0000912057-01-534009.txt : 20011009 0000912057-01-534009.hdr.sgml : 20011009 ACCESSION NUMBER: 0000912057-01-534009 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20010921 ITEM INFORMATION: Other events ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 20011001 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SENIOR HOUSING PROPERTIES TRUST CENTRAL INDEX KEY: 0001075415 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 043445278 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-15319 FILM NUMBER: 1749172 BUSINESS ADDRESS: STREET 1: 400 CENTRE STREET CITY: NEWTON STATE: MA ZIP: 02458 BUSINESS PHONE: 6173323990 8-K 1 a2060299z8-k.txt FORM 8-K -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report (Date of earliest event reported): SEPTEMBER 21, 2001 ------------------------ SENIOR HOUSING PROPERTIES TRUST (Exact name of registrant as specified in charter) MARYLAND 001-15319 04-3445278 (State or other jurisdiction (Commission File (I.R.S. Employer of incorporation) Number) Identification Number) 400 CENTRE STREET, 02458 NEWTON, MASSACHUSETTS (Zip code) (Address of principal executive offices)
Registrant's telephone number, including area code: 617-796-8350 ------------------------ -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- ITEM 5. OTHER EVENTS. A. PROPOSED SPIN-OFF On September 21, 2001, we announced that Five Star Quality Care, Inc., formerly known as SHOPCO Holdings, Inc., a Maryland corporation and one of our wholly owned subsidiaries, filed a preliminary registration statement with the Securities and Exchange Commission concerning a possible distribution of substantially all of our share ownership in Five Star to our shareholders. The Registration Statement has not yet become effective. Five Star's common shares may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This Form 8-K shall not constitute an offer to sell or the solicitation of an offer to buy Five Star common shares, nor shall there be any sale of Five Star common shares in any state in which such offer, solicitation, or sale would be unlawful prior to registration or qualification under the securities laws of such state. We have not yet entered into definitive documentation with Five Star regarding the terms of our spin-off and related transactions, including the leases we refer to in this Form 8-K. The description of these agreements in this Form 8-K includes the material terms which we currently expect and which are based on our best estimate as of the date of this Form 8-K. The final terms may be different from those that we now expect. Final terms are subject to negotiation between us and Five Star, and are subject to approval by our Board of Trustees and Five Star's Board of Directors. The final terms may be influenced by factors which include, but are not limited to, changes to the status of the economy, industry or regulatory changes, or changes in the performance or expected performance of the facilities we expect to lease to Five Star. These changes could affect any of the terms of the leases or the transaction agreement, described below, or all of them, and may include, for example, an increase or decrease in the initial capital of Five Star on the date of the spin-off or an increase or decrease in annual minimum rents, percentage rents, initial term length or renewal options of the leases. THE PROPOSED SPIN-OFF If we consummate the spin-off, we will distribute substantially all of Five Star's common shares to our shareholders. HRPT Properties Trust, a Maryland real estate investment trust, or REIT, which owns 44% of our shares, expects to distribute all of Five Star's common shares it receives in the spin-off to its shareholders. We currently expect that we will retain one percent of Five Star's common shares. In 2000, we repossessed or acquired nursing home facilities from former tenants of ours. Upon consummation of the spin-off, we expect we will lease 56 of these facilities to Five Star. Shortly after the spin-off, in order to acquire the personnel, systems and assets used in managing these 56 facilities, Five Star will acquire FSQ, Inc., formerly known as Five Star Quality Care, Inc. FSQ is owned by Gerard M. Martin and Barry M. Portnoy, our managing trustees and the owners of REIT Management & Research LLC, or RMR, our investment manager. As consideration in the acquisition, Messrs. Martin and Portnoy will receive Five Star common shares. At this time the number of shares to be issued to Messrs. Martin and Portnoy has not been determined and is dependent on negotiations between FSQ and us, including our independent trustees. We expect to receive an opinion from a nationally recognized investment banking firm as to the fairness to us of the consideration to be received by Messrs. Martin and Portnoy in the FSQ acquisition. In order to provide for an orderly spin-off and to govern relations after the spin-off, we intend to enter into a transaction agreement with Five Star, HRPT, Hospitality Properties Trust, or HPT, a Maryland REIT which invests in hotels, FSQ and RMR, our investment manager and the investment 2 manager to HRPT and HPT. In addition to other actions described in this Form 8-K, we expect the transaction agreement to provide for the following material actions and terms: - Prior to the spin-off, we will reorganize Five Star's business. This reorganization will include the transfer to our subsidiaries, other than Five Star and its subsidiaries, of substantially all of Five Star's real estate assets and furnishings, fixtures and equipment and some of Five Star's receivables and liabilities not associated with routine operation of the 56 senior living facilities. - We expect to adjust Five Star's net equity to $40 million by contributing cash. This net equity will consist primarily of cash and accounts receivable net of accounts payable arising from the operation of the 56 senior living facilities now owned by us which Five Star will lease. - HPT will provide certain consents to Crestline Capital Corporation in order to facilitate the closing of the transaction with Crestline, described below. - Five Star will afford us, HRPT and HPT a right of first refusal before it acquires or finances any real estate investments of the type in which we, HRPT or HPT, respectively, invest. - Five Star will agree to restrict the ownership of Five Star's common shares and conduct its business activities in a manner which does not jeopardize our or HRPT's status as a REIT. - Shortly after the distribution of Five Star's common shares to our and to HRPT's shareholders, Five Star will acquire FSQ in order to acquire the personnel, systems and assets necessary to operate the 56 facilities which Five Star will lease. - To retain certain services now provided by RMR to FSQ, simultaneously with the FSQ acquisition, Five Star will enter into a shared services agreement with RMR. - We will cooperate with Five Star to file future tax returns including appropriate allocation of taxable income, expenses and other tax attributes. - From and after the distribution date, Five Star will agree to indemnify us from any damages, claims, losses, expenses, costs or liabilities, arising out of any breach by Five Star under the transaction agreement, any liability assumed by Five Star under various assignment and assumption agreements relating to the reorganization and the Crestline transaction and any liability relating to the operation of Five Star's business or assets. - If we acquire the 31 Marriott facilities from Crestline, Five Star will simultaneously assume the rights and obligations under existing management agreements with Marriott, acquire certain operating assets and liabilities of those facilities operations and lease those facilities from us. - We will pay all of the costs and expenses of the spin-off and related transactions which may be incurred by the parties to the transaction agreement. Our completion of the spin-off is subject to the consent of various federal and state healthcare regulatory authorities. In addition, Five Star needs to acquire FSQ in order for it to be able to operate its senior living facilities after the spin-off. Negotiation of the merger agreement pursuant to which Five Star will acquire FSQ is not complete and we may not be able to agree on the terms of the merger agreement. While we are planning on consummating the spin-off in December 2001, we can give no assurances that the spin-off will be completed or that the final terms of the spin-off will not differ, including in material respects, from the terms we currently expect, as described in this Form 8-K. BACKGROUND AND REASONS FOR THE SPIN-OFF In order to maintain our status as a REIT for federal income tax purposes, a substantial majority of our revenues must be derived from real estate rents and mortgage interest. 3 In July 2000, we repossessed or acquired facilities from former tenants, and retained FSQ to manage these properties. Tax laws applicable to REITs allow these arrangements only for limited periods, after which we must either sell or locate one or more tenants for these facilities. In August 2001, we entered into an agreement with Crestline to purchase 31 senior living facilities managed by Marriott Senior Living Services, Inc. Tax laws applicable to REITs do not allow us to own these facilities without a third party tenant. We expect Five Star to meet our need for a tenant for the 56 facilities managed by FSQ and the 31 Marriott facilities and to own other assets that we could not own ourselves, as well as to conduct other business activities that we could not, as a REIT, conduct ourselves. Five Star, which will be taxed as a regular corporation rather than a REIT, will be able to engage in activities that we are not permitted to engage in. When we distribute Five Star's common shares, we expect HRPT to distribute to HRPT shareholders the Five Star shares that it receives from us. HRPT expects to agree to make this simultaneous distribution because doing so will allow HRPT to retain its own tax status as a REIT and assist us in retaining our REIT status. For a more detailed discussion of the tax provisions applicable to REITs which underlie this spin-off, see "Supplementary Federal Income Tax Considerations" below. 4 THE 56 SENIOR LIVING FACILITIES THAT FIVE STAR WILL OPERATE AFTER THE SPIN-OFF DESCRIPTION OF THE FACILITIES Upon completion of the spin-off, Five Star will lease and operate 56 senior living facilities which are owned by us. These 56 facilities include 54 nursing homes and two assisted living facilities; three of the nursing homes contain independent living units. These 56 facilities have 5,282 beds or living units and they are located in 12 states. The following table provides additional information about these facilities:
NO. OF BEDS/UNITS FACILITY/LOCATION TYPE OF FACILITY FUNCTIONALLY AVAILABLE* ---------------------------------- ----------------- ----------------------- 1. Phoenix, AZ Nursing Home 119 2. Yuma, AZ Nursing Home 125 3. Yuma, AZ Assisted Living 55 4. Arleta, CA Assisted Living 90 5. Lancaster, CA Nursing Home 99 6. Stockton, CA Nursing Home 116 7. Thousand Oaks, CA Nursing Home 124 8. Van Nuys, CA Nursing Home 58 9. Canon City, CO Nursing Home/ 133 Senior Apartments 10. Cherrelyn, CO Nursing Home 200 11. Colorado Springs, CO Nursing Home 100 12. Delta, CO Nursing Home 76 13. Grand Junction, CO Nursing Home 95 14. Grand Junction, CO Nursing Home 82 15. Lakewood, CO Nursing Home 125 16. New Haven, CT Nursing Home 150 17. Waterbury, CT Nursing Home 150 18. College Park, GA Nursing Home 99 19. Dublin, GA Nursing Home 130 20. Glenwood, GA Nursing Home 61 21. Marietta, GA Nursing Home 109 22. Clarinda, IA Nursing Home 96 23. Council Bluffs, IA Nursing Home 62 24. Des Moines, IA Nursing Home 85 25. Glenwood, IA Nursing Home 116 26. Mediapolis, IA Nursing Home 62 27. Pacific Junction, IA Nursing Home 12 28. Winterset, IA Nursing Home/ 99 Senior Apartments 29. Ellinwood, KS Nursing Home 55 30. Farmington, MI Nursing Home 149 31. Howell, MI Nursing Home 172 32. Tarkio, MO Nursing Home 76 33. Ainsworth, NE Nursing Home 48 34. Ashland, NE Nursing Home 101 35. Blue Hill, NE Nursing Home 63 36. Campbell, NE Nursing Home 45 37. Central City, NE Nursing Home 66 38. Columbus, NE Nursing Home 48
5
NO. OF BEDS/UNITS FACILITY/LOCATION TYPE OF FACILITY FUNCTIONALLY AVAILABLE* ---------------------------------- ----------------- ----------------------- 39. Edgar, NE Nursing Home 52 40. Exeter, NE Nursing Home 48 41. Grand Island, NE Nursing Home 76 42. Gretna, NE Nursing Home 63 43. Lyons, NE Nursing Home 63 44. Milford, NE Nursing Home 54 45. Sutherland, NE Nursing Home 62 46. Utica, NE Nursing Home 40 47. Waverly, NE Nursing Home 50 48. Brookfield, WI Nursing Home 226 49. Clintonville, WI Nursing Home 103 50. Clintonville, WI Nursing Home 62 51. Madison, WI Nursing Home 63 52. Milwaukee, WI Nursing Home 154 53. Pewaukee, WI Nursing Home 204 54. Waukesha, WI Nursing Home 105 55. Laramie, WY Nursing Home 120 56. Worland, WY Nursing Home/ 86 Senior Apartments TOTALS: 5,282 beds/units
------------------------ */ As of September 1, 2001. Total licensed bed/unit capacity is 5,590. After we repossessed or acquired the foregoing facilities from bankrupt former tenants, we undertook to correct deferred maintenance which had been allowed to occur at these facilities by their former tenants. Between July 2000 and August 2001, we spent $3 million under this program. As part of the transaction agreement, we expect to agree to assume liabilities associated with completing any of these projects which remain unfinished at the time of the spin-off without any adjustment to Five Star's rent. THE LEASE FOR THE FACILITIES We expect to lease the 56 facilities to Five Star. We expect that this lease will require Five Star to maintain our facilities during the lease term and to indemnify us for any liability which may arise by reason of our ownership of the properties during the lease term. The following is a summary of the expected material terms of this lease: OPERATING COSTS. The lease will be a so-called "triple-net" lease which will require Five Star to pay all costs incurred in the operation of the facilities, including the costs of personnel, service to residents, insurance and real estate and personal property taxes. MINIMUM RENT. The lease will require Five Star to pay minimum rent to us. We expect that this rent will equal $7 million per year. PERCENTAGE RENT. Starting in 2004, the lease will require additional rent with respect to each lease year. We expect that this additional rent will be in an amount equal to three percent (3%) of net patient revenues at the leased facilities in excess of net patient revenues during 2003. TERM. The lease will expire on June 30, 2018. 6 RENEWAL OPTION. Five Star will have the option to renew the lease for all, but not less than all, of the facilities for one renewal term ending on June 30, 2033. RENT DURING RENEWAL TERM. Rent during the renewal term shall be a continuation of minimum rent and percentage rent payable during the initial term. Our lease of the 56 facilities is expected to include other terms and conditions substantially in the form of and on the terms of our current triple net leases described in our Annual Report on Form 10-K for the year ended December 31, 2000, relating to, among other things, Five Star's indemnification of us for potential liabilities which may arise from environmental hazards, damage, destruction or condemnation, events of default and related remedies, security provided us by Five Star including a pledge of Five Star's subsidiary shares and guarantee of lease obligations to us and restrictions on Five Star's ability to assign, sublet, enter or modify operating agreements with third parties or close facilities. B. CRESTLINE TRANSACTION As we have previously reported, on August 9, 2001, we entered an agreement with Crestline and certain of its subsidiaries for the purchase of the stock of Crestline subsidiaries which own 31 senior living facilities operated by Marriott and related assets. We will acquire the Marriott facilities subject to the terms of Crestline's existing operating agreements with Marriott. This transaction is expected to close in early 2002. The Crestline transaction is subject to conditions, and there can be no assurance that the Crestline transaction will close. The Five Star spin-off is not conditioned upon the closing of the Crestline transaction. Contemporaneously with the closing of the Crestline transaction, if we complete the Five Star spin-off, we will lease the 31 Marriott facilities to Five Star, Five Star will assume the rights and obligations under existing operating agreements with Marriott and we will transfer to Five Star assets and liabilities relating to operation of these facilities. The assets and liabilities are expected to be principally composed of accounts receivable and accrued operating liabilities associated with the 31 facilities. The net of these operating assets and liabilities, if any, will be settled between us and Five Star in cash. The following is a summary of the material provisions of our stock purchase agreement with Crestline and certain related agreements and instruments. If you want more information, you should read the entire stock purchase agreement and related agreements and instruments, which have been filed as an exhibit to this Form 8-K. THE STOCK PURCHASE AGREEMENT ACQUIRED ASSETS Pursuant to the terms of the stock purchase agreement, a subsidiary of ours will acquire from Crestline the capital stock of certain Crestline subsidiaries, and Crestline will assign other of its assets pertaining to the Marriott facilities and Crestline's rights under various agreements relating to its senior living business, including its subsidiaries' rights under operating and related agreements, transition agreements, prior tax matters agreements, prior stock purchase agreements, and an indemnity agreement with Marriott pertaining to the Marriott facilities. We will also assume certain liabilities related to the Marriott facilities, including various mortgages and other obligations related to the facilities. 