays caused by Owner shall be borne by Owner. Manager shall not be responsible
for the preparation of Owner’s federal or state income tax returns, provided Manager shall cooperate fully with Owner as may be necessary to
enable Owner to file such federal or state income tax returns, including by preparing data reasonably requested by Owner and
submitting it to Owner as soon as reasonably practicable following such request.
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Section 8.02.
REIT Qualification .
Manager shall take all commercially reasonable actions reasonably requested by Owner for the purpose of
(a)
qualifying Owner’s rental income from Tenants as “rents from real property” pursuant to Sections 856(d)(1), 856(d)(2)(C) and 856(d)(7)(C)
(i) of the Code. Manager shall not be liable if such reasonably requested actions, once implemented, fail to have the desired result of qualifying
Owner’s rental income from Tenants as “rents from real property” pursuant to Sections 856(d)(1), 856(d)(2)(C) and 856(d)(7)(C)(i) of the
Code. This Section 8.02 shall not apply in situations where an Adverse Regulatory Event has occurred; instead, Section 8.04 shall apply.
(b)
If Owner wishes to invoke the terms of Section 8.02(a), Owner shall contact Manager and the parties shall meet to
discuss the relevant issues and to develop a mutually-agreed upon plan for implementing such reasonably requested actions.
(c)
Any additional out-of-pocket costs or expenses incurred by Manager in complying with such a request shall be
borne by Owner (and shall not be a Community Expense). Owner shall reimburse Manager for such expense or cost promptly, but not later
than five (5) Business Days after such expense or cost is incurred.
Section 8.03.
Further Compliance with Section 856(d) of the Code .
(a)
Manager shall not own, directly or indirectly or constructively (within the meaning of Section 856(d)(5) of the
Code), more than thirty-five percent (35%) of the shares of Senior Housing Properties Trust, a Maryland real estate investment trust, whether
by vote, value or number of shares, and Manager shall otherwise comply with any regulations or other administrative or judicial guidance
existing under said Section 856(d)(5) of the Code with respect to such ownership limits; Manager shall cause its ultimate parent, Five Star
Quality Care, Inc. to enforce the restrictions in its charter documents regarding five percent (5%) or greater owners; and
Manager, without the prior consent of Owner, which consent shall not be unreasonably withheld, conditioned or
(b)
delayed, shall not permit or suffer:
(i)
Manager to fail to continue as a corporation under state law and taxable under the Code as an association;
(ii)
Either of Manager’s affiliates, FSQ, Inc., a Delaware corporation, and FVE Managers, Inc., a Delaware
corporation, to fail to continue as a corporation under state law and taxable under the Code as an association; or
(iii)
for so long as Owner or any Affiliate of Owner shall seek to qualify as a “real estate investment trust”
under the Code, Manager to be reorganized, restructured, combined, merged or amalgamated with any Affiliate (as to
Manager) in such manner that would, or could, be expected to adversely affect (including, e.g., by application of any
Person’s actual “disregarded entity” status under the Code) Manager’s status as a Code Section 856(l)(1) “taxable REIT
subsidiary” of Owner or an Affiliate of Owner.
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ARTICLE IX
FINANCING; INSPECTION
Section 9.01.
the Community.
Financing of the Community . Manager shall cooperate with Owner in connection with any financing by Owner of
Section 9.02.
Owner’s Right To Inspect . Owner, or its employees, representatives, lenders or agents shall have access to the
Community and the files, books, accounts, and records of Manager related to the Community at any and all reasonable times during usual
business hours for the purpose of inspection or showing the Community to prospective purchasers, investors, Tenants or mortgagees.
ARTICLE X
REPAIRS AND MAINTENANCE
Section 10.01.
Repairs, Maintenance and Capital Replacements . Manager shall maintain the Community in good, orderly, clean
and safe repair and condition consistent with a first class independent living community and in conformity with Legal Requirements. Manager
shall make such routine and preventive maintenance, repairs and minor alterations, the cost of which can be expensed under GAAP, as it, from
time to time, deems necessary for such purposes, consistent with the Approved Budget. The cost of such maintenance, repairs and alterations
shall be paid from Gross Revenues. Manager shall make such Capital Replacements as are contemplated by the Approved Budget and funded
by Owner. The cost of such Capital Replacements shall be funded by Owner.
Section 10.02.