7 If Crestline is unable to obtain the consents necessary to sell its interests in certain facilities, we may exclude from the Crestline transaction or delay our acquisition of the facilities for which consents have not been obtained. If we do not acquire all 31 facilities at closing, the purchase price we pay at closing will be reduced according to a formula set forth in the stock purchase agreement, Crestline will continue to use commercially reasonable efforts to obtain any necessary consents, and we and Crestline will endeavor to effect our later acquisition of the excluded facilities under terms and conditions agreed to in the stock purchase agreement. PURCHASE PRICE We have agreed to pay Crestline a purchase price of $600 million subject to adjustments described below. The purchase price paid at closing will be decreased by (a) any indebtedness (including capital leases) of the Crestline subsidiaries we will acquire, including new loans (in an expected amount of $170 million) to be obtained by Crestline, the proceeds of which will be distributed to Crestline and which will remain outstanding after the closing date as obligations of these former Crestline subsidiaries, (b) amounts not funded by Crestline prior to the closing date for capital expenditures required under the facilities operating agreements for 2001, (c) any deficiencies in taxes, insurance, escrow accounts for capital expenditures or mortgage reserves prior to the closing of the transaction, (d) amounts paid by facility residents to the Crestline subsidiaries that we acquire under continuing care contracts, and (e) other adjustments customary in transactions of this type. The purchase price paid at closing will be increased by (a) amounts funded by Crestline prior to the closing date for capital expenditures required under the facilities' operating agreements for 2002, (b) any costs associated with obtaining the new loans, (c) any interest that has been prepaid for any period after the closing of the transaction, (d) any prepayments, including for rent under ground leases, or deposits for taxes, mortgage reserves or insurance for any period after the closing of the transaction, and (e) other adjustments customary in transactions of this type. Assuming that there are no adjustments to the purchase price other than relating to outstanding indebtedness, we expect that the $600 million purchase price will be comprised of approximately $403 million in the form of outstanding debt of the Crestline subsidiaries that we will acquire, $25 million by delivery to Crestline of an unsecured promissory note of ours and the balance in cash, including $7.5 million of ours that is currently being held in escrow as a deposit. REPRESENTATIONS AND WARRANTIES; COVENANTS; AND INDEMNIFICATION The stock purchase agreement contains customary: - representations and warranties of each party; - nonsolicitation provisions whereby Crestline has agreed that it will not solicit, initiate, or facilitate an alternative proposal for the acquisition of the acquired companies, or enter into a transaction which would prevent, delay or dilute the benefits of the transaction as contemplated by us; - covenants pertaining to the conduct of the business of the acquired subsidiaries; - other covenants on the part of Crestline and us; and - post-closing indemnification provisions whereby each of us and Crestline indemnifies the other and their respective affiliates, officers, directors, employees and against various matters relating to breach of the stock purchase agreement, subject to customary limits. Crestline's indemnification generally covers pre-closing liabilities of the acquired subsidiaries only to the extent Crestline has made representations as to these liabilities. As a general matter Crestline's representations expire one year after the closing. 8 CONDITIONS TO CONSUMMATION OF THE TRANSACTION The stock purchase agreement contains numerous conditions to closing, including the following: - approval by vote of or consent of Crestline's stockholders; - consent from Marriott as required under its operating agreements; - consents from certain Crestline lenders as to various aspects of the transaction including Five Star's leasing the properties; - the acquired subsidiaries obtaining new mortgage financing (we currently expect that this financing will be in a principal amount of $170 million); and - various regulatory approvals for the change of ownership for these facilities from Crestline to us and for our leases to Five Star. TERMINATION OF THE STOCK PURCHASE AGREEMENT The stock purchase agreement may be terminated, in addition to other customary reasons, by: - mutual agreement of Crestline and us; - either Crestline or us if the closing has not occurred prior to June 30, 2002; - either Crestline or us if any court or other governmental authority prohibits Crestline or us from completing the transaction; - either Crestline or us if certain conditions to closing are not met; and - either Crestline or us if Crestline's shareholders do not approve the transaction at a special meeting of Crestline shareholders or if Crestline accepts an offer to purchase the acquired subsidiaries or their assets, including the facilities, from a third party other than us. In addition, we may terminate the agreement according to the process outlined in the stock purchase agreement if we give Crestline written notice, on or before October 15, 2001, that we object to any title exceptions or environmental or other real property issues which adversely affect any of the senior living facilities in any material respect and Crestline does not elect to remove the title exception or remedy such matter on or prior to the closing. TERMINATION FEE Crestline must pay us a termination fee of $7.5 million if the stock purchase agreement is terminated because its stockholders reject the transaction. This termination fee shall increase to $15 million under certain circumstances involving Crestline's failure to close, or subsequent sale of their senior living business, as further set forth in the agreement, or if we terminate the agreement because the conditions to closing have not been satisfied as a result of Crestline's willful actions or omissions. We must pay Crestline a termination fee (which includes the escrow deposit of $7.5 million) of $15 million if we do not have sufficient funds to pay the purchase price other than as a result of the failure of Crestline to obtain new mortgage financing of $150 to $175 million; or if Crestline terminates the agreement because the conditions to closing have not been satisfied as a result of our willful acts or omissions. If we consummate the spin-off and receive the termination fee from Crestline, we will pay $7.5 million to Five Star. OTHER AGREEMENTS Pursuant to the stock purchase agreement, we will enter into or have entered into the agreements listed below. A copy of the form of each of these related agreements is filed as an exhibit to the stock purchase agreement. The descriptions below describe the material provisions of each of these 9 agreements, but they do not purport to be complete and are subject to, and qualified in their entirety by reference to, all of the provisions of each of the agreements. ESCROW AGREEMENT Crestline and we entered into an escrow agreement relating to the transactions contemplated by the stock purchase agreement. Pursuant to the escrow agreement, we deposited $7.5 million with an escrow agent. That amount and any interest earned thereon will be applied as a credit to the purchase price on the closing of the Crestline transaction. If the Crestline transaction does not close, the escrow funds will be returned to us or, if applicable, applied as a credit to any termination fee which we may owe Crestline as described above. PROMISSORY NOTE On the closing date, we expect to deliver a portion of the purchase price by delivery of our unsecured $25 million promissory note. The full amount of the note will become due on the earlier of January 31, 2004 or the date when one of the Crestline subsidiary loans that will remain outstanding is repaid in full. The maturity date of this loan is September 11, 2020, and $116.7 million was outstanding as of June 15, 2001. This loan is prepayable without penalty on or after September 11, 2003. Our note is prepayable by us at any time upon notice to Crestline. The annual interest rate on the unpaid principal of this note will be 10 percent. Interest will be payable in arrears by us in equal installments on the last day of March, June, September and December each year during which the note remains outstanding. If we default on the note, three percent will be added to the interest rate until the entire obligation is repaid in full. TAX ALLOCATION AGREEMENT We will enter into a tax allocation agreement with Crestline that allocates responsibility for filing tax returns of the Crestline subsidiaries that we acquire, and provides for cooperation between us and Crestline concerning other tax matters. Under this agreement, taxes of the acquired Crestline subsidiaries for the period after the Crestline transaction, if any, are generally our responsibility, while taxes that relate to the period before the acquisition are generally the responsibility of Crestline or its predecessors. Crestline has tax allocation agreements with entities who owned substantially all of Crestline's senior living business before Crestline did. Under the tax allocation agreement, Crestline has assigned to us the benefits and burdens of indemnities provided to Crestline by these prior owners. DEBT ASSUMED A portion of the purchase price for the Crestline transaction will be paid by our acquiring Crestline subsidiaries subject to outstanding mortgage and other debt at the closing date. Included in this debt will be new mortgage debt on 8 of the 31 Marriott facilities in a minimum aggregate principal amount of at least $150 million that Crestline has agreed to cause to be incurred. Preliminary negotiations have taken place with a financing source and we expect that these mortgages will total $170 million, have a five year term, require amortization beginning in the third year, and carry interest at one-month floating rates plus a spread. In addition to the new mortgages, we expect that the Crestline subsidiaries we acquire will be subject to the following:
NUMBER OF ESTIMATED BALANCE AT COLLATERAL DECEMBER 31, 2001 OBLIGATION FACILITIES INTEREST RATE FINAL MATURITY (IN 000S) ---------- ------------ ---------------- -------------- -------------------- Mortgages 8 facilities LIBOR + 2.75% 2005 $ 92,370 Mortgages 8 facilities 10.008% 2020 116,220 Loan (unsecured) 1 facility 5.87% 2027 14,700 Capital Leases 2 facilities various 2016 9,354 -------- $232,644
10 The mortgages due in 2005 do not require principal amortization prior to maturity, and are prepayable at any time at par, plus 0.5% of the principal balance under certain conditions. The mortgages due in 2020 require principal amortization during their term and are, prior to September 2003, prepayable only with a yield maintenance penalty. After September 2003, the mortgages are prepayable at par. If not prepaid by September 11, 2003, the loan interest rate increases to the greater of 15.008% or the then prevailing yields on 10 year treasury securities plus 5% and substantially all cash flow in excess of amounts needed to service the schedule of payment of principal and interest on the loan, operating costs and capital improvements must be applied to amortize the then outstanding principal balance of the loan. Each of the facilities is subject to a single mortgage and each mortgage is cross collateralized and contains cross default provisions with each other mortgage. The loan due in 2027 is prepayable, beginning in 2007 at par plus 2% of the then outstanding balance, beginning in 2008 at par plus 1% of the then outstanding balance and beginning in 2009 at par. The capital leases are not prepayable. One of the capital leases requires payment of base rent equal to 102.5% of debt service under certain municipal bonds until November of 2003. From December 2003 through May 2010, this lease requires (subject to adjustments) monthly payments of base rent in the amount of $92,776. Thereafter monthly base rent payments reduce to $8,333. The other capital lease requires monthly payments of base rent, plus amounts required to service certain landlord indebtedness in respect of the leased property, and amounts payable under a regulatory agreement with the Secretary of Housing and Urban Development. The agreements governing the payment of this debt contain customary events of defaults and restrictive covenants which apply to these subsidiaries. The restrictive covenants, among other things: (i) require maintenance of segregated cash collection of all rents for certain of the senior living facilities; (ii) require separate cash reserves for debt service, property improvements, real estate taxes and insurance; and (iii) limit the applicable subsidiary's ability to incur additional indebtedness, enter into or cancel leases, enter into certain transactions with affiliates or sell certain assets. LEASES FOR THE MARRIOTT FACILITIES If we complete the spin-off and the Crestline transaction, we will lease the 31 Marriott facilities to Five Star. We expect that the material terms of the leases for these facilities will be substantially the same as those of the lease for the 56 facilities described above, except as follows: MINIMUM RENT. We expect that the leases will require Five Star to pay minimum rent to us of $63 million per year. PERCENTAGE RENT. Starting in 2003, the leases will require additional rent with respect to each lease year. We expect that this additional rent will be in an amount equal to five percent (5%) of net patient revenues at the leased facilities in excess of 2002 net patient revenues. TERM. The leases will expire on June 20, 2017. RENEWAL OPTIONS. Five Star will have two options to renew the leases for all, but not less than all, the facilities which are then subject to a Marriott management agreement: the first for 10 years ending on June 20, 2027; and the second for five years ending June 20, 2032. The second renewal option will be exercisable by Five Star only if Marriott renews, as provided under its management agreement with Five Star, for a five-year term ending in June 2032. 11 SUMMARY OF THE MARRIOTT FACILITIES The following table provides information about the 31 Marriott facilities:
FACILITY LOCATION TYPE OF UNITS NO. OF UNITS ------------------------------------ ------------------------------------ ------------ 1. Peoria, AZ Independent Living 155 Assisted Living 79 Nursing Care 57 ----- 291 2. Scottsdale, AZ Independent Living 167 Assisted Living 33 Nursing Care 96 ----- 296 3. Tucson, AZ Independent Living 202 Assisted Living 30 Special Care 27 Nursing Care 67 ----- 326 4., 5. San Diego, CA Independent Living 246 (2 properties) Assisted Living 100 Nursing Care 59 ----- 405 6. Newark, DE Independent Living 62 Assisted Living 26 Nursing Care 110 ----- 198 7. Wilmington, DE Independent Living 140 Assisted Living 37 Nursing Care 66 ----- 243 8. Wilmington, DE Independent Living 71 Assisted Living 44 Nursing Care 46 ----- 161 9. Wilmington, DE Independent Living 62 Assisted Living 15 Nursing Care 82 ----- 159 10. Wilmington, DE Assisted Living 51 Special Care 26 Nursing Care 31 ----- 108
12
FACILITY LOCATION TYPE OF UNITS NO. OF UNITS ------------------------------------ ------------------------------------ ------------ 11. Coral Springs, FL Independent Living 184 Assisted Living 62 Nursing Care 35 ----- 281 12. Deerfield Beach, FL Independent Living 198 Assisted Living 33 Nursing Care 60 ----- 291 13. Ft. Lauderdale, FL Assisted Living 109 14. Ft. Myers, FL Assisted Living 85 15. Palm Harbor, FL Independent Living 230 Assisted Living 87 ----- 317 16. West Palm Beach, FL Independent Living 276 Assisted Living 64 ----- 340 17. Indianapolis, IN Independent Living 117 Special Care 30 Nursing Care 74 ----- 221 18. Overland Pk, KS Independent Living 117 Assisted Living 30 Nursing Care 60 ----- 207 19. Lexington, KY Independent Living 140 Assisted Living 9 ----- 149 20. Lexington, KY Assisted Living 22 Nursing Care 111 ----- 133 21. Louisville, KY Independent Living 240 Assisted Living 44 Nursing Care 40 ----- 324 22. Winchester, MA Assisted Living 125 23. Lakewood, NJ Independent Living 217 Assisted Living 108 Special Care 31 Nursing Care 60 ----- 416
13
FACILITY LOCATION TYPE OF UNITS NO. OF UNITS ------------------------------------ ------------------------------------ ------------ 24. Albuquerque, NM Independent Living 114 Assisted Living 34 Nursing Care 60 ----- 208 25. Columbus, OH Independent Living 143 Assisted Living 87 Special Care 25 Nursing Care 60 ----- 315 26. Myrtle Beach, SC Assisted Living 60 Special Care 36 Nursing Care 68 ----- 164 27. Dallas, TX Independent Living 190 Assisted Living 38 Nursing Care 90 ----- 318 28. El Paso, TX Independent Living 123 Special Care 15 Nursing Care 120 ----- 258 29. Houston, TX Independent Living 197 Assisted Living 71 Special Care 60 Nursing Care 87 ----- 415 30. San Antonio, TX Independent Living 151 Assisted Living 30 Special Care 28 Nursing Care 60 ----- 269 31. Woodlands, TX Independent Living 239 Assisted Living 100 Special Care 16 ----- 355 Totals Independent Living 3,981 Assisted Living 1,613 Special Care 294 Nursing Care 1,599 ----- 7,487 =====
14 C. SUPPLEMENTARY FEDERAL INCOME TAX CONSIDERATIONS The following summary of federal income tax considerations relating to the acquisition, ownership and disposition of our shares and the common shares of Five Star supplements and updates the more detailed description of these matters in our Annual Report on Form 10-K for the year ended December 31, 2000, which we incorporate in this Form 8-K by reference. Sullivan & Worcester LLP, Boston, Massachusetts, has rendered a legal opinion that the discussion in the section of our 2000 Annual Report captioned "Federal Income Tax Considerations", as supplemented by the discussion in this section, is accurate in all material respects and fairly summarizes the federal income tax issues discussed in those sections, and the opinions of counsel referred to in those sections represent Sullivan & Worcester LLP's opinions on those subjects. Specifically, subject to qualifications and assumptions contained in its opinion, in our 2000 Annual Report and in this section, Sullivan & Worcester LLP has given opinions to the effect that we have been organized and have qualified as a REIT under the Internal Revenue Code of 1986, as amended (the "IRC"), for our 1999 and 2000 taxable years, and that our current investments and plan of operation will enable us to continue to meet the requirements for qualification and taxation as a REIT under the IRC. These opinions are conditioned upon the assumption that our leases and other contracts with Five Star, our charter and bylaws, the Five Star charter and bylaws, and all other legal documents to which we or Five Star are or have been a party, have been and will be complied with by all parties to these documents, upon the accuracy and completeness of the factual matters described in this Form 8-K, and upon representations that we and Five Star have made as to the current expectations of the final terms of the leases and other contracts. The opinions of Sullivan & Worcester LLP are based on the law as it exists today, but the law may change in the future, possibly with retroactive effect. Also, an opinion of counsel is not binding on the Internal Revenue Service, or IRS, or the courts, and the IRS or a court could take a position different from that expressed by counsel. The IRC imposes upon us various REIT qualification tests discussed more fully in our 2000 Annual Report. While we believe that we have operated and will operate in a manner to satisfy these various REIT qualification tests, counsel has not reviewed and will not review our compliance with these tests on a continuing basis. The following discussion summarizes how the Crestline transaction and the Five Star spin-off affect our REIT qualification and taxation under the IRC, in each case assuming that these transactions are consummated as currently contemplated. Our actual qualification as a REIT will depend upon our ability to meet, and our meeting, through actual annual operating results and distributions, the various REIT qualification tests imposed under the IRC. The following summary of federal income tax considerations is based on existing law, and is limited to investors who own our shares, and who will own Five Star common shares, as investment assets rather than as inventory or as property used in a trade or business. The summary does not discuss the particular tax consequences that might be relevant to you if you are subject to special rules under the federal income tax law, for example if you are: - a bank, life insurance company, regulated investment company, or other financial institution, - a broker or dealer in securities or foreign currency, - a person who has a functional currency other than the U.S. dollar, - a person who acquires our shares or Five Star common shares in connection with his employment or other performance of services, - a person subject to alternative minimum tax, - a person who owns our shares or Five Star common shares as part of a straddle, hedging transaction, constructive sale transaction, or conversion transaction, or 15 - except as specifically described in the following summary, a tax-exempt entity or a foreign person. The sections of the IRC that govern the federal income tax qualification and treatment of a REIT and its shareholders are complex. This summary is based on applicable IRC provisions, related rules and regulations and administrative and judicial interpretations, all of which are subject to change, possibly with retroactive effect. Future legislative, judicial, or administrative actions or decisions could affect the accuracy of statements made in this summary. Neither we nor Five Star has sought a ruling from the IRS with respect to the Crestline transaction or the Five Star spin-off, and we cannot assure you that the IRS or a court will agree with the statements made in this summary. In addition, the following summary is not exhaustive of all possible tax consequences, and does not discuss any gift, estate, generation skipping transfer, state, local, or foreign tax consequences. For all these reasons, we urge you to consult with a tax advisor about the federal income tax and other tax consequences of your acquisition, ownership and disposition of our shares and Five Star common shares. Your federal income tax consequences may differ depending on whether or not you are a "U.S. person". For purposes of this summary, a U.S. person for federal income tax purposes is: - a citizen or resident of the United States, including an alien individual who is a lawful permanent resident of the United States or meets the substantial presence residency test under the federal income tax laws, - a corporation, partnership or other entity treated as a corporation or partnership for federal income tax purposes, that is created or organized in or under the laws of the United States, any state thereof or the District of Columbia, unless otherwise provided by Treasury regulations, - an estate the income of which is subject to federal income taxation regardless of its source, or - a trust if a court within the United States is able to exercise primary supervision over the administration of the trust and one or more United States persons have the authority to control all substantial decisions of the trust, or electing trusts in existence on August 20, 1996, to the extent provided in Treasury regulations, whose status as a U.S. person is not overridden by an applicable tax treaty. Conversely, a "non-U.S. person" is a beneficial owner of our shares or Five Star common shares who is not a U.S. person. REASONS FOR THE FIVE STAR SPIN-OFF In order to maintain our status as a REIT for federal income tax purposes, a substantial majority of our gross income must generally be derived from real estate rents and mortgage interest. Thus the IRC imposes strict limits on our ability to own properties that we or others operate for our own account. Even in circumstances where we are permitted to own properties operated for our own account, the IRC encourages leasing the properties to one or more qualified tenants. A qualified tenant is a tenant in whom we have at all times during the taxable year an actual or constructive ownership interest of less than 10% by vote and by value. In particular, we must generally pay federal corporate income tax on our net income from operated property, whereas we generally do not pay any corporate income tax on our rental income from qualified tenants that we distribute to our shareholders. With respect to facilities we repossessed or obtained from former tenants, the REIT foreclosure property tax rules generally permit us to have these facilities operated for our account only through December 31, 2003. Further, during the period that these facilities are operated for our account, we cannot make improvements other than repairs, and the net income from the repossessed facility operations is subject to corporate income tax. In contrast, leased facilities can generally be improved without limitation, and rental income from leased facilities that is distributed to our shareholders is 16 generally not subject to corporate income tax. Finally, if the Crestline transaction closes, the IRC REIT qualification rules will require us to lease the Crestline facilities to one or more qualified tenants. For all of these reasons, we intend to spin-off Five Star, and we expect that our significant shareholder, HRPT, will distribute all of the Five Star common shares its receives from us, in a manner so that Five Star will be our qualified tenant for our 2002 taxable year and thereafter. FEDERAL INCOME TAX CONSEQUENCES OF THE SPIN-OFF TO SENIOR HOUSING COMMON SHAREHOLDERS IN GENERAL. As a REIT, our distribution of Five Star common shares by spin-off will generally affect our shareholders in the same manner as any other distribution of cash or property we make on our common shares. These tax consequences are summarized below: - We are generally not subject to tax on our net income to the extent that net income is distributed to our shareholders. - Distributions to our shareholders out of our current or accumulated earnings and profits that are not designated by us as capital gain dividends generally will be taken into account by our shareholders as ordinary income dividends. To the extent of our net capital gain for the taxable year, we may designate dividends as capital gain dividends that will be taxable to our shareholders as long-term capital gain. - Distributions in excess of our current and accumulated earnings and profits will not be taxable to a shareholder of ours to the extent that they do not exceed his adjusted basis in his Senior Housing common shares, but rather will reduce the adjusted basis in those shares. - Distributions in excess of our current and accumulated earnings and profits that exceed a shareholder's adjusted basis in his Senior Housing common shares generally will be taxable as capital gain from a deemed sale of those shares. - Our earnings and profits for a year will be allocated among each of our distributions for that year in proportion to the amount of each distribution. - Neither our ordinary income dividends nor our capital gain dividends will entitle our corporate shareholders to any dividends received deduction. Accordingly, the spin-off of Five Star common shares will be treated as a distribution by us to you in the amount of the fair market value of the Five Star common shares distributed. Since we expect our 2001 distributions to exceed our current and accumulated earnings and profits, we expect that a portion of this distribution will be taxable to you as a dividend and a portion will be treated as a reduction in your adjusted tax basis in our common shares. You will have a tax basis in the Five Star common shares received in the spin-off equal to their fair market value at the time of the spin-off, and your holding period in those common shares commences on the day after the spin-off. We believe that for federal income tax purposes each of the Five Star common shares may be properly valued on the distribution date as the average of the reported high and low trading prices in the public market on that date, and we and Five Star will perform all tax reporting, including statements supplied to you and to the IRS, on the basis of this average price, called the distribution price. Because of the factual nature of value determinations, Sullivan & Worcester LLP is unable to render an opinion on the fair market value of the Five Star common shares. As described in more detail below, although the amount and extent to which we recognize gains and losses in the spin-off is not free from doubt, we expect: (1) to recognize neither gain nor loss on Five Star's and its subsidiaries' assets; and (2) to recognize gain but not loss on the distribution of the Five Star shares. Any gain that we recognize in the spin-off will increase our 2001 current earnings and profits, and the spin-off itself will increase the total amount of our 2001 distributions by the amount of 17 the distribution of the Five Star shares. The IRC requires that a REIT's available earnings and profits for its taxable year be allocated pro rata among each of its common share distributions for that taxable year. Because we expect to generate taxable income during 2001 which will be allocated to each distribution we make, including the spin-off, a portion of the spin-off distribution will be considered taxable dividends. The final determination will be subject to a number of factors which are unknown at this time, including our final taxable income for 2001, the gain, if any, we realize in the spin-off, the amount and timing of distributions we declare which relate to our 2001 taxable year and the distribution price of the Five Star shares at the time of the spin-off. Assuming that you have held our common shares for the entire 2001 calendar year, we estimate: - If the distribution price for the Five Star shares equals their book value, you will have no additional taxable dividend as a result of the spin-off. - You will have no additional taxable dividend for distribution prices up to about 110% of book value for Five Star shares. - Distribution prices in excess of 110% of the book value of Five Star shares will increase your taxable dividend for 2001. Each $0.10 increase in distribution price per our common share will yield an additional taxable dividend to you of $0.10 per our common share. - The spin-off distribution will not reduce the taxable dividends to you for the year. However, a definitive taxable dividend computation will not be possible until after the spin-off. To the extent we are able, we intend to designate a portion of our taxable dividends for the year as capital gain dividends that generally will be subject to tax at the maximum capital gain rates of 20% and 25% in the case of our noncorporate shareholders. TAXATION OF TAX-EXEMPT ENTITIES. Tax-exempt entities are generally not subject to federal income taxation except to the extent of their "unrelated business taxable income", often referred to as UBTI, as defined in Section 512(a) of the IRC. As with our other distributions, the distribution of Five Star common shares to you if you are a tax-exempt entity should generally not constitute UBTI, provided that you have not financed your acquisition of our common shares with acquisition indebtedness within the meaning of Section 514 of the IRC. However, if you are a tax-exempt pension trust, including a so-called 401(k) plan but excluding an individual retirement account or government pension plan, that owns more than 10% by value of a pension-held REIT, then you may have to report a portion of the dividends that you receive from that REIT as UBTI. Although we cannot provide complete assurance on this matter, we believe that we have not been and will not become a pension-held REIT. TAXATION OF NON-U.S. PERSONS. If you are a non-U.S. person who holds our common shares, the spin-off of Five Star common shares will generally be taxable to you in the same manner as any other distribution of cash or property that we make to you. The rules governing the federal income taxation of non-U.S. persons are complex, and the following discussion is intended only as a summary of these rules. If you are a non-U.S. person, you should consult with your own tax advisor to determine the impact of federal, state, local, and foreign tax laws, including any tax return filing and other reporting requirements, with respect to the spin-off of the Five Star common shares and your investment in our common shares. You will generally be subject to regular federal income tax in the same manner as a U.S. person with respect to the spin-off of Five Star common shares and your investment in our common shares, if this investment is effectively connected with your conduct of a trade or business in the United States. In addition, if you are a corporate shareholder of ours, your income that is effectively connected with a trade or business in the United States may also be subject to the 30% branch profits tax under Section 884 of the IRC, which is payable in addition to regular federal corporate income tax. The balance of 18 this summary addresses only those non-U.S. persons whose investment in our common shares is not effectively connected with the conduct of a trade or business in the United States. We are not at this time designating the distribution of the Five Star common shares as a capital gain dividend that is subject to 35% withholding for non-U.S. persons, and accordingly the 30% or applicable lower treaty rate withholding will be imposed upon the fair market value of the Five Star common shares that we distribute to you. We or other applicable withholding agents will collect the amount required to be withheld by reducing to cash for remittance to the IRS a sufficient portion of the Five Star common shares that you would otherwise receive, and you will bear the brokerage or other costs for this withholding procedure. Because we cannot determine our current and accumulated earnings and profits until the end of our taxable year, withholding at the rate of 30% or applicable lower treaty rate will be imposed on the gross fair market value of the Five Star common shares distributed to you. Notwithstanding this and other withholding on distributions in excess of our current and accumulated earnings and profits, these distributions are a nontaxable return of capital to the extent that they do not exceed your adjusted basis in our common shares, and the nontaxable return of capital will reduce your adjusted basis in our common shares. To the extent that distributions in excess of our current and accumulated earnings and profits exceed your adjusted basis in our common shares, the distributions will give rise to tax liability only if you would otherwise be subject to tax on any gain from the sale or exchange of our common shares. Your gain from the sale or exchange of our common shares will not be taxable if: (1) our common shares are "regularly traded" within the meaning of Treasury regulations under Section 897 of the IRC and you have at all times during the preceding five years owned 5% or less by value of our outstanding common shares, or (2) we are a "domestically-controlled REIT" within the meaning of Section 897 of the IRC. Although we cannot provide complete assurance on this matter, we believe that our shares are regularly traded and that we are a domestically-controlled REIT. You may seek a refund of amounts withheld on distributions to you in excess of our current and accumulated earnings and profits, provided that you furnish the required information to the IRS. Some of our 2001 distributions may be treated for federal income tax purposes as attributable to dispositions of United States real property interests. To the extent that a portion of any of our distributions to you, including the distribution of Five Star common shares, is attributable to a disposition by us of United States real property interests, you will be subject to tax on this portion as though it were gain effectively connected with a trade or business conducted in the United States. Accordingly, you will be taxed on these amounts at the capital gain rates applicable to a U.S. person, subject to any applicable alternative minimum tax and to a special alternative minimum tax in the case of nonresident alien individuals; you will be required to file a United States federal income tax return reporting these amounts, even if applicable 35% withholding is imposed as described below; and if you are a corporation, you may owe the 30% branch profits tax under Section 884 of the IRC in respect of these amounts. If you are a non-U.S. person, we and other applicable withholding agents will be required to withhold from distributions to you, and to remit to the IRS, 35% of the maximum amount of any distribution that could be designated as a capital gain dividend by us. In addition, if we designate any of our prior distributions as capital gain dividends, then our subsequent distributions up to the amount of the designated prior distributions will be treated as capital gain dividends for purposes of this 35% withholding rule. After the close of our 2001 taxable year, we expect to designate to the maximum extent possible a portion of one or more of our 2001 distributions as capital gain dividends, and accordingly 35% withholding will be imposed upon our subsequent distributions to you to that extent. 