Emergency Repairs . If either party has actual knowledge of, or receives a written order or notice from a
Governmental Authority, pertaining to a violation or potential violation of any Legal Requirement relating to the physical condition of the
Community or the continued safe operation of the Community, such party shall give the other party prompt notice thereof and not later than
three (3) Business Days after obtaining such knowledge or, in the case of an order or notice from a Governmental Authority, receipt. Manager
shall recommend appropriate remedial action to Owner and, subject to Owner’s consent (which shall not be unreasonably withheld,
conditioned or delayed), take such remedial action, provided Manager shall be authorized to take appropriate remedial action consisting of
repairs or maintenance to the Community without receiving Owner’s prior consent: (a) in an emergency threatening the safety of such
Community or its Tenants, invitees or employees or imminent material physical damage to the Community, or (b) if the continuation of the
given condition will subject Manager and/or Owner to regulatory, civil, or criminal liability or result in the suspension or revocation of a
material permit, license or certificate. Any disagreement regarding the necessity of taking such remedial action and/or the funding of the cost
thereof that is not resolved by the parties within ten (10) Business Days shall be resolved by arbitration.
Section 10.03.
Liens . Manager shall use commercially reasonable efforts to prevent any liens from being filed against the
Community which arise from any maintenance, repairs, alterations, improvements, renewals or replacements in or to the Community. Manager
shall not file any lien against the Community.
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Section 10.04.
Ownership . All repairs, replacements, alterations and additions shall be the property of Owner.
Casualty or Condemnation . If, during the Term, the Community is (a) totally destroyed by fire or other casualty or
Section 10.05.
there is a Condemnation or, (b) partially destroyed by fire or other casualty or there is a partial Condemnation and as a result the Community is
Unsuitable for Use, either Manager or Owner may terminate this Agreement by sixty (60) days written notice to the other and Owner shall be
entitled to retain the insurance proceeds or Condemnation award, as the case may be.
If, as a result of partial destruction or partial Condemnation, the Community is not rendered Unsuitable for Use, Owner shall make the
insurance proceeds or award received by Owner available to Manager as necessary to repair or restore the destroyed or untaken portion of the
Community to the same condition as existed previously, provided Manager shall have the right to discontinue operating all or a portion of the
Community pending completion of the repairs or restoration as necessary to comply with Legal Requirements or for the safe and orderly
operation of the Community.
If the cost of repair or restoration is less than the insurance proceeds or award received by Owner, Owner shall make available the
funds necessary to permit the Community or the untaken portion to be repaired and restored. If the cost of the repair or restoration exceeds the
amount of insurance proceeds or award, Manager shall give notice to Owner setting forth in reasonable detail the nature of such deficiency, and
Owner shall promptly advise Manager whether Owner will fund the deficiency. If Owner does not elect to fund the deficiency, Manager may
terminate this Agreement by notice to Owner.
Any obligation of Owner to make funds available to Manager to repair or restore the Community is subject to the requirements of any
Mortgage.
Notwithstanding any provisions of this Section 10.05 to the contrary, if partial destruction or a partial Condemnation occurs during the
last twelve (12) months of the Term (including any renewal) and if full repair and restoration would not reasonably be expected to be
completed prior to the date that is nine (9) months prior to the end of the Term (including any renewal), the provisions of this Section 10.05
shall apply as if the Community had been rendered Unsuitable for Use.
ARTICLE XI
INSURANCE
Section 11.01.
General Insurance Requirements . Manager shall, at all times during the Term, keep (or cause to be kept) the
Community and all property located therein or thereon, insured against the risks and in such amounts as is against such risks and in such
amounts as Owner shall reasonably require and as may be commercially reasonable. Any disputes regarding such matters not resolved by the
parties within ten (10) Business Days (which period may be extended upon mutual agreement of the parties) shall be resolved by arbitration.
Section 11.02.
Waiver of Subrogation . Owner and Manager agree that (insofar as and to the extent that such agreement may be
effective without invalidating or making it impossible to
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secure insurance coverage from responsible insurance companies doing business in the State) with respect to any property loss which is
covered by insurance then being carried by Owner or Manager, the party carrying such insurance and suffering said loss releases the others of
and from any and all claims with respect to such loss; and they further agree that their respective insurance companies (and, if Owner or
Manager shall self insure in accordance with the terms hereof, Owner or Manager, as the case may be) shall have no right of subrogation
against the other on account thereof, even though extra premium may result therefrom. If any extra premium is payable by Manager as a result
of this provision, Owner shall not be liable for reimbursement to Manager for such extra premium.