19 FEDERAL INCOME TAX CONSEQUENCES OF THE SPIN-OFF TO SENIOR HOUSING The IRC imposes upon us various REIT qualification tests discussed more fully in our 2000 Annual Report. While we believe that we have operated and will operate in a manner to satisfy the various REIT qualification tests, our counsel has not reviewed and will not review our compliance with these tests on a continuing basis. The following discussion summarizes how the Five Star spin-off affects our REIT qualification and taxation issues under the IRC. IN GENERAL. So long as Five Star and its subsidiaries remain our wholly owned direct or indirect subsidiaries, Five Star and most of its subsidiaries will be our qualified REIT subsidiaries under Section 856(i) of the IRC or, equivalently, noncorporate entities that are taxed as part of us under regulations issued under Section 7701 of the IRC. During these periods Five Star and most of its subsidiaries will not be taxpayers separate from us for federal income tax purposes. However, a few of the Five Star subsidiaries are currently our taxable REIT subsidiaries, with federal income tax filing and payment obligations that are separate from ours. Under the expected transaction agreement that will govern the spin-off, we will be generally responsible for Five Star's federal income tax filings and liabilities, if any, as well as those of all its subsidiaries, for the periods prior to the spin-off. When Five Star ceases to be wholly owned by us as a result of the spin-off, the following will be deemed to have occurred for federal income tax purposes: - Immediately preceding the spin-off distribution of the Five Star common shares, we disposed of Five Star's properties and assets, and the properties and assets of its subsidiaries, in a tax-free exchange called the deemed incorporation, in which the aggregate amount we realized equaled the sum of: (1) the fair market value of all the Five Star common shares immediately preceding the spin-off, plus (2) the aggregate amount of liabilities that are associated with Five Star and its subsidiaries' properties and assets and that remain Five Star's and its subsidiaries' responsibility after the spin-off. For these purposes, the assets and liabilities of our taxable REIT subsidiaries are ignored, and instead the stock in the parent taxable REIT subsidiary is treated like any other asset of Five Star's. - Immediately after the deemed incorporation, we distributed to our common shareholders substantially all of the Five Star common shares that we were treated as having received in the deemed incorporation. TAXATION OF THE DISTRIBUTION OF THE FIVE STAR COMMON SHARES. Our distribution to you of the Five Star common shares in the spin-off will be treated in the same manner as any other distribution of cash or property that we may make. Thus, the distribution of Five Star common shares together with our other 2001 distributions will entitle us to a dividends paid deduction to the extent of our earnings and profits for the year. In addition, we will recognize gain from the distribution of the Five Star common shares equal to the excess, if any, of the fair market value of the Five Star common shares that we distribute over our tax basis in those shares. In contrast, we will not recognize loss on the distribution even if our tax basis in the distributed Five Star common shares exceeds their fair market value. Under applicable judicial precedent, it is possible that for federal income tax purposes the per share fair market value of the Five Star common shares we distribute will differ from the average of the reported high and low trading prices for those shares in the public market on the date of the spin-off, called the distribution price. Because of the factual nature of value determinations, Sullivan & Worcester LLP is unable to render an opinion on the fair market value of the Five Star common shares that we will distribute. However, for purposes of computing any gain that we may have on the distribution of the Five Star common shares, we believe that the fair market value of the Five Star common shares may be computed as the distribution price multiplied by the number of distributed Five Star common shares. Our tax basis in the Five Star common shares distributed is computed as described below. 20 Any gain that we recognize on the distribution of the Five Star common shares will be qualifying gross income under the 95% gross income test of Section 856(c) of the IRC, provided that we are not treated as holding those shares as inventory or other property held primarily for sale to customers. If any of this gain were characterized as the sale of inventory or other property held primarily for sale to customers, this would not affect our ability to satisfy the 95% gross income test, but the recharacterized gain would be subject to the 100% penalty tax of Section 857(b)(6) of the IRC. Although we can provide no assurance on this matter, we do not believe that we have held the Five Star common shares as inventory or other property held primarily for sale to customers, and accordingly we believe that our gain, if any, on distributed common shares will be short-term capital gain. Our tax basis in the 100% of the Five Star common shares that we own immediately prior to the spin-off will be equal to, and our tax basis in each distributed share of Five Star common stock will be the per share value of, the following sum: (1) our aggregate adjusted tax basis in Five Star's properties and assets, and the properties and assets of its subsidiaries, immediately prior to the deemed incorporation; minus (2) the aggregate amount of liabilities that are associated with Five Star's properties and assets, and the properties and assets of its subsidiaries, that remain Five Star's and its subsidiaries' responsibility after the spin-off. For these purposes, the assets and liabilities of our taxable REIT subsidiaries are ignored, and instead the stock in the parent taxable REIT subsidiary is treated like any other asset of Five Star's. Accordingly, we expect that our tax basis in each Five Star common share that we own immediately prior to the distribution will be approximately equal to the distribution price, and may possibly exceed the distribution price. Under these circumstances, we could recognize some gain but no loss on our distribution of the Five Star common shares. OUR POST SPIN-OFF RELATIONSHIP WITH FIVE STAR. After the distribution of the Five Star common shares, we expect to own one percent of the Five Star common shares. In addition, we anticipate that our leases with Five Star, Five Star's charter and bylaws, and the contemplated transaction agreement governing the spin-off will collectively contain restrictions upon the ownership of Five Star common shares and require Five Star to refrain from taking any actions that may jeopardize our qualification as a REIT under the IRC, including actions which would result in our, or our principal shareholder HRPT, obtaining actual or constructive ownership of 10% or more of the Five Star common shares for IRC Section 856(d) purposes. Accordingly, commencing with our 2002 taxable year, we expect that the rental income we receive from Five Star and its subsidiaries will be "rents from real property" under Section 856(d) of the IRC, and thus qualifying income under the 75% and 95% gross income tests described in our 2000 Annual Report. OUR TAXABLE REIT SUBSIDIARIES. As described in our 2000 Annual Report, a few of our 100%-owned subsidiaries own healthcare facilities that are operated for our account and that do not constitute "foreclosure property" under the IRC. These subsidiaries have retained an independent contractor to be responsible for the day-to-day operation and management of their healthcare facilities, and we have filed taxable REIT subsidiary elections with respect to these subsidiaries effective January 1, 2001. We have also submitted a private letter ruling request to the IRS to confirm that these subsidiaries do not violate the IRC requirement that prohibits the direct or indirect operation or management of a healthcare facility by a taxable REIT subsidiary. If for whatever reason we are unable to obtain a favorable IRS private ruling on this matter, we will for our 2001 taxable year continue to treat these subsidiaries as our taxable REIT subsidiaries in reliance on Sullivan & Worcester LLP's opinion that, although the matter is not free from doubt, it is more likely than not that these subsidiaries do qualify for treatment as our taxable REIT subsidiaries. Further, our taxable REIT subsidiaries are also subsidiaries of Five Star and thus will be spun-off from us when we spin-off Five Star. Accordingly, we do not expect to have taxable REIT subsidiary qualification issues after the Five Star spin-off. Also, although we have not made arrangements to lease these subsidiaries' healthcare facilities to qualified tenants, we will take steps to qualify for the 75% and 95% gross income tests' relief provision 21 described in our 2000 Annual Report, including for example by attaching an applicable schedule of gross income to our 2001 federal income tax return as required by Section 856(c)(6)(A) of the IRC. Thus, even if the IRS or a court ultimately determines that these subsidiaries failed to qualify as our taxable REIT subsidiaries, and that this failure thereby implicated our compliance with the 75% and 95% gross income tests, we expect we would qualify for the gross income tests' relief provision and thereby preserve our qualification and taxation as a REIT. If this relief provision were to apply to us, we would be subject to tax at a 100% rate on the greater of the amount by which we fail the 75% or the 95% gross income test, with adjustments, multiplied by a fraction intended to reflect our profitability for the taxable year; however, we would expect to owe little or no tax in these circumstances. FEDERAL INCOME TAXATION OF FIVE STAR AND ITS SHAREHOLDERS IN GENERAL. After the spin-off distribution, Five Star will be taxable as a subchapter C corporation. Accordingly, Five Star will pay federal income taxes on its income, and not be subject to the distribution and other requirements applicable to REITs. Under the contemplated transaction agreement that will govern the spin-off, we expect to be generally responsible for Five Star's federal income tax liabilities and filings, as well as those of all its subsidiaries, for the periods prior to the spin-off. DISTRIBUTIONS ON FIVE STAR COMMON SHARES. At the present time, Five Star is not expected to pay any dividends on its common shares. However, if it does later decide to do so, tax consequences arising from your ownership of Five Star common shares would generally be as follows. If you are a U.S. person, distributions to you on the Five Star common shares during taxable years beginning on or after the spin-off will be treated as ordinary income dividends to the extent attributable to Five Star's current or accumulated earnings and profits, and thereafter as a return of basis to the extent of that basis, with any excess being treated as gain from a deemed disposition of your Five Star common shares. If you are a corporation, dividends paid to you on Five Star's common shares will generally be eligible for the dividends received deduction, subject to the limitations of the IRC with respect to the corporate dividends received deduction. If you are a non-U.S. person, dividends paid to you will be subject to withholding of federal income tax at a 30% rate or a lower rate as may be specified by an applicable income tax treaty. If you are eligible for a reduced rate of withholding pursuant to a tax treaty, you may obtain a refund of any excess amounts previously withheld by filing an appropriate claim for refund with the IRS. To claim the benefits of an income tax treaty, you are required to satisfy the applicable certification requirements, generally by executing an IRS Form W-8. DISPOSITIONS OF FIVE STAR COMMON SHARES. If you are a U.S. person, you will generally recognize gain or loss on a disposition of your Five Star common shares in an amount equal to the difference between the amount realized on the disposition and your adjusted basis in the disposed of common shares. This gain or loss will be capital gain or loss, and will be long-term capital gain or loss if your holding period in the disposed of Five Star common shares exceeds one year. Special rates of tax may apply to long-term capital gains recognized by noncorporate U.S. persons. If you are a non-U.S. person, you will generally not be subject to United States federal income tax in respect of gain you recognize on a disposition of the Five Star common shares. However, you may be subject to taxation if you are an individual who is present in the United States for 183 or more days in the taxable year of the sale. In addition, you may be subject to taxation if Five Star is or has been a "United States real property holding corporation" for federal income tax purposes; however, this taxation will not apply if the Five Star common shares are "regularly traded" within the meaning of Treasury regulations under Section 897 of the IRC and you have at all times during the preceding five years owned 5% or less by value of the Five Star common shares. For corporate non-U.S. persons, 22 taxable gains recognized on a United States real property holding corporation may also attract an additional "branch profits" tax at a 30% or lower applicable treaty rate. At this time, we do not believe that Five Star is or will become a "United States real property holding corporation" for federal income tax purposes, but can provide no assurance in this regard. THE CRESTLINE TRANSACTION The IRC imposes upon us various REIT qualification tests discussed more fully in our 2000 Annual Report. While we believe that we have operated and will operate in a manner to satisfy the various REIT qualification tests, counsel has not reviewed and will not review our compliance with these tests on a continuing basis. The following discussion summarizes how the Crestline transaction affects our REIT qualification and taxation issues under the IRC. IN GENERAL. Pursuant to the Crestline transaction, which is expected to close during our 2002 taxable year, we will acquire all of the outstanding stock of a subsidiary of Crestline. At the time of that acquisition, this subsidiary of Crestline will directly or indirectly own all or nearly all of the outstanding equity interests in lower tier, corporate and noncorporate subsidiaries. Upon our acquisition, we expect each of the acquired entities will become either our qualified REIT subsidiary under Section 856(i) of the IRC, or alternatively a disregarded entity or a partnership under Treasury regulations issued under Section 7701 of the IRC. Thus, after our acquisition, all assets, liabilities and items of income, deduction and credit of wholly-owned subsidiaries will be treated as ours for purposes of the various REIT qualification tests described in our 2000 Annual Report; similarly, for purposes of these various REIT qualification tests, we will be treated as owning and receiving our allocable share of acquired partnership assets, liabilities, income, deduction, and credit, as described in our 2000 Annual Report. In addition, we will generally be treated as the successor to the acquired subsidiaries' federal income tax attributes, such as those entities' adjusted tax bases in their assets and their depreciation schedules; we will also be treated as the successor to the acquired corporate subsidiaries' earnings and profits for federal income tax purposes, if any. Upon the closing of the Crestline transaction, we will lease the 31 owned facilities to Five Star and its subsidiaries. For our 2002 taxable year and thereafter, we expect Five Star and its subsidiaries will be tenants in whom we have at all times during the taxable year an actual and constructive ownership interest of less than 10% by vote and by value. Accordingly, commencing with our 2002 taxable year, we expect the rental income we receive from Five Star and its subsidiaries to be "rents from real property" under Section 856(d) of the IRC, and thus qualifying income under the 75% and 95% gross income tests described in our 2000 Annual Report. BUILT-IN GAINS FROM C CORPORATIONS. As described in our 2000 Annual Report, notwithstanding our qualification and taxation as a REIT, we may still be subject to corporate level taxation in particular circumstances. Specifically, if we acquire an asset from a subchapter C corporation in a transaction in which our adjusted tax basis in the asset is determined by reference to the adjusted tax basis of that asset in the hands of the C corporation, and if we subsequently recognize gain on the disposition of that asset during the ten year period following our acquisition, then we will generally pay tax at the highest regular corporate tax rate, currently 35%, on the lesser of (1) the excess at the time we acquired the asset, if any, of the asset's fair market value over its then adjusted tax basis, or (2) our gain recognized in the disposition. Accordingly, any taxable disposition of an asset acquired in the Crestline transaction during the ten-year period commencing with the closing of the Crestline transaction could be subject to tax under these rules. However, except as described below, we have no present plan or intent to dispose of any assets acquired in the Crestline transaction. We expect to agree in the transaction agreement governing the spin-off to convey to Five Star and its subsidiaries the operating assets that are typically owned by the tenant of a senior living facility at the closing of the Crestline transaction. In exchange, Five Star and its subsidiaries will assume related 23 operating liabilities. We expect that the aggregate adjusted tax basis in the transferred operating assets will be less than the related liabilities assumed and that Five Star and its subsidiaries will receive a cash payment from us in the amount of the difference. We believe that the fair market value of these conveyed operating assets will equal their adjusted tax bases, and we and Five Star expect to do our respective tax return reporting to that effect. Accordingly, although Sullivan & Worcester LLP is unable to render an opinion on factual determinations such as assets' fair market values, we expect to report no gain or loss, and therefore to owe no corporate level tax under the rules for former C corporation assets, in respect of this conveyance of the operating assets to Five Star. EARNINGS AND PROFITS. In addition to the other requirements for REIT qualification and taxation described in our 2000 Annual Report, there is a further requirement that will become relevant to us in our 2002 taxable year as a result of the Crestline transaction: we cannot at the end of any taxable year have any undistributed earnings and profits for federal income tax purposes that is attributable to a subchapter C corporation. Upon the closing of the Crestline transaction, we will as described above succeed to the undistributed earnings and profits, if any, of the acquired corporate subsidiaries. Thus, we need to distribute any and all of these undistributed earnings and profits no later than December 31, 2002. If we fail to do so, we will not qualify and be taxed as a REIT for 2002 and thereafter, unless a relief provision applies. Although Sullivan & Worcester LLP is unable to render an opinion on factual determinations such as the amount of undistributed earnings and profits, we have made preliminary estimates of the amount of undistributed earnings and profits that we would inherit in the Crestline transaction. At present, we believe that we will not acquire any undistributed earnings and profits in the Crestline transaction. However, there can be no assurance that the IRS would not, upon subsequent examination, propose adjustments to the undistributed earnings and profits that we inherit as a result of the Crestline transaction. In examining the calculation of undistributed earnings and profits that we inherit, the IRS might consider all taxable years of the acquired subsidiaries as open for review for purposes of its proposed adjustments. If, after the Crestline transaction closes, we discover that we have inherited undistributed earnings and profits in the Crestline transaction that would not be eliminated by December 31, 2002 through our normal distributions to shareholders, we may elect to preserve our qualification and taxation as a REIT by making a special distribution for our 2002 taxable year. If, despite our best efforts during our 2002 taxable year, it is subsequently determined that we have undistributed earnings and profits from the Crestline transaction at December 31, 2002, we may be eligible for a relief provision similar to the "deficiency dividends" procedure described in our 2000 Annual Report. To utilize this relief provision, we would have to pay an interest charge for the delay in distributing the undistributed earnings and profits; in addition, we would be required to distribute to our shareholders, in addition to our other REIT distribution requirements, the amount of