Section 11.03.
Community.
Risk Management . Manager shall be responsible for the provision of risk management oversight at the
ARTICLE XII
TERM AND TERMINATION
Term . The Term of this Agreement shall begin on the date hereof and end December 31, 2031 (“Term”), provided
Section 12.01.
the Term will be automatically extended for two consecutive periods of fifteen (15) years each unless notice of non-renewal is given by
Manager at least twenty-four (24) months prior to the end of the then current Term, unless sooner terminated as provided in this Agreement.
Upon sixty (60) days notice given at any time during the final twenty-four (24) months of the then current Term, if Manager has given notice of
non-renewal, or of the second extension period, as the case may be, Owner may terminate this Agreement.
Section 12.02.
Early Termination . Without limiting either party’s rights under Article XIV:
(i)
Owner may terminate this Agreement without cause at any time after January 15, 2016, upon sixty (60)
days notice to Manager given within thirty (30) days prior to or after an annual anniversary of this Agreement. Upon
termination under this Section 12.02(i) by Owner, Owner shall pay Manager the Termination Fee, within sixty (60) days of
the effective date of termination, as liquidated damages and in lieu of any other remedy of Manager at law or in equity.
(ii)
Manager may terminate this Agreement upon sixty (60) days notice to Owner given within thirty (30) days
following a Change in Control of Owner. Upon termination under this Section 12.01(ii) Manager shall be compensated as
provided in Section 13.01, but the termination shall otherwise be without recourse to Owner.
ARTICLE XIII
TRANSITION ON TERMINATION
Section 13.01.
Termination . Upon any termination of this Agreement, except as otherwise provided in Section 12.02(i) or 14.04,
Manager shall be compensated for its services only through the date of termination and all amounts remaining in any accounts maintained by
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Manager pursuant to Section 5.04, after payment of such amounts as may be due to Manager hereunder, shall be distributed to Owner. In the
event of any termination, both parties shall fully cooperate with one another to ensure a smooth transition of management. Upon termination,
Manager will deliver to Owner the following:
(i)
a final accounting, reflecting the balance of income and expenses of the Community as of the date of
termination, to be delivered as soon as reasonably possible but not later than sixty (60) days after such termination,
(ii)
after payment of any amounts as may be due to Manager hereunder, any balance of monies of Owner or
Tenant deposits, or both, held by Manager with respect to the Community, to be delivered as soon as reasonably possible, but
not later than sixty (60) days after such termination,
all records, contracts, leases, resident agreements, tenant correspondence, files, receipts for deposits,
(iii)
unpaid bills and other papers, documents or computer disks or information which pertain in any way to the Community to be
delivered as soon as reasonably possible, but not later than sixty (60) days after such termination, and
(iv)
Manager shall cooperate reasonably in all respects to achieve a transfer of any license and/or certificate (or
to obtain a new license and/or certificate, if necessary) required in connection with the operation of the Community, but shall
not be required to incur any monetary expenditures in connection therewith (unless Owner agrees to reimburse Manager
therefor).
ARTICLE XIV
DEFAULTS
Section 14.01.
following:
Default by Manager . An Event of Default with respect to Manager shall occur in the event of any of the
(a)
the Bankruptcy of Manager,
(b)
the gross negligence or willful misconduct of Manager with respect to its duties and obligations under this
Agreement,
(c)
the permit(s), license(s) or certificate(s) required for use, operation or management of the Community are at any
time suspended, terminated or revoked and not reinstated within the applicable appeal period, if any, for any reason due solely to the acts or
omissions of Manager,
(d)
Manager’s failure to keep, observe or perform any material covenant, agreement, term or provision of this
Agreement to be kept, observed or performed by Manager, which failure shall continue (i) for a period of five (5) Business Days after Manager
receives notice from Owner in case of monetary defaults or (ii) for a period of twenty (20) Business Days after Manager receives notice from
Owner in the case of non-monetary defaults, in each case, specifying the default; provided, however, that if such non-monetary default cannot
be cured
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within such twenty (20) Business Day period, then Manager shall be entitled to such additional time as shall be reasonable, provided the default
is curable and Manager has promptly proceeded to commence cure of such default within said period, and thereafter diligently prosecutes the
cure to completion; provided, however, that in no event shall such additional time exceed ninety (90) days,
(e)
a Change in Control of Manager to which Owner does not consent,
(f)
a default by Manager or any Affiliate of Manager under any other agreement between Manager or an Affiliate of
Manager and Owner or an Affiliate of Owner, which continues beyond any applicable notice and cure period.
Section 14.02.
Default by Owner . An Event of Default with respect to Owner shall occur in the event of any of the following:
(a)
the Bankruptcy of Owner;
(b)
the gross negligence or willful misconduct of Owner with respect to its obligations under this Agreement;
(c)
the permit(s), license(s) or certificate(s) required for use, operation or management of the Community are at any
time suspended, terminated or revoked and not reinstated within the applicable appeal period, if any, for any reason due solely to the acts or
omissions of Owner or one of its Affiliates;
(d)
Owner shall fail to (i) timely fund Working Capital or to fund Capital Replacements pursuant to an Approved
Budget and such failure shall continue for a period of ten (10) Business Days after notice thereof by Manager or (ii) keep, observe or perform
any other material covenant, agreement, term or provision of this Agreement to be kept, observed or performed by Owner and such failure shall
continue (x) for a period of five (5) Business Days after Owner receives notice from Manager in case of monetary defaults or (y) for a period of
twenty (20) Business Days after Owner receives notice from Manager in the case of non-monetary defaults, in each case specifying the default;
provided, however, if such default cannot be cured within such twenty (20) Business Day period, then Owner shall be entitled to such
additional time as shall be reasonable, provided the default is curable, Owner has promptly proceeded to commence cure of such non-monetary
default within said period, and thereafter diligently prosecutes the cure to completion; provided, however, that in no event shall such additional
time to cure non-monetary defaults exceed ninety (90) days.
Remedies of Owner . Upon the occurrence of an Event of Default by Manager, Owner may terminate this
Section 14.03.
Agreement immediately upon notice and shall be entitled to exercise any other rights at law or in equity.
Section 14.04.
Remedies of Manager . Upon the occurrence of an Event of Default by Owner described in Section 14.02,
Manager may terminate this Agreement on thirty (30) days notice and Owner shall pay Manager the Termination Fee, within thirty (30) days of
the effective date of termination, as liquidated damages and in lieu of any other remedy of Manager at law or in equity, as well as any accrued
but unpaid fees owed to Manager pursuant to Section 5.01.
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Section 14.05.
No Waiver of Default . The failure by Owner or Manager to insist upon the strict performance of any one of the
terms or conditions of this Agreement or to exercise any right, remedy or election herein contained or permitted by law shall not constitute or
be construed as a waiver or relinquishment for the future of such term, condition, right, remedy or election, but the same shall continue and
remain in full force and effect. All rights and remedies that Owner or Manager may have at law, in equity or otherwise for any breach of any
term or condition of this Agreement shall be distinct, separate and cumulative rights and remedies and no one of them, whether or not exercised
by Owner or Manager, shall be deemed to be in exclusion of any right or remedy of Owner or Manager.
ARTICLE XV
GOVERNING LAW, ARBITRATION, LIABILITY OF MANAGER AND INDEMNITY
Section 15.01.
Governing Law, Etc . This Agreement shall be interpreted, construed, applied and enforced in accordance with
the laws of the Commonwealth of Massachusetts applicable to contracts between residents of Massachusetts which are to be performed entirely
within Massachusetts, regardless of (i) where this Agreement is executed or delivered; or (ii) where any payment or other performance required
by this Agreement is made or required to be made; or (iii) where any breach of any provision of this Agreement occurs, or any cause of action
otherwise accrues; or (iv) where any action or other proceeding is instituted or pending; or (v) the nationality, citizenship, domicile, principal
place of business, or jurisdiction of organization or domestication of any party; or (vi) whether the laws of the forum jurisdiction otherwise
would apply the laws of a jurisdiction other than Massachusetts; or (vii) any combination of the foregoing.
Section 15.02.
Arbitration .