the undistributed earnings and profits less the interest charge paid. 24 INFORMATION REPORTING AND BACKUP WITHHOLDING Information reporting and backup withholding may apply to distributions or proceeds paid to our shareholders and to Five Star shareholders in the circumstances discussed below. Amounts withheld under backup withholding are generally not an additional tax and may be refunded or credited against your federal income tax liability, provided that you furnish the required information to the IRS. The current backup withholding rate is 30.5%, but that rate falls to 30% for the calendar years 2002 and 2003, and is scheduled to gradually decrease to 28% by calendar year 2006. The distribution of the Five Star common shares is an in-kind distribution to our shareholders, and thus we, or other applicable withholding agents, will have to collect any applicable backup withholding by reducing to cash for remittance to the IRS a sufficient portion of the Five Star common shares that you would otherwise receive, and you will bear the brokerage or other costs for this withholding procedure. IF YOU ARE A U.S. PERSON. You may be subject to backup withholding when you receive distributions on, or proceeds upon the sale, exchange, redemption, retirement or other disposition of, our shares or the Five Star common shares. Thus, backup withholding may apply to the Five Star common shares you receive in the spin-off distribution. In general, you can avoid this backup withholding if you have properly executed under penalties of perjury an IRS Form W-9 or substantially similar form on which you: - provide your correct taxpayer identification number, and - certify that you are exempt from backup withholding because (a) you are a corporation or come within another enumerated exempt category, (b) you have not been notified by the IRS that you are subject to backup withholding or (c) you have been notified by the IRS that you are no longer subject to backup withholding. If you have not previously provided and do not provide your correct taxpayer identification number on the IRS Form W-9 or substantially similar form, you may be subject to penalties imposed by the IRS and the withholding agent may also have to withhold a portion of any capital gain distributions paid to you. Unless you have established on a properly executed IRS Form W-9 or substantially similar form that you are a corporation or come within another exempt category, distributions and other payments on our shares and the Five Star common shares paid to you during the calendar year, and the amount of tax withheld if any, will be reported to you and to the IRS. IF YOU ARE A NON-U.S. PERSON. Distributions on our shares or on the Five Star common shares paid to you during each calendar year, and the amount of tax withheld if any, will generally be reported to you and to the IRS. This information reporting requirement applies regardless of whether you were subject to withholding, or whether the withholding was reduced or eliminated by an applicable tax treaty. Also, distributions and other payments to you on our shares or on the Five Star common shares may be subject to backup withholding as discussed above, unless you have properly certified your non-U.S. person status on an IRS Form W-8 or substantially similar form. Similarly, information reporting and backup withholding will not apply to proceeds you receive upon the sale, exchange, redemption, retirement or other disposition of our shares or the Five Star common shares if you have properly certified your non-U.S. person status on an IRS Form W-8 or substantially similar form. Even without having executed an IRS Form W-8 or substantially similar form, however, in some cases information reporting and backup withholding will not apply to proceeds that you receive upon the sale, exchange, redemption, retirement or other disposition of our shares or the Five Star common shares if you receive those proceeds through a broker's foreign office. 25 OTHER TAX CONSEQUENCES You should recognize that our and our shareholders' federal income tax treatment, as well as Five Star's and its shareholders' federal income tax treatment, may be modified by legislative, judicial, or administrative actions at any time, and these actions may be retroactive in effect. The rules dealing with federal income taxation are constantly under review by the Congress, the IRS and the Treasury Department, and statutory changes as well as promulgation of new regulations, revisions to existing regulations, and revised interpretations of established concepts occur frequently. No prediction can be made as to the likelihood of passage of new tax legislation or other provisions either directly or indirectly affecting us and Five Star, or any of our respective shareholders. Revisions in federal income tax laws and interpretations of these laws could adversely affect the tax consequences of an investment in our shares and in the Five Star common shares. We and Five Star, as well as our respective shareholders, may also be subject to state or local taxation in various state or local jurisdictions, including those in which we, Five Star and our respective shareholders transact business or reside. State and local tax consequences may not be comparable to the federal income tax consequences discussed above. FORWARD-LOOKING STATEMENTS Statements contained in this Form 8-K, including the documents that are incorporated by reference, that are not historical facts are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Also, when we use any of the words "believe," "expect," "anticipate," "intend," "plan," "estimate," or similar expressions, we are making forward-looking statements. These statements concern our ability to successfully conclude a planned acquisition of 31 senior living facilities from Crestline, our ability to effect a spin-off of substantially all of the shares of Five Star, our ability to operate facilities which we took back from financially troubled tenants, the possible expansion of our portfolio, the performance of our tenants and facilities, our ability to make distributions, our policies and plans regarding investments, financings and other matters, our tax status as a real estate investment trust, our ability to appropriately balance the use of debt and equity and to access capital markets or other sources of funds and other statements or implications arising from such statements. Readers are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties. Actual results may differ materially from those contained in or implied by the forward-looking statements as a result of various factors. Such factors include, without limitation, whether we complete the spin-off on the contemplated terms, the ability of Crestline and us to satisfy conditions to closing our acquisition of 31 senior living facilities, and the impact of changes on us and our tenants, including Five Star, in the status of the economy and the capital markets (including prevailing interest rates), compliance with and changes to regulations and payment policies within the healthcare industry, changes in financing terms, competition within the healthcare and senior housing industries, and changes in federal, state and local legislation. The information contained in our Annual Report on Form 10-K for our fiscal year ended December 31, 2000 including under the headings "Business" and "Management's Discussion and Analysis of Financial Condition and Results of Operations," identify other important factors that could cause such differences. 26 ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS. (a) Pro Forma Financial Information and Other Data (see index on page F-1) (b) Financial Statements of CSL Group, Inc. and Subsidiaries as Partitioned For Sale to SNH/CSL Properties Trust (see index on page F-1) (c) Exhibits 8.1 Legal Opinion of Sullivan & Worcester LLP as to tax matters. 10.1 Stock Purchase Agreement dated as of August 9, 2001, among Senior Housing Properties Trust, SNH/CSL Properties Trust, CLJ Capital Corporation and CSL Group, Inc. including forms of Escrow Agreement and Tax Allocation Agreement. 23.1 Consent of Arthur Andersen LLP. 27 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. SENIOR HOUSING PROPERTIES TRUST By: /s/ DAVID J. HEGARTY ----------------------------------------- Name: David J. Hegarty Title: President By: /s/ JOHN R. HOADLEY ----------------------------------------- Name: John R. Hoadley Title: Chief Financial Officer Date: October 1, 2001
28 INDEX TO FINANCIAL STATEMENTS SENIOR HOUSING PROPERTIES TRUST UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS Introduction to Unaudited Pro Forma Consolidated Financial Statements................................................ F-2 Unaudited Pro Forma Consolidated Balance Sheet at June 30, 2001...................................................... F-3 Unaudited Pro Forma Consolidated Statement of Income for the year ended December 31, 2000.............................. F-4 Unaudited Pro Forma Consolidated Statement of Income for the six months ended June 30, 2001............................ F-5 Notes to Unaudited Pro Forma Consolidated Financial Statements................................................ F-6 CONSOLIDATED FINANCIAL STATEMENTS OF CSL GROUP, INC. AND SUBSIDIARIES AS PARTITIONED FOR SALE TO SNH/CSL PROPERTIES TRUST Unaudited Condensed Consolidated Balance Sheet at June 15, 2001...................................................... F-12 Unaudited Condensed Consolidated Statements of Operations for the twenty-four weeks ended June 15, 2001 and June 16, 2000...................................................... F-13 Unaudited Condensed Consolidated Statements of Cash Flows for the twenty-four weeks ended June 15, 2001 and June 16, 2000...................................................... F-14 Notes to Unaudited Condensed Consolidated Financial Statements................................................ F-15 Report of Independent Public Accountants.................... F-16 Consolidated Balance Sheets at December 31, 2000 and 1999... F-17 Consolidated Statement of Operations for the three fiscal years ended December 29, 2000, December 31, 1999 and January 1, 1999........................................... F-18 Consolidated Statements of Cash Flows for the three fiscal years ended December 29, 2000, December 31, 1999 and January 1, 1999........................................... F-20
F-1 SENIOR HOUSING PROPERTIES TRUST INTRODUCTION TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS PRO FORMA CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 2001 AND PRO FORMA CONSOLIDATED STATEMENTS OF INCOME FOR THE YEAR ENDED DECEMBER 31, 2001 AND THE SIX MONTHS ENDED JUNE 30, 2001 The following unaudited pro forma consolidated balance sheet gives separate effect to: (1) financing transactions completed subsequent to June 30, 2001, as described in the notes thereto; (2) the proposed spin-off of Five Star, the commencement of the lease for 56 facilities which we currently own and certain related transactions described in the notes thereto; and (3) the proposed Crestline transaction and the commencement of the lease with Five Star for the 31 facilities thereby acquired and certain related transactions described in the notes thereto, as though such transactions had occurred on June 30, 2001. The following unaudited pro forma consolidated statements of income give effect to our foreclosure or acquisition of facilities from former tenants, our sale of four properties in October 2000 financing transactions completed after January 1, 2000 and certain other transactions described in the notes thereto, as though such transactions had occurred on January 1, 2000. Separately, the following unaudited pro forma financial statements of income give effect to the proposed spin-off of Five Star, the commencement of the lease for 56 facilities which we currently own, and related transactions as described in the notes thereto, as though such transactions occurred on January 1, 2000. Separately, the following unaudited pro forma consolidated statements of income give effect to the proposed Crestline transaction and the commencement of the lease with Five Star for the 31 facilities thereby acquired and certain related transactions described in the notes hereto, as though such transactions occurred on January 1, 2000. The pro forma information is based in part upon our historical financial statements filed on our Form 10-Q for the quarter ended June 30, 2001 and Form 10-K for the year ended December 31, 2000, and financial statements of CSL Group, Inc. and Subsidiaries as Partitioned For Sale to SNH/CSL Properties Trust, filed herewith, and the financial statements of our acquired businesses filed on Form 8-K dated January 30, 2001 as amended. This pro forma information should be read in conjunction with all of the financial statements and notes thereto included or incorporated by reference in this Form 8-K. In the opinion of management, all adjustments necessary to reflect the effects of the transactions discussed above have been reflected in the pro forma information. We currently have sufficient financial resources to effect the closing of the Crestline transaction through a combination of assumed debt, seller financing and our revolving line of credit (see Notes K and X). We may undertake one or more financings from time to time and at any time in the future. Those financings could include common equity, preferred equity, debt or other forms of capital. It is likely that any financing will reduce the amount of proceeds under our revolving credit facility that we use to close the Crestline transaction, if it closes at all. Any common equity financing will increase our total shares outstanding and will cause our per share results to be less than the per share results shown on the accompanying pro forma income statements, whether or not the Crestline transaction or the spin-off is completed. Any financing other than common shares will also cause our per share results to be less than the per share results shown on the accompanying pro forma income statements, whether or not the Crestline transaction or the spin-off is completed, because if we undertake these financings, we will likely incur interest or other fixed charges which are higher than the pro forma interest charges on outstanding amounts under our revolving credit facility. Although it is not possible to estimate the effect of future possible financings because their terms are unknown at this time, their impact may be material. The following unaudited pro forma financial data is not necessarily indicative of what our actual financial position or results of operations would have been as of the date or for the period indicated, nor does it purport to represent our financial position or results of operations for future periods. F-2 SENIOR HOUSING PROPERTIES TRUST UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET JUNE 30, 2001 (DOLLARS IN THOUSANDS)
PRO FORMA FOR ADJUSTED PRO FORMA CRESTLINE SPIN-OFF AND Company Financing COMPANY FOR Transaction CRESTLINE Historical Adjustments HISTORICAL Spin-off SPIN-OFF Adjustments TRANSACTION ---------- ----------- ---------- -------- ---------- ----------- -------------- ASSETS Real estate properties, at cost....................... $598,526 $ -- $598,526 $ -- $ 598,526 $605,310 (I) $1,203,836 Less accumulated depreciation............... 116,567 116,567 116,567 116,567 -------- -------- -------- -------- --------- -------- ---------- 481,959 481,959 481,959 605,310 1,087,269 Cash and cash equivalents.... 5,554 5,554 5,554 5,554 Accounts receivable, net..... 49,741 49,741 (40,853)(D) 8,888 8,888 Other assets................. 20,442 75 (A) 20,517 (964)(E) 19,553 7,573 (J) 27,126 -------- -------- -------- -------- --------- -------- ---------- $557,696 $ 75 $557,771 $(41,817) $ 515,954 $612,883 $1,128,837 ======== ======== ======== ======== ========= ======== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Revolving credit facility.... $ 74,000 $(44,596)(B) $ 29,404 $ 13,758 (F) $ 43,162 $183,290 (K) $ 226,452 Other debt................... -- -- -- 428,829 (K) 428,829 Prepaid rent................. 8,520 8,520 8,520 8,520 Security deposits............ 1,520 1,520 1,520 1,520 Accounts payable and accrued expenses of facilities' operations................. 15,575 15,575 (15,575)(G) -- -- Other liabilities............ 10,774 10,774 10,774 764 (L) 11,538 -------- -------- -------- -------- --------- -------- ---------- Total liabilities............ 110,389 (44,596) 65,793 (1,817) 63,976 612,883 676,859 Mandatorily redeemable preferred securities of a subsidiary whose sole assets are the Company's junior subordinated debentures due 2041 ("Trust Preferred Securities")..... 25,000 2,394 (A) 27,394 27,394 27,394 Shareholders' equity......... 422,307 42,277 (C) 464,584 (40,000)(H) 424,584 424,584 -------- -------- -------- -------- --------- -------- ---------- $557,696 $ 75 $557,771 $(41,817) $ 515,954 $612,883 $1,128,837 ======== ======== ======== ======== ========= ======== ==========
F-3 SENIOR HOUSING PROPERTIES TRUST UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 2000 (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
DISPOSITION PRO FORMA FOR AND ADJUSTED CRESTLINE SPIN-OFF AND Company Financing COMPANY PRO FORMA FOR Transaction CRESTLINE Historical Adjustments HISTORICAL Spin-off SPIN-OFF Adjustments TRANSACTION ---------- -------------- ---------- -------- -------------- ----------- -------------- REVENUES: Rental income............. $ 64,377 $ (9,366)(M) $ 54,426 $(1,227)(T) $53,199 $63,000(T) $116,199 (585)(N) Other real estate income.................. 2,520 2,520 (2,520)(U) -- -- Interest and other income.................. 1,520 400 (O) 1,920 (695)(T) 1,225 1,225 FF&E reserve income....... -- -- -- 7,188 (W) 7,188 Gain on foreclosures and lease terminations...... 7,105 (7,105)(P) -- -- -- -------- -------- -------- ------- ------- ------- -------- Total revenues............ 75,522 (16,656) 58,866 (4,442) 54,424 70,188 124,612 -------- -------- -------- ------- ------- ------- -------- EXPENSES: Interest.................. 15,366 (12,356)(Q) 3,010 1,157 (V) 4,167 55,680 (X) 59,847 Distributions on Trust Preferred............... -- 2,797 (R) 2,797 2,797 2,797 Depreciation.............. 20,140 (1,936)(M) 18,167 18,167 17,132 (Y) 35,299 (37)(N) General and administrative.......... -- Recurring.............. 5,475 (424)(M) 4,995 4,995 3,523 (Y) 8,518 (56)(N) -- Related to foreclosures and lease terminations............ 3,519 (3,519)(P) -- -- -- -------- -------- -------- ------- ------- ------- -------- Total expenses............ 44,500 (15,531) 28,969 1,157 30,126 76,335 106,461 -------- -------- -------- ------- ------- ------- -------- Income before gain on sale of properties........... $ 31,022 $ (1,125) $ 29,897 $(5,599) $24,298 $(6,147) $ 18,151 ======== ======== ======== ======= ======= ======= ======== Weighted average shares outstanding............. 25,958 3,416 (S) 29,374 -- 29,374 -- 29,374 ======== ======== ======== ======= ======= ======= ======== Basic and diluted earnings per share: Net income................ $ 1.20 $ 1.02 $ 0.83 $ 0.62 ======== ======== ======= ========
F-4 SENIOR HOUSING PROPERTIES TRUST UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME FOR SIX MONTHS ENDED JUNE 30, 2001 (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