(a)
Any disputes, claims or controversies between the parties (i) arising out of or relating to this Agreement, or
(ii) brought by or on behalf of any shareholder of any party or a direct or indirect parent of a party (which, for purposes of this Section 15.02,
shall mean any shareholder of record or any beneficial owner of shares of any party, or any former shareholder of record or beneficial owner of
shares of any party), either on his, her or its own behalf, on behalf of any party or on behalf of any series or class of shares of any party or
shareholders of any party against any party or any member, trustee, officer, manager (including Reit Management & Research LLC or its
successor), agent or employee of any party, including disputes, claims or controversies relating to the meaning, interpretation, effect, validity,
performance or enforcement of this Agreement, including this arbitration provision, or the declarations of trust, limited liability company
agreements or bylaws of any party hereto (all of which are referred to as “Disputes”), or relating in any way to such a Dispute or Disputes shall,
on the demand of any party to such Dispute be resolved through binding and final arbitration in accordance with the Commercial Arbitration
Rules (the “Rules”) of the American Arbitration Association (“AAA”) then in effect, except as those Rules may be modified in this
Section 15.02. For the avoidance of doubt, and not as a limitation, Disputes are intended to include derivative actions against trustees, officers
or managers of any party and class actions by a shareholder against those individuals or entities and any party. For the avoidance of doubt, a
Dispute shall include a Dispute made derivatively on behalf of one party against another party.
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For purposes of this Article XV, the term “party” shall include any direct or indirect parent of a party.
(b)
There shall be three arbitrators. If there are only two parties to the Dispute, each party shall select one arbitrator
within fifteen (15) days after receipt of a demand for arbitration. Such arbitrators may be affiliated or interested persons of such parties. If
there are more than two parties to the Dispute, all claimants, on the one hand, and all respondents, on the other hand, shall each select, by the
vote of a majority of the claimants or the respondents, as the case may be, one arbitrator within fifteen (15) days after receipt of a demand for
arbitration. Such arbitrators may be affiliated or interested persons of the claimants or the respondents, as the case may be. If either a claimant
(or all claimants) or a respondent (or all respondents) fail to timely select an arbitrator then the party (or parties) who has selected an arbitrator
may request the AAA to provide a list of three proposed arbitrators in accordance with the Rules (each of whom shall be neutral, impartial and
unaffiliated with any party) and the party (or parties) that failed to timely appoint an arbitrator shall have ten (10) days from the date the AAA
provides such list to select one of the three arbitrators proposed by AAA. If such party (or parties) fail to select such arbitrator by such time,
the party (or parties) who have appointed the first arbitrator shall then have ten (10) days to select one of the three arbitrators proposed by AAA
to be the second arbitrator; and, if he/they should fail to select such arbitrator by such time, the AAA shall select, within fifteen (15) days
thereafter, one of the three arbitrators it had proposed as the second arbitrator. The two arbitrators so appointed shall jointly appoint the third
and presiding arbitrator (who shall be neutral, impartial and unaffiliated with any party) within fifteen (15) days of the appointment of the
second arbitrator. If the third arbitrator has not been appointed within the time limit specified herein, then the AAA shall provide a list of
proposed arbitrators in accordance with the Rules, and the arbitrator shall be appointed by the AAA in accordance with a listing, striking and
ranking procedure, with each party having a limited number of strikes, excluding strikes for cause.
(c)
The place of arbitration shall be Boston, Massachusetts unless otherwise agreed by the parties.
(d)
There shall be only limited documentary discovery of documents directly related to the issues in dispute, as may be
ordered by the arbitrators.
(e)
In rendering an award or decision (the “Award”), the arbitrators shall be required to follow the laws of The
Commonwealth of Massachusetts. Any arbitration proceedings or Award rendered hereunder and the validity, effect and interpretation of this
arbitration agreement shall be governed by the Federal Arbitration Act, 9 U.S.C. §1 et seq. The Award shall be in writing and may, but shall
not be required to, briefly state the findings of fact and conclusions of law on which it is based.
(f)
Except to the extent expressly provided by this Agreement or as otherwise agreed by the parties, each party
involved in a Dispute shall bear its own costs and expenses (including attorneys’ fees), and the arbitrators shall not render an
award that would include shifting of any such costs or expenses (including attorneys’ fees) or, in a derivative case or class action, award any
portion of a party’s award to the claimant or the claimant’s attorneys. Each party (or, if there are more than two parties to the Dispute, all
claimants, on the one hand, and all
22
respondents, on the other hand, respectively) shall bear the costs and expenses of its (or their) selected arbitrator and the parties (or, if there are
more than two parties to the Dispute, all claimants, on the one hand, and all respondents, on the other hand) shall equally bear the costs and
expenses of the third appointed arbitrator.
(g)
An Award shall be final and binding upon the parties thereto and shall be the sole and exclusive remedy between
such parties relating to the Dispute, including any claims, counterclaims, issues or accounting presented to the arbitrators. Judgment upon the
Award may be entered in any court having jurisdiction. To the fullest extent permitted by law, no application or appeal to any court of
competent jurisdiction may be made in connection with any question of law arising in the course of arbitration or with respect to any award
made except for actions relating to enforcement of this agreement to arbitrate or any arbitral award issued hereunder and except for actions
seeking interim or other provisional relief in aid of arbitration proceedings in any court of competent jurisdiction.
(h)
Any monetary award shall be made and payable in U.S. dollars free of any tax, deduction or offset. Each party
against which the Award assesses a monetary obligation shall pay that obligation on or before the 30th day following the date of the Award or
such other date as the Award may provide.
(i)
This Section 15.02 is intended to benefit and be enforceable by the shareholders, members, direct and indirect
parents, trustees, directors, officers, managers (including Reit Management & Research LLC or its successor), agents or employees of any party
and the parties and shall be binding on the shareholders of any party and the parties, as applicable, and shall be in addition to, and not in
substitution for, any other rights to indemnification or contribution that such individuals or entities may have by contract or otherwise.
Section 15.03.
Consent to Jurisdiction and Forum . This Section 15.03 is subject to, and shall not in any way limit the application
of, Section 15.02; in case of any conflict between this Section 15.03 and Section 15.02, Section 15.02 shall govern. Notwithstanding anything
to the contrary in Section 15.02, the exclusive jurisdiction and venue in any action brought by any party hereto pursuant to this Agreement shall
lie in any federal or state court located in Boston, Massachusetts. By execution and delivery of this Agreement, each party hereto irrevocably
submits to the jurisdiction of such courts for itself and in respect of its property with respect to such action. The parties irrevocably agree that
venue would be proper in such court, and hereby waive any objection that such court is an improper or inconvenient forum for the resolution of
such action. The parties further agree and consent to the service of any process required by any such court by delivery of a copy thereof in
accordance with Section 17.01 and that any such delivery shall constitute valid and lawful service of process against it, without necessity for
service by any other means provided by statute or rule of court.
Section 15.04.
Standard of Care . Manager shall discharge its duties in good faith, and agrees to exercise, with respect to all
services provided by Manager under this Agreement, a standard of care, skill, prudence and diligence under the circumstances then existing as
is consistent with the prevailing practices of institutional property managers that manage properties comparable to the Community in the same
market and in no event with less care, skill, prudence
23
or diligence as Manager would customarily utilize in the conduct of its business, and as is necessary to comply with all Legal Requirements.
Section 15.05.
Indemnity . In any action, proceeding or claim brought or asserted by a third party, Manager will defend,
indemnify and hold Owner (and any of its Affiliates, their respective directors, trustees, officers, shareholders, employees and agents) harmless
from and against any claims, losses, expenses, costs, suits, actions, proceedings, demands or liabilities that are asserted against, or sustained or
incurred by them because of Manager’s breach of any material term of this Agreement, or arising from Manager’s failure to act or not act in
accordance with Owner’s reasonable instructions or gross negligence, fraud, or willful misconduct, except to the extent caused by Owner’s
breach of any material term of this Agreement, gross negligence, fraud or willful misconduct. Owner will defend, indemnify, and hold
Manager (and any of its Affiliates, their respective directors, trustees, officers, shareholders, employees and agents) harmless, from and against
any and all claims, expenses, costs, suits, actions, proceedings, demands, or liabilities that are asserted against, or sustained or incurred by them
in connection with the performance of Manager’s duties under this Agreement or otherwise while acting within the scope of the agency
established by the parties to this Agreement and in accordance with Section 15.04, or in the case of an action, proceeding or claim brought or
asserted by a third party against any of them as a result of Owner’s breach of any material term of this Agreement, violation of Legal
Requirements, instructions to Manager to act or not act with respect to the relevant matter or gross negligence, fraud or willful misconduct,
except to the extent caused by Manager’s breach of any material term of this Agreement, failure to act or not act in accordance with Owner’s
reasonable instructions, gross negligence, fraud or willful misconduct. The scope of the foregoing indemnities includes any and all costs and
expenses properly incurred in connection with any proceedings to defend any indemnified claim, or to enforce the indemnity, or both.
Recovery upon an indemnity contained in this Agreement shall be reduced dollar-for-dollar by any applicable insurance collected by the
indemnified party with respect to the claims covered by such indemnity.