PRO FORMA FOR ADJUSTED Crestline SPIN-OFF AND Company Financing COMPANY PRO FORMA FOR Transaction CRESTLINE Historical Adjustments HISTORICAL Spin-off SPIN-OFF Adjustments TRANSACTION ---------- ----------- ---------- -------- -------------- ----------- -------------- Revenues: Rental income.............. $ 22,215 $ -- $ 22,215 $ 3,500 (T) $ 25,715 $ 31,500 (T) $ 57,215 Facilities' operations..... 113,260 113,260 (113,260)(U) -- -- Interest and other income................... 489 489 489 489 FF&E Reserve Income........ -- -- -- 3,594 (W) 3,594 -------- -------- -------- -------- --------- -------- ---------- Total revenues............. 135,964 -- 135,964 (109,760) 26,204 35,094 61,298 -------- -------- -------- -------- --------- -------- ---------- EXPENSES: Interest................... 4,000 (1,494)(Q) 2,506 461 (V) 2,967 24,046 (X) 27,013 Distributions on Trust Preferred Securities of subsidiary trust......... 62 1,337 (R) 1,399 1,399 1,399 Depreciation............... 9,676 9,676 9,676 8,566 (Y) 18,242 Facilities' operations..... 110,365 110,365 (110,365)(U) -- -- General and administrative........... -- Recurring............... 2,108 2,108 2,108 1,762 (Y) 3,870 -- Related to foreclosures and lease terminations... 4,167 (4,167)(P) -- -- -- -------- -------- -------- -------- --------- -------- ---------- Total expenses............. 130,378 (4,324) 126,054 (109,904) 16,150 34,374 50,524 -------- -------- -------- -------- --------- -------- ---------- Net income................. $ 5,586 $ (4,324) $ 9,910 $ 144 $ 10,054 $ 720 $ 10,774 ======== ======== ======== ======== ========= ======== ========== Weighted average shares outstanding.............. 25,917 3,457 (S) 29,374 -- 29,374 -- 29,374 ======== ======== ======== ======== ========= ======== ========== Basic and diluted earnings per share: Net income................. $ 0.22 $ 0.34 $ 0.34 $ 0.37 ======== ======== ========= ==========
F-5 SENIOR HOUSING PROPERTIES TRUST CONDENSED CONSOLIDATED BALANCE SHEET ADJUSTMENTS (DOLLARS IN THOUSANDS) FINANCING ADJUSTMENTS Subsequent to June 30, 2001, we have completed several financing transactions which in the aggregate have changed our financial position. These transactions consist of the issuance of 3,445,000 common shares of beneficial interest and the issuance of 95,750 shares of preferred securities of a subsidiary which completed an offering that was initiated prior to June 30, 2001. All of the net proceeds of these transactions were applied to the outstanding balance on our revolving credit facility. A. Represents gross proceeds of $2,394 from the issuance of 95,750 shares of preferred securities of a subsidiary which completed an offering that was initiated prior to June 30, 2001, and $75 of related issuance costs to be amortized over the life of the securities. B. Amount represents pro forma net cash applied as a reduction of our revolving credit facility: Net proceeds from issuance of 3,445,000 common shares at $13.00 per share......................................... $42,277 Net proceeds from issuance of 95,750 preferred securities of a subsidiary at $25.00 per share...................... 2,319 ------- Proceeds applied to credit facility........................ $44,596 =======
C. Represents our issuance in July 2001 of 3,445,000 common shares: Gross proceeds from issuance of 3,445,000 common shares at $13.00 per share......................................... $44,785 Underwriters' discount and other offering costs............ (2,508) ------- Net proceeds............................................... $42,277 =======
SPIN-OFF ADJUSTMENTS Although contingent upon a number of factors at this time, we currently expect to spin-off our subsidiary, Five Star Quality Care, Inc., which will separate our real estate ownership activities from our operating activities. The operating assets and liabilities associated with our ownership of 56 senior housing facilities which we repossessed or acquired from former tenants will be contributed to Five Star. D. Represents patient accounts receivable to be transferred to Five Star as part of the spin-off generated by the 56 facilities which will be owned by us and leased to Five Star subsequent to the spin-off. E. Represents primarily prepaid expenses to be transferred to Five Star as part of the spin-off related to the 56 facilities which will be owned by us and leased to Five Star subsequent to the spin-off. F. Represents borrowings under our revolving credit facility used to fund initial cash amounts expected to be contributed to Five Star. G. Represents accounts payable and accrued expenses to be transferred to Five Star as part of the spin-off generated by the 56 facilities which will be owned by us and leased to Five Star subsequent to the spin-off. F-6 SENIOR HOUSING PROPERTIES TRUST H. Represents the estimated net equity (assets in excess of liabilities, see Notes D, E, F, and G) of Five Star and distributed to our shareholders in the spin-off. CRESTLINE TRANSACTION ADJUSTMENTS Pursuant to an agreement we announced in August 2001, we expect to acquire 31 senior living facilities from Crestline Capital Corporation. Concurrent with the Crestline transaction, we expect to lease these 31 facilities to Five Star. As described in the Introduction to Pro Forma Financial Statements, the Crestline transaction is subject to contingencies and may not close. I. The Crestline transaction will result in the allocation of consideration using the purchase method of accounting. In addition to the payments made on the closing date of the Crestline transaction of the contract purchase price and adjustments thereto, we estimate we will pay closing costs of $10 million and we expect to make a cash payment to Five Star. The expected cash payment to Five Star of $3,613 on a pro forma basis is intended to compensate Five Star for assuming certain liabilities in excess of assets used in the operation of the 31 facilities. Amounts allocated to tangible fixed assets are as follows: Contract purchase price................................... $600,000 Contract purchase price adjustments, net.................. (1,494) Estimated closing costs................................... 10,000 Estimated payment to Five Star at lease commencement (see Note X)................................................. 3,613 -------- Subtotal................................................ 612,119 Monetary assets received in Crestline transaction (see Note J)................................................. (7,573) Monetary liabilities received in Crestline transaction other than funded debt (see Note L)..................... 764 -------- Total fixed assets........................................ $605,310 ========
J. Amounts allocated to other assets represent cash deposits in accounts restricted for use: (1) servicing future interest payments on assumed mortgage debt; (2) making future payments for real estate taxes on properties which secure the related mortgage debt; and (3) cash escrow accounts for routine capital expenditures at the facilities. K. To finance the Crestline transaction, we expect to assume certain existing debts of the Crestline subsidiaries we will acquire and to contribute additional funds from our own sources toward the purchase price and to Five Star. As described in the Introduction to Pro Forma Financial Statements our own sources may include our revolving credit facility, as reflected below, and may include funds from other financing transactions which we may undertake prior to our closing of the Crestline transaction. Assumed term debt, including capital leases............... $233,829 New term debt............................................. 170,000 Seller financing.......................................... 25,000 -------- Total debt assumed or seller financed..................... 428,829 Borrowings under our credit facility...................... 183,290 -------- Total debt to close the Crestline transaction............. $612,119 ========
L. Amounts allocated to other liabilities primarily represent accrued interest. F-7 SENIOR HOUSING PROPERTIES TRUST CONDENSED CONSOLIDATED STATEMENT OF INCOME ADJUSTMENTS (DOLLARS IN THOUSANDS) DISPOSITION AND FINANCING ADJUSTMENTS M. Represents elimination of rental income, depreciation expense and general and administrative expense recognized related to four facilities we sold during 2000 for cash of $123,000. Net proceeds were applied to reduce then outstanding amounts under our revolving credit facility. See Note Q. N. Represents the elimination of rental and interest income, depreciation expense and general and administrative expense recognized during the period prior to transfer to a former tenant of five facilities and transfer to a former borrower of one mortgage as part of foreclosure settlements, net of similar impact from one facility transferred to us as part of a foreclosure settlement and leased to a new tenant. O. Represents annualized dividend income on common shares of HRPT Properties Trust conveyed to us at the time of our foreclosure on properties formerly leased to a former tenant which were transferred to us as part of a foreclosure settlement. P. Represents the elimination of the gain on foreclosure and lease terminations and the related general and administrative expenses because they are not expected to recur. Q. Represents a reduction in interest expense related to the repayment of borrowings under the revolving credit facility described in Note B and the sale of properties described in Note M as follows:
SIX MONTHS YEAR ENDED ENDED DECEMBER 31, 2000 JUNE 30, 2001 ------------------ -------------- Proceeds from sale of facilities in October 2000 used to repay amounts outstanding under credit facility... $123,000 Weighted average interest rate........ 8.4% -------- Annual interest expense............... 10,332 Proration for 10 months............... x 10/12 -------- Interest expense reduction............ $ 8,610 $ -- Proceeds from offerings described in Note B used to repay amounts outstanding under credit facility... 44,596 44,596 Weighted average interest rate........ 8.4% 6.7% -------- ------- Interest expense reduction............ 3,746 1,494 ------- ------- Total interest expense reduction...... $12,356 $ 1,494 ======= =======
F-8 SENIOR HOUSING PROPERTIES TRUST R. Represents impact on distributions from the issuance of 10.125% preferred securities of a subsidiary as follows:
YEAR ENDED SIX MONTHS DECEMBER 31, ENDED 2000 JUNE 30, 2001 ------------- -------------- Gross amount of securities issued........... $27,394 $27,394 Distribution rate (10.125% per annum)....... 10.125% 5.0625% ------- ------- Total distributions during the period....... 2,774 1,387 Amortization of deferred issuance costs..... 23 12 ------- ------- Expense for period.......................... 2,797 1,399 Less amount included in historical results................................... -- 62 ------- ------- Total adjustment............................ $ 2,797 $ 1,337 ======= =======
S. Represents the impact of transactions described in Note C on our weighted average common shares outstanding during the period. ACQUISITION AND SPIN-OFF ADJUSTMENTS T. Represents expected minimum rents under the terms of our leases with Five Star as follows, net of rent and interest received from former tenants prior to foreclosure:
YEAR ENDED SIX MONTHS DECEMBER 31, ENDED 2000 JUNE 30, 2001 ------------- -------------- Minimum rent for 56 facilities currently owned by us to be leased to Five Star..... $ 7,000 $ 3,500 Less rent received from former tenants prior to foreclosure............................ (8,227) -- ------- ------- Net adjustment.............................. $(1,227) $ 3,500 ======= ======= Interest income received from former tenant prior to foreclosure...................... $ 695 $ -- ======= ======= Minimum rent for facilities to be acquired in the Crestline transaction to be leased to Five Star.............................. $63,000 $31,500 ======= =======
U. Represents elimination, for the period subsequent to December 31, 2000, of facilities' operating revenues and expenses, and for the period prior to December 31, 2000, of other real estate income. These amounts were derived from the operations of facilities that were conducted for our own account. The facilities will be operated by Five Star subsequent to the spin-off under the terms of a lease agreement between us and Five Star. F-9 SENIOR HOUSING PROPERTIES TRUST V. Represents the interest expense related to the borrowings on our credit facility described in Note F:
YEAR ENDED SIX MONTHS DECEMBER 31, ENDED 2000 JUNE 30, 2001 ------------- -------------- Borrowings on credit facility............... $13,758 $13,758 Weighted average interest rate.............. 8.4% 6.7% ------- ------- Additional interest expense................. $ 1,157 $ 461 ======= =======
W. Represents deposits made into reserves for capital improvements in accordance with existing management agreements for the properties to be acquired in the Crestline transaction and the expected leases with Five Star. X. As part of the Crestline transaction, we will assume debts as described in Note K above. These debts bear interest at various rates, and some of these debts bear interest at floating rates based on LIBOR. The applicable interest rates during the pro forma periods, assuming LIBOR equals its monthly average during the periods presented, were as follows:
YEAR ENDED SIX MONTHS DECEMBER 31, ENDED 2000 JUNE 30, 2001 ------------- -------------- Assumed term debt including capitalized leases, fixed rates....................... 9.4% 9.4% Assumed term debt, floating rates........... 9.2% 7.5% New mortgage financing, floating rate....... 9.4% 7.7% Seller financing, fixed rate................ 10.0% 10.0% Credit facility, floating rate.............. 8.4% 6.7%
The table below estimates interest on the new mortgage financing based upon our preliminary discussions with a financing source. Some of the debt we will assume in the Crestline transaction requires both interest and principal payments. The weighted average outstanding balance for the obligations described above are as follows:
YEAR ENDED SIX MONTHS DECEMBER 31, ENDED 2000 JUNE 30, 2001 ------------- -------------- Assumed term debt including capitalized leases, fixed rates....................... $142,364 $141,319 Assumed term debt, floating rates........... 92,370 92,370 New mortgage financing, floating rate....... 170,000 170,000 Seller financing, fixed rate................ 25,000 25,000 Credit facility, floating rate.............. 182,385 183,430 -------- -------- Total....................................... $612,119 $612,119 ======== ========
F-10 SENIOR HOUSING PROPERTIES TRUST On a pro forma basis, the combination of the average interest rates and the average debt balances set forth above produce interest expense as follows:
YEAR ENDED SIX MONTHS DECEMBER 31, ENDED 2000 JUNE 30, 2001 ------------- -------------- Assumed term debt including capitalized leases, fixed rates....................... $13,382 $ 6,642 Assumed term debt, floating rates........... 8,498 3,464 New mortgage financing, floating rate....... 15,980 6,545 Seller financing, fixed rate................ 2,500 1,250 Credit facility, floating rate.............. 15,320 6,145 ------- ------- Total....................................... $55,680 $24,046 ======= =======
As outlined above, a substantial portion of the debt we expect to incur as part of the Crestline transaction will be at floating rates. A 1/8 percentage point increase in interest rates would produce pro forma interest expense which is $555 higher per annum. Y. Represents the impact of the Crestline transaction on depreciation expense and general and administrative expense. F-11 CSL GROUP, INC. AND SUBSIDIARIES AS PARTITIONED FOR SALE TO SNH/CSL PROPERTIES TRUST CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED, IN THOUSANDS)
JUNE 15, 2001 --------- ASSETS Property and equipment, net................................. $635,024 Due from Marriott Senior Living Services, net............... 9,289 Other assets................................................ 10,960 Cash and cash equivalents................................... 14,454 -------- Total assets............................................ $669,727 ======== LIABILITIES AND EQUITY Debt........................................................ $247,723 Accounts payable and accrued expenses....................... 451 Deferred income taxes....................................... 62,502 Other liabilities........................................... 16,669 -------- Total liabilities....................................... $327,345 -------- Equity: Investments in and advances from parent................... 342,382 -------- Total liabilities and equity............................ $669,727 ========
See Notes to Condensed Consolidated Financial Statements. F-12 CSL GROUP, INC. AND SUBSIDIARIES AS PARTITIONED FOR SALE TO SNH/CSL PROPERTIES TRUST CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE TWENTY-FOUR WEEKS ENDED JUNE 15, 2001 AND JUNE 16, 2000 (UNAUDITED, IN THOUSANDS)
JUNE 15, JUNE 16, 2001 2000 --------- --------- REVENUES Routine................................................... $115,715 $109,002 Ancillary................................................. 10,690 10,985 -------- -------- 126,405 119,987 Equity in earnings of affiliates.......................... -- 20 -------- -------- Total revenues.......................................... 126,405 120,007 -------- -------- OPERATING COSTS AND EXPENSES Property-level operating costs and expenses Routine................................................. 73,542 69,796 Ancillary............................................... 6,064 6,729 Other operating costs and expenses Depreciation and amortization........................... 11,090 10,902 Management fees......................................... 8,229 7,402 Property taxes and other................................ 4,034 4,409 -------- -------- Total operating costs and expenses.................... 102,959 99,238 -------- -------- OPERATING PROFIT............................................ 23,446 20,769 Corporate expenses.......................................... (940) (967) Interest expense............................................ (9,776) (7,620) Interest income............................................. 432 227 -------- -------- INCOME BEFORE INCOME TAXES.................................. 13,162 12,409 Provision for income taxes.................................. (5,397) (5,088) -------- -------- NET INCOME.................................................. $ 7,765 $ 7,321 ======== ========
See Notes to Condensed Consolidated Financial Statements. F-13 CSL GROUP, INC. AND SUBSIDIARIES AS PARTITIONED FOR SALE TO SNH/CSL PROPERTIES TRUST CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE TWENTY-FOUR WEEKS ENDED JUNE 15, 2001 AND JUNE 16, 2000 (UNAUDITED, IN THOUSANDS)