Section 15.06.
Limitation of Liability . To the maximum extent permitted by applicable law, no shareholder, member, officer,
director, trustee, employee or agent of any party to this Agreement (and of any Affiliate of such party that is not a party to this Agreement)
shall have any personal liability with respect to the liabilities or obligations of such party under this Agreement or any document executed by
such party pursuant to this Agreement.
ARTICLE XVI
PROPRIETARY MARKS; INTELLECTUAL PROPERTY
Section 16.01.
Proprietary Marks . During the Term of this Agreement, each Community shall be known as a “Five Star Senior
Living” community, with such additional identification as may be necessary and agreed to by Owner and Manager to provide local
identification or to comply with local licensing or consumer protection laws.
Section 16.02.
Ownership of Proprietary Marks . The Proprietary Marks shall in all events remain the exclusive property of
Manager, and except as expressly set forth in this Agreement, nothing contained herein shall confer on Owner the right to use the Proprietary
Marks. Except as provided below in this section, upon termination, any use of or right to use the
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Proprietary Marks by Owner shall cease forthwith, and Owner shall promptly remove, at Manager’s expense, from the Community any signs or
similar items that contain the Proprietary Marks. Upon termination, Owner shall have the right to use any inventory or Household
Replacement items marked with the Proprietary Marks exclusively in connection with the Community until they are consumed.
Intellectual Property . All Intellectual Property shall at all times be proprietary to Manager or its Affiliates, and
Section 16.03.
shall be the exclusive property of Manager or its Affiliates. During the Term, Manager shall be entitled to take all reasonable steps to ensure
that the Intellectual Property remains confidential. Upon termination, all Intellectual Property shall be removed from the Community by
Manager, without compensation to Owner.
ARTICLE XVII
MISCELLANEOUS PROVISIONS
Section 17.01.
Notices . All notices, demands, consents, approvals, and requests given by either party to the other hereunder shall
be in writing and shall be deemed to have been duly given when delivered in person, upon confirmation of receipt when transmitted by
facsimile transmission, or on the next business day if transmitted by nationally recognized overnight courier, to the parties at the following
addresses:
SNH IL Properties Trust
Two Newton Place
255 Washington Street, Suite 300
Newton, Massachusetts 02458
Attn: David J. Hegarty
Telephone: (617) 796-8104
Facsimile: (617) 796-8349
FVE IL Managers, Inc.
400 Centre Street
Newton, Massachusetts 02458
Attn: Bruce J. Mackey Jr.
Telephone: (617) 796-8214
Facsimile: (617) 796-8243
or to such other address and to the attention of such other person as either party may from time to time designate in writing. Notices properly
given as described above shall be effective upon receipt.
Section 17.02.
Severability . If any term or provision of this Agreement or the application thereof in any circumstance is held
invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of any such provision in every other
respect and of the remaining provisions hereof shall not be in any way impaired, unless the provisions held invalid, illegal or unenforceable
shall substantially impair the benefits of the remaining provisions hereof.
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Section 17.03.
Gender and Number . Whenever the context of this Agreement requires, the gender of all words herein shall
include the masculine, feminine, and neuter, and the number of all words herein shall include the singular and plural.
Section 17.04.
Headings and Interpretation . The descriptive headings in this Agreement are for convenience of reference only
and shall not affect in any way the meaning or interpretation of this Agreement. References to “Section” in this Agreement shall be a reference
to a Section of this Agreement unless otherwise indicated. Whenever the words “include,” “includes” or “including” are used in this
Agreement they shall be deemed to be followed by “without limitation.” The words “hereof,” “herein,” “hereby” and “hereunder,” when used
in this Agreement, shall refer to this Agreement as a whole and not to any particular provision unless otherwise indicated. The word “or” shall
not be exclusive. This Agreement shall be construed without regard to any presumption or rule requiring construction or interpretation against
the party drafting.
Section 17.05.
Estoppel Certificates . Each party to this Agreement shall at any time and from time to time, upon not less than
thirty (30) day’s prior notice from the other party, execute, acknowledge and deliver to such other party, or to any third party specified by such
other party, a statement in writing: (i) certifying that this Agreement is unmodified and in full force and effect (or if there have been
modifications, that the same, as modified, is in full force and effect and stating the modifications); (ii) stating whether or not to the best
knowledge of the certifying party: (x) there is a continuing Default by the non-certifying party in the performance or observation of any
covenant, agreement or condition contained in this Agreement; or (y) there shall have occurred any event which, with the giving of notice or
the passage of time or both, would become such a Default, and, if so, specifying such Default or occurrence of which the certifying party may
have knowledge; and (iii) stating such other information as the non-certifying party may reasonably request. Such statement shall be binding
upon the certifying party and may be relied upon by the non-certifying party and/or such third party specified by the non-certifying party as
aforesaid. The obligations set forth in this Section 17.05 shall survive Termination (that is, each party shall, on request, within the time period
described above, execute and deliver to the non-certifying party and to any such third party a statement certifying that this Agreement has been
terminated).
Section 17.06.
Confidentiality of Business Information . Manager and Owner agree to keep confidential and not to use or to
disclose to others, any of their respective secrets or confidential or proprietary information, customer lists, or trade secrets, or any matter or
items relating to this Agreement, the management of the Community or their association with each other except (a) to their respective
Affiliates, which may in turn disclose to any holder of a Mortgage, any prospective lender, purchaser or prospective purchaser of the
Community, (b) to any rating agencies, lenders, stock analysts, accountants, lawyers and other like professionals, (c) as expressly consented to
in writing by the other party, (d) as required by law or the rules of any national securities exchange or automated quotation system to which
Owner or Manager, or any Affiliate of either, is or becomes subject, or (e) as required by law or the applicable regulators with respect to any
initial, renewal or other required application for licensure or other approval or certification of the Community.
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Section 17.07.
Assignment . Owner may assign this Agreement to any Affiliate (but only as such term is defined in Section 1.03
(i) or (iii)) of Owner without Manager’s consent. Manager shall not assign or transfer its interest in this Agreement without the prior written
consent of Owner which may be withheld in Owner’s sole and absolute discretion. If Owner consents to an assignment of this Agreement by
Manager, no further assignment shall be made without the express consent in writing of Owner.
Entire Agreement/Amendment . With respect to the subject matter hereof, this Agreement supersedes all previous
Section 17.08.
contracts and understandings between the parties and constitutes the entire Agreement between the parties with respect to the subject matter
hereof. This Agreement may not be modified, altered or amended in any manner except by an amendment in writing, duly executed by the
parties hereto.
Section 17.09.
Third Party Beneficiaries . The terms and conditions of this Agreement shall inure to the benefit of, and be binding
upon, the respective successors, heirs, legal representatives or permitted assigns of each of the parties hereto, and as otherwise provided in
Section 15.05, no Person other than the parties hereto and their successors and permitted assigns is intended to be a beneficiary of this
Agreement.
Section 17.10.
Survival . The following provisions shall survive termination or expiration of this Agreement: Sections 11.02,
12.02, 13.01, 14.03, 14.04 and 14.05, Article XV and Article XVII.
Section 17.11.
Relationship Between the Parties . The relationship between Owner and Manager pursuant to this Agreement shall
not be one of general agency, but shall be that of an independent contractor relationship, provided with respect to those specific and limited
circumstances in which (a) Manager is holding funds for the account of Owner or (b) Manager is required or authorized to act as authorized
representative for Owner with respect to agreements with Tenants, filings with and applications to governmental bodies or pursuant to licenses
or Legal Requirements, the relationship between Owner and Manager shall be that of trustee and authorized representative (with limited
agency), respectively. Neither this Agreement nor any agreements, instruments, documents or transactions contemplated hereby shall in any
respect be interpreted, deemed or construed as making Owner a partner or joint venturer with Manager or as creating any similar relationship or
entity, and each party agrees that it will not make any contrary assertion, contention, claim or counterclaim in any action, suit or other legal
proceeding involving the other.
[Signatures on the following page]
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed under seal by their duly authorized officers,
all as of the day and year first above written.
Manager:
FVE IL MANAGERS, INC.
By:
/s/ Bruce J. Mackey Jr.
Name: Bruce J. Mackey Jr.
Title: President
Owner:
SNH IL PROPERTIES TRUST
By:
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/s/ Richard A. Doyle
Name: Richard A. Doyle
Title: Treasurer and Chief Financial Officer
Exhibit A
5455 La Sierra Drive
Dallas, Texas 75231
Schedule 4.05
Five Star Rehabilitation and Wellness Services, LLC
FSQ Pharmacy Holdings, LLC
Senior Living Insurance Company
Affiliates Insurance Company
Reit Management & Research LLC