JUNE 15, JUNE 16, 2001 2000 --------- --------- OPERATING ACTIVITIES Cash provided by operations................................. $15,205 $ 24,259 ------- -------- INVESTING ACTIVITIES Expansions of senior living communities................... -- (3,163) Other capital expenditures................................ (3,348) (3,275) Increase (decrease) in capital improvement reserve........ (23) 412 ------- -------- Cash used in investing activities........................... (3,371) (6,026) ------- -------- FINANCING ACTIVITIES Repayments of debt........................................ (1,151) (1,808) Net advances to parent.................................... (2,905) (16,946) ------- -------- Cash used in financing activities........................... (4,056) (18,754) ------- -------- Increase (decrease) in cash and cash equivalents............ 7,778 (521) Cash and cash equivalents, beginning of period.............. 6,676 3,006 ------- -------- Cash and cash equivalents, end of period.................... $14,454 $ 2,485 ======= ========
See Notes to Condensed Consolidated Financial Statements. F-14 CSL GROUP, INC. AND SUBSIDIARIES AS PARTITIONED FOR SALE TO SNH/CSL PROPERTIES TRUST NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. On August 9, 2001, Crestline Capital Corporation ("Crestline Capital") and CSL Group, Inc. ("CSL Group") entered into a stock purchase agreement (the "Stock Purchase Agreement") with Senior Housing Properties Trust ("SNH") and SNH/CSL Properties Trust ("SNH/CSL"). Pursuant to the Stock Purchase Agreement, SNH/CSL would purchase the stock of CSL Group and certain other subsidiaries of Crestline Capital that compose Crestline Capital's senior living business (the "Partitioned Business") for $600 million, including the assumption of approximately $235 million in existing debt. The transaction is expected to close in the first quarter of 2002 and is subject to a successful vote by at least two-thirds of Crestline Capital's shareholders, arranging additional mortgage debt financing for $150 million to $175 million, obtaining certain consents and customary closing conditions. These condensed consolidated financial statements include only the assets and liabilities, along with the results from operations generated from the Partitioned Business, as described in the Stock Purchase Agreement. The Partitioned Business is an organizational unit of Crestline Capital and is not a distinct legal entity. As of June 15, 2001, the Partitioned Business consisted of the ownership of 31 senior living communities, a general partnership interest in one senior living community and a second mortgage note receivable on a senior living community. The accompanying condensed consolidated financial statements of the Partitioned Business have been prepared by management without audit. Certain information and footnote disclosures normally included in financial statements presented in accordance with generally accepted accounting principles have been condensed or omitted. Management believes the disclosures made are adequate to make the information presented not misleading. However, the condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Partitioned Business's audited financial statements for the fiscal year ended December 29, 2000. The accompanying unaudited condensed consolidated financial statements reflect all adjustments (which include only normal and recurring adjustments) necessary to present fairly the financial position of the Partitioned Business as of June 15, 2001 and the results of operations and cash flows for the twenty-four week period ended June 15, 2001. All significant intercompany accounts and transactions have been eliminated. Interim results are not necessarily indicative of fiscal year performance because of the impact of seasonal and short-term variations. F-15 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Crestline Capital Corporation: We have audited the accompanying consolidated balance sheets of CSL Group, Inc. and subsidiaries (a business unit wholly owned by Crestline Capital Corporation) as partitioned for sale to SNH/CSL Properties Trust (see Note 1) as of December 29, 2000 and December 31, 1999, and the related consolidated statements of operations, equity and cash flows for the fiscal years ended December 29, 2000, December 31, 1999 and January 1, 1999. These consolidated financial statements are the responsibility of Crestline Capital Corporation's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the 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 our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of CSL Group, Inc. as partitioned for sale to SNH/CSL Properties Trust, as of December 29, 2000 and December 31, 1999 and the results of its operations, equity and its cash flows for the fiscal years ended December 29, 2000, December 31, 1999 and January 1, 1999, in conformity with accounting principles generally accepted in the United States. /s/ ARTHUR ANDERSEN LLP Vienna, Virginia August 31, 2001 F-16 CSL GROUP, INC. AND SUBSIDIARIES AS PARTITIONED FOR SALE TO SNH/CSL PROPERTIES TRUST CONSOLIDATED BALANCE SHEETS DECEMBER 29, 2000 AND DECEMBER 31, 1999 (IN THOUSANDS)
2000 1999 -------- -------- ASSETS Property and equipment, net................................. $643,110 $656,758 Due from Marriott Senior Living Services, net............... 6,106 5,729 Other assets................................................ 12,522 17,246 Cash and cash equivalents................................... 6,676 3,006 -------- -------- Total assets............................................ $668,414 $682,739 ======== ======== LIABILITIES AND EQUITY Debt........................................................ $249,190 $205,629 Accounts payable and accrued expenses....................... 701 1,184 Deferred income taxes....................................... 63,660 61,554 Other liabilities........................................... 17,342 17,240 -------- -------- Total liabilities....................................... 330,893 285,607 -------- -------- Equity: Investments in and advances to parent..................... 337,521 397,132 -------- -------- Total liabilities and equity............................ $668,414 $682,739 ======== ========
See Notes to Consolidated Financial Statements. F-17 CSL GROUP, INC. AND SUBSIDIARIES AS PARTITIONED FOR SALE TO SNH/CSL PROPERTIES TRUST CONSOLIDATED STATEMENTS OF OPERATIONS FISCAL YEARS ENDED DECEMBER 29, 2000, DECEMBER 31, 1999 AND JANUARY 1, 1999 (IN THOUSANDS)
2000 1999 1998 -------- -------- -------- REVENUES Routine................................................... $239,065 $223,794 $213,378 Ancillary................................................. 22,821 22,704 27,899 -------- -------- -------- 261,886 246,498 241,277 Equity in earnings of affiliates.......................... 37 92 20 -------- -------- -------- Total revenues.......................................... 261,923 246,590 241,297 -------- -------- -------- OPERATING COSTS AND EXPENSES Property-level operating costs and expenses Routine................................................. 153,049 145,778 138,099 Ancillary............................................... 14,493 15,414 21,317 Other operating costs and expenses Depreciation and amortization........................... 24,083 21,624 22,115 Management fees......................................... 15,658 14,965 13,973 Property taxes and other................................ 9,263 8,549 8,554 Loss on impairment of asset............................. -- 3,522 -- Other................................................... -- 1,650 -- -------- -------- -------- Total operating costs and expenses.................... 216,546 211,502 204,058 -------- -------- -------- OPERATING PROFIT............................................ 45,377 35,088 37,239 Corporate expenses.......................................... (1,917) (2,096) (2,092) Interest expense............................................ (19,586) (17,061) (22,173) Interest income............................................. 942 773 2,028 -------- -------- -------- INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEM........... 24,816 16,704 15,002 Provision for income taxes.................................. (10,175) (6,849) (6,151) -------- -------- -------- INCOME BEFORE EXTRAORDINARY ITEM............................ 14,641 9,855 8,851 Gain on early extinguishment of debt, net of taxes.......... 253 -- -- -------- -------- -------- NET INCOME.................................................. $ 14,894 $ 9,855 $ 8,851 ======== ======== ========
See Notes to Consolidated Financial Statements. F-18 CSL GROUP, INC. AND SUBSIDIARIES AS PARTITIONED FOR SALE TO SNH/CSL PROPERTIES TRUST CONSOLIDATED STATEMENTS OF EQUITY FISCAL YEARS ENDED DECEMBER 29, 2000, DECEMBER 31, 1999 AND JANUARY 1, 1999 (IN THOUSANDS) Balance, January 2, 1998.................................... $230,727 Investment from parent, net............................... 159,225 Net income................................................ 8,851 -------- Balance, January 1, 1999.................................... 398,803 Net income................................................ 9,855 Advances to parent, net................................... (11,526) -------- Balance, December 31, 1999.................................. 397,132 Net income................................................ 14,894 Advances to parent, net................................... (74,505) -------- Balance, December 29, 2000.................................. $337,521 ========
See Notes to Consolidated Financial Statements. F-19 CSL GROUP, INC. AND SUBSIDIARIES AS PARTITIONED FOR SALE TO SNH/CSL PROPERTIES TRUST CONSOLIDATED STATEMENTS OF CASH FLOWS FISCAL YEARS ENDED DECEMBER 29, 2000, DECEMBER 31, 1999 AND JANUARY 1, 1999 (IN THOUSANDS)
2000 1999 1998 -------- -------- -------- OPERATING ACTIVITIES Net income.................................................. $ 14,894 $ 9,855 $ 8,851 Adjustments to reconcile net income to cash from operations: Depreciation and amortization............................. 24,083 21,624 22,115 Gain on early extinguishment of debt, net of taxes........ (253) -- -- Loss on impairment of asset............................... -- 3,522 -- Amortization of debt premiums and deferred financing costs................................................... (710) (1,550) (1,550) Change in amounts due from Marriott Senior Living Services................................................ (377) 2,156 (10,934) Change in other operating accounts........................ 11,867 2,820 (303) -------- -------- -------- Cash provided by operations................................. 49,504 38,427 18,179 -------- -------- -------- INVESTING ACTIVITIES Expansions of senior living communities................... (3,204) (18,451) (8,653) Purchase of minority partnership interest................. -- (7,010) -- Other capital expenditures................................ (10,380) (9,239) (5,567) Other..................................................... 998 535 (3,432) -------- -------- -------- Cash used in investing activities........................... (12,586) (34,165) (17,652) -------- -------- -------- FINANCING ACTIVITIES Repayments of debt........................................ (47,250) (4,197) (3,608) Issuances of debt......................................... 92,370 -- -- Net advances to parent.................................... (74,505) (11,526) -- Other..................................................... (3,863) -- (96) -------- -------- -------- Cash used in financing activities........................... (33,248) (15,723) (3,704) -------- -------- -------- Increase (decrease) in cash and cash equivalents............ 3,670 (11,461) (3,177) Cash and cash equivalents, beginning of year................ 3,006 14,467 17,644 -------- -------- -------- Cash and cash equivalents, end of year...................... $ 6,676 $ 3,006 $ 14,467 ======== ======== ======== SUPPLEMENTAL INFORMATION--NON-CASH ACTIVITY: Investments from parent: Property and equipment.................................. $ -- $ -- $ 20,959 Acquisition of minority interests paid by Crestline Capital............................................... -- -- 12,963 Debt forgiveness........................................ -- -- 92,195 Debt prepayment paid by Host Marriott................... -- -- 26,405 Other................................................... -- -- 6,703
See Notes to Consolidated Financial Statements. F-20 CSL GROUP, INC. AND SUBSIDIARIES AS PARTITIONED FOR SALE TO SNH/CSL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION AND ORGANIZATION On June 21, 1997, Crestline Capital Corporation ("Crestline Capital", formerly known as HMC Senior Living Communities, Inc.), a wholly owned subsidiary of Host Marriott Corporation ("Host Marriott"), acquired all the outstanding stock of CSL Group, Inc. and subsidiaries ("CSL Group", formerly known as Forum Group, Inc. "Forum") from Marriott Senior Living Services, Inc. ("MSLS"), a subsidiary of Marriott International, Inc., pursuant to a stock purchase agreement dated June 21, 1997. In connection with the acquisition, Crestline Capital acquired the ownership of 29 senior living communities, and assigned to MSLS its interest as manager under long-term operating agreements. Subsequent to Crestline Capital's acquisition of Forum, the Partitioned Business acquired two additional senior living communities. On December 29, 1998 (the "Distribution Date"), Crestline Capital became a publicly traded company when Host Marriott completed its plan of reorganizing its business operations by spinning-off Crestline Capital to the shareholders of Host Marriott (the "Distribution"), as part of a series of transactions pursuant to which Host Marriott elected to be considered a real estate investment trust. On August 9, 2001, Crestline Capital and CSL Group entered into a stock purchase agreement (the "Stock Purchase Agreement") with Senior Housing Properties Trust ("SNH") and SNH/CSL Properties Trust ("SNH/CSL"). Pursuant to the Stock Purchase Agreement, SNH/CSL would purchase the stock of CSL Group and certain other subsidiaries of Crestline Capital that compose Crestline Capital's senior living business (the "Partitioned Business") for $600 million, including the assumption of approximately $235 million in existing debt. The transaction is expected to close in the first quarter of 2002 and is subject to a successful vote by at least two-thirds of Crestline Capital's shareholders, arranging additional mortgage debt financing for $150 million to $175 million, obtaining certain consents and customary closing conditions. These consolidated financial statements include only the assets and liabilities, along with the results from operations generated from the Partitioned Business, as described in the Stock Purchase Agreement. The Partitioned Business is an organizational unit of Crestline Capital and is not a distinct legal entity. As of December 29, 2000, the Partitioned Business consisted of the ownership of 31 senior living communities, a general partnership interest in one senior living community and a second mortgage note receivable on a senior living community. The Securities and Exchange Commission, in Staff Accounting Bulletin Number 55 (SAB 55), requires that historical financial statements of a subsidiary, division, or lesser business component of another entity include certain expenses incurred by the parent on its behalf. These expenses include officer and employee salaries, rent or depreciation, advertising, accounting and legal services, other selling, general and administrative expenses and other such expenses. Investments and advances from parent represents the net amount of investments and advances made by Crestline Capital as a result of the acquisition and operation of the Partitioned Business. These financial statements include the adjustments necessary to comply with SAB 55. Through the Distribution Date, the Partitioned Business operated as a wholly owned business unit of Host Marriott utilizing Host Marriott's employees, insurance and administrative services since the Partitioned Business had no employees. Subsequent to the Distribution Date, the Partitioned Business operated as a wholly-owned business unit of Crestline Capital utilizing Crestline Capital's employees, insurance and administrative services since the Partitioned Business had no employees. Periodically, certain operating expenses, capital expenditures and other cash requirements of the Partitioned F-21 CSL GROUP, INC. AND SUBSIDIARIES AS PARTITIONED FOR SALE TO SNH/CSL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. BASIS OF PRESENTATION AND ORGANIZATION (CONTINUED) Business were paid by either Host Marriott or Crestline Capital and charged directly or allocated to the Partitioned Business. Certain general and administrative costs of Host Marriott or Crestline Capital were allocated to the Partitioned Business using a variety of methods, principally including Host Marriott's or Crestline Capital's specific identification of individual cost items and otherwise through allocations based upon estimated levels of effort devoted by its general and administrative departments to individual entities or relative measures of size of the entities based on assets or revenues. In the opinion of management, the methods for allocating corporate, general and administrative expenses and other direct costs are reasonable. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Partitioned Business and its subsidiaries and controlled affiliates. Investments in affiliates owned 20 percent or more and over which the Partitioned Business has the ability to exercise significant influence, but does not control, are accounted for using the equity method. All material intercompany transactions and balances have been eliminated. FISCAL YEAR The Partitioned Business's fiscal year ends on the Friday nearest to December 31. REVENUES Revenues represent operating revenues from senior living communities. Routine revenues consist of resident fees and health care service revenues, which are generated primarily from monthly charges for independent and assisted living apartments and special care center rooms and daily charges for healthcare beds and are recognized monthly based on the terms of the residents' agreements. Advance payments received for services are deferred until the services are provided. Ancillary revenue is generated on a "fee for service" basis for supplemental items requested by residents and is recognized as the services are provided. A portion of revenues from health care services was attributable to patients whose bills are paid by Medicare or Medicaid under contractual arrangements. For fiscal year 1998 and earlier, reimbursements under these contractual arrangements were subject to retroactive adjustments based on agency reviews. Revenues from health care services in 1998 were generally recorded net of estimated contractual allowances in the Partitioned Business's consolidated financial statements. Audits under the reimbursement agreements have generally been completed through fiscal year 1998 and there were no material audit adjustments. For fiscal years 1999 and 2000, the Partitioned Business is generally paid a fixed payment rate for its Medicare and Medicaid services and therefore, there are no contractual allowances for these fiscal years in the Partitioned Business's consolidated financial statements. CASH AND CASH EQUIVALENTS All highly liquid investments with a maturity of three months or less at date of purchase are considered cash equivalents. F-22 CSL GROUP, INC. AND SUBSIDIARIES AS PARTITIONED FOR SALE TO SNH/CSL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) PROPERTY AND EQUIPMENT Property and equipment are recorded at cost. Replacements and improvements that extend the useful life of property and equipment are capitalized. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, generally 40 years for buildings and three to 10 years for furniture and equipment. Leasehold improvements are amortized over the shorter of the lease term or the useful lives of the related assets. In cases where management is holding for sale a particular property, management assesses impairment based on whether the estimated sales price less cost of disposal of each individual property to be sold is less than the net book value. A property is considered to be held for sale when a decision is made to dispose of the property. Otherwise, impairment is assessed based on whether it is probable that undiscounted future cash flows from each property will be less than its net book value. If a property is impaired, its basis is adjusted to its fair value. CONCENTRATION OF CREDIT RISK Financial instruments that potentially subject the Partitioned Business to significant concentration of credit risk consist principally of cash and cash equivalents. The Partitioned Business maintains cash and cash equivalents with various high credit-quality financial institutions and limits the amount of credit exposure with any institution. WORKING CAPITAL Pursuant to the terms of the senior living operating agreements (see Note 6), the Partitioned Business is required to provide MSLS with working capital and supplies to meet the operating needs of the senior living communities. MSLS converts cash advanced by the Partitioned Business into other forms of working capital consisting primarily of operating cash, inventories, resident deposits and trade receivables and payables which are maintained and controlled by MSLS. Upon the termination of the operating agreements, MSLS is required to convert working capital and supplies into cash and return it to the Partitioned Business. As a result of these conditions, the individual components of working capital and supplies controlled by MSLS are not reflected in the Partitioned Business's consolidated balance sheets, however, the net working capital advanced is included in due from Marriott Senior Living Services on the Partitioned Business's consolidated balance sheets. DEFERRED REVENUE Monthly fees deferred for the non-refundable portion of the entry fees are recorded as deferred revenue and included in other liabilities in the Partitioned Business's consolidated balance sheets. These amounts are recognized as revenue as services are performed over the expected term of the residents' contracts. LIABILITY FOR FUTURE HEALTH CARE SERVICES Certain resident and admission agreements at the communities entitled residents to receive limited amounts of health care up to defined maximums. The estimated liabilities associated with the health care obligation have been accrued in other liabilities in the Partitioned Business's consolidated balance F-23 CSL GROUP, INC. AND SUBSIDIARIES AS PARTITIONED FOR SALE TO SNH/CSL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) sheets. As of December 29, 2000 and December 31, 1999, the liability totaled $977,000 and $1,140,000, respectively. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. NEW STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS During July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations", SFAS No. 142, "Goodwill and Intangible Assets" and SFAS No. 143, "Accounting for Asset Retirement Obligations". In the opinion of management the adoption of these statements will not have a material effect on the Partitioned Business's consolidated financial statements. 3. PROPERTY AND EQUIPMENT Property and equipment consists of the following:
2000 1999 -------- -------- (IN THOUSANDS) Land.................................................... $107,425 $107,425 Buildings and leasehold improvements.................... 564,867 560,029 Furniture and equipment................................. 49,292 43,675 -------- -------- 721,584 711,129 Less accumulated depreciation and amortization.......... (78,474) (54,371) -------- -------- $643,110 $656,758 ======== ========
In 1999, management determined that one of its senior living communities was impaired as a result of a deterioration of the community's operating results due to its size and age and the new supply of communities in its market. A $3.5 million pre-tax charge was recorded to reduce the net book value of the property to its fair value. F-24 CSL GROUP, INC. AND SUBSIDIARIES AS PARTITIONED FOR SALE TO SNH/CSL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. RESTRICTED CASH Restricted cash, which is included in other assets on the Partitioned Business's consolidated balance sheets, consists of the following:
2000 1999 -------- -------- (IN THOUSANDS) Debt service escrows....................................... $1,137 $ 1,624 Fixed asset escrows........................................ 4,878 5,310 Real estate tax escrows.................................... 1,697 4,092 Insurance escrows.......................................... 64 3,364 ------ ------- $7,776 $14,390 ====== =======
The debt service, fixed asset, real estate tax and insurance escrows consist of cash transferred into segregated escrow accounts out of revenues generated by the senior living communities, pursuant to the secured debt agreements. Funds from these reserves are periodically disbursed by the collateral agent to pay for debt service, capital expenditures, insurance premiums and real estate taxes relating to the secured properties. In addition, the fixed asset escrows also include cash transferred into segregated escrow accounts pursuant to the senior living community operating agreements to fund certain capital expenditures at the senior living communities (see Note 6). 5. LEASES The Partitioned Business is the lessee under capital and operating leases. Future minimum annual rental commitments for all non-cancelable leases as of December 29, 2000 are as follows:
CAPITAL OPERATING LEASES LEASES -------- --------- (IN THOUSANDS) 2001..................................................... $ 1,240 $ 281 2002..................................................... 1,258 281 2003..................................................... 1,477 281 2004..................................................... 1,384 281 2005..................................................... 1,384 281 Thereafter............................................... 8,392 2,205 ------- ------ Total minimum lease payments............................. 15,135 $3,610 ====== Less amount representing interest........................ (5,293) ------- Present value of minimum lease payments.................. $ 9,842 =======
The Partitioned Business leases two senior living communities under capital leases expiring in 2016. Upon the expiration of the lease or anytime prior to lease expiration, the Partitioned Business has the first right of refusal to submit a counter offer to any acceptable bona fide offer from a third party within 30 days of notice from the lessor. If the Partitioned Business fails to exercise its right of first refusal, then the lessor may proceed with the sale of the leased property and all assets therein. The assets recorded under capital leases, which are included in property and equipment on the Partitioned Business's consolidated balance sheets, were $13.4 million and $14.1 million as of December 29, 2000 F-25 CSL GROUP, INC. AND SUBSIDIARIES AS PARTITIONED FOR SALE TO SNH/CSL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. LEASES (CONTINUED) and December 31, 1999, respectively, net of accumulated amortization of $3.6 million and $2.4 million, respectively. The amortization for assets recorded under capital leases is included in depreciation and amortization on the Partitioned Business's consolidated statements of operations. The Partitioned Business also has one long-term operating ground lease which expires in 2013. The operating lease includes three renewal options exercisable in five-year increments through the year 2028. Rent expense for fiscal years 2000, 1999 and 1998 was $278,000, $281,000 and $279,000, respectively. 6. OPERATING AGREEMENTS The senior living communities are subject to operating agreements which provide for MSLS to operate the senior living communities, generally for an initial term of 25 to 30 years with renewal terms subject to certain performance criteria at the option of MSLS of up to an additional five to ten years. The operating agreements provide for payment of base management fees equal to five percent of revenues and incentive management fees equal to 20% of operating profit (as defined in the operating agreements) over a priority return to the owner. In the event of early termination of the operating agreements, MSLS will receive additional fees based on the unexpired term and expected future base and incentive management fees. The Partitioned Business has the option to terminate certain, but not all, management agreements if specified performance thresholds are not satisfied. No operating agreement with respect to a single community is cross-collateralized or cross-defaulted to any other operating agreement, and any single operating agreement may be terminated following a default by the Partitioned Business or MSLS, although such termination will not trigger the cancellation of any other operating agreement. Most of the senior living communities are also subject to pooling agreements whereby for the limited purpose of calculating management fees and exercising certain termination rights under the operating agreements, the management fees and rights are considered in the aggregate for the senior living communities in each pool. The operating agreements require MSLS to furnish certain services ("Central Administrative Services") which are generally furnished on a central or regional basis to other senior living communities in the Marriott retirement community system. Such services will include the following: (i) marketing and public relations services; (ii) human resources program development; (iii) information systems support and development; and (iv) centralized computer payroll and accounting services. In lieu of reimbursement for such services, MSLS is paid an amount equal to 2% of revenues. Generally, through the earlier of (i) the end of the seventh year of the operating agreement or (ii) the date upon which certain performance criteria have been met, 50% of the Central Administrative services fee is payable only to the extent that operating profit for the communities exceeds a priority return to the owner. However, the payment of fees for the Central Administrative Services were generally waived for the first year of the operating agreement. The Partitioned Business is required under the operating agreements to contribute a percentage of revenues into an interest-bearing reserve account to cover the cost of (a) certain routine repairs and maintenance to the senior living communities which are normally capitalized and (b) replacements and F-26 CSL GROUP, INC. AND SUBSIDIARIES AS PARTITIONED FOR SALE TO SNH/CSL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. OPERATING AGREEMENTS (CONTINUED) renewals to the senior living communities' property and improvements. The annual contribution amount (expressed as a percentage of revenues) generally will be 2.65% through fiscal year 2002, 2.85% for fiscal years 2003 through 2007, and 3.5% thereafter. The amount contributed for fiscal years 2000, 1999 and 1998 was $6.9 million, $6.4 million and $6.3 million, respectively. The operating agreements provide that the Partitioned Business shall separately fund the cost of certain major or non-routine repairs, alterations, improvements, renewals and replacements to the senior living communities. 7. DEBT Debt consists of the following as of December 29, 2000 and December 31, 1999:
2000 1999 -------- -------- (IN THOUSANDS) Mortgage debt secured by eight senior living communities with $242 million of real estate assets, with an interest rate of 10.01%, maturing through 2020 (amount includes debt premium of $13.5 million in 2000 and $14.1 million in 1999)................................ $131,298 $133,586 Mortgage debt secured by eight senior living communities with $117 million of real estate assets, with an interest rate of 9.56%, maturing in July 2005......... 92,370 -- Mortgage debt secured by nine senior living communities (amount included debt premium of $0.9 million in 1999)................................................. -- 45,097 Revenue bonds with an interest rate of 5.875%, due 2027.................................................. 14,700 14,700 Capital lease obligations............................... 9,842 10,277 Other notes, with an interest rate of 7.5%, maturing through December 31, 2001............................. 980 1,969 -------- -------- Total debt.......................................... $249,190 $205,629 ======== ========
Debt maturities at December 29, 2000, excluding the unamortized debt premiums of $13.5 million, are as follows (in thousands): 2001........................................................ $ 3,200 2002........................................................ 2,500 2003........................................................ 2,967 2004........................................................ 3,154 2005........................................................ 95,870 Thereafter.................................................. 128,024 -------- $235,715 ========
In conjunction with the June 21, 1997 acquisition of Forum, the Partitioned Business issued $72 million in notes payable to MSLS. Subsequent to the acquisition, the Partitioned Business issued additional notes payable to MSLS to finance additional senior living expansion units totaling approximately $20 million. In the second quarter of 1998, Host Marriott loaned the Partitioned F-27 CSL GROUP, INC. AND SUBSIDIARIES AS PARTITIONED FOR SALE TO SNH/CSL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. DEBT (CONTINUED) Business $92 million to repay the notes payable to MSLS. In the third quarter of 1998, Host Marriott forgave the $92 million note and it was recorded as an investment in the Partitioned Business. During the first quarter of 1998, Host Marriott prepaid $26.4 million of the Partitioned Business's mortgage debt. Host Marriott's prepayment of the debt was recorded as an investment in the Partitioned Business. In 2000, the Partitioned Business entered into five loan agreements totaling $92.4 million secured by mortgages on eight senior living communities. The non-recourse loans bear interest at the 30-day LIBOR rate plus 275 basis points (9.56% at December 29, 2000). The loans mature in July 2005 and there is no principal amortization during the term of the loans. The proceeds of the financing were used to repay the existing loan secured by the senior living communities with a principal balance of $43.5 million, which bore interest at 9.93% and had a scheduled maturity of January 1, 2001. In connection with the prepayment of the existing loan, the Partitioned Business recognized an extraordinary gain on the early extinguishment of debt of $253,000, net of income taxes of $175,000. The indentures governing the mortgages of certain of the Partitioned Business's senior living communities contain restrictive covenants that, among other restrictions, (i) require maintenance of segregated cash collection of all rents for certain of the senior living communities; (ii) require separate cash reserves for debt service, property improvements, real estate taxes and insurance; and (iii) limit the ability to incur additional indebtedness, enter into or cancel leases, enter into certain transactions with affiliates or sell certain assets. As of December 29, 2000 and December 31, 1999, the Partitioned Business was in compliance with all debt covenants. In conjunction with the acquisition of Forum, the Partitioned Business recorded the debt assumed at its fair value. The Partitioned Business is amortizing this premium to interest expense over the remaining life of the related debt. The amortization of this debt premium for fiscal years 2000, 1999 and 1998 was $1.1 million, $1.6 million and $1.6 million, respectively. Cash paid for interest for fiscal years 2000, 1999 and 1998 totaled $20.8 million, $18.6 million and $19.8 million, respectively. Deferred financing costs, which are included in other assets on the Partitioned Business's consolidated balance sheets, was $3.4 million net of accumulated amortization of $0.4 million as of December 29, 2000. There was no deferred financing cost in 1999. 8. INCOME TAXES Total deferred tax assets and liabilities as of December 29, 2000 and December 31, 1999 were as follows:
2000 1999 -------- -------- (IN THOUSANDS) Deferred tax assets..................................... $ 17,359 $ 18,596 Deferred tax liabilities................................ (81,019) (80,150) -------- -------- Net deferred income tax liability..................... $(63,660) $(61,554) ======== ========
F-28 CSL GROUP, INC. AND SUBSIDIARIES AS PARTITIONED FOR SALE TO SNH/CSL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. INCOME TAXES (CONTINUED) The tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax assets and liabilities was as follows:
2000 1999 -------- -------- (IN THOUSANDS) Property and equipment.................................. $(80,552) $(77,170) Debt adjustment to fair value at acquisition............ 5,700 6,160 Net operating losses and other, net..................... 11,192 9,456 -------- -------- Net deferred income tax liability..................... $(63,660) $(61,554) ======== ========
The provision for income taxes for fiscal years 2000, 1999 and 1998 consists of the following:
2000 1999 1998 -------- -------- -------- (IN THOUSANDS) Current............................................ $ 8,667 $6,928 $4,781 Deferred........................................... 1,508 (79) 1,370 ------- ------ ------ $10,175 $6,849 $6,151 ======= ====== ======
A reconciliation of the statutory Federal tax rate to the Partitioned Business's effective income tax rate for fiscal years 2000, 1999 and 1998 is as follows:
2000 1999 1998 -------- -------- -------- Statutory federal tax rate.............................. 35.0% 35.0% 35.0% State income taxes, net of federal tax benefit.......... 6.0 6.0 6.0 ---- ---- ---- 41.0% 41.0% 41.0% ==== ==== ====
The Partitioned Business was included in the consolidated federal income tax return of Host Marriott and its affiliates for the period from January 3, 1998 through the Distribution Date, and subsequent to the Distribution Date, the Partitioned Business was included in the consolidated federal income tax return of Crestline Capital (collectively, the "Group"). Tax expense was allocated to the Partitioned Business as a member of the Group based upon the relative contribution to the Group's consolidated taxable income/loss and changes in temporary differences. This allocation method results in federal and net state tax expense allocated for all periods presented that is substantially equal to the expense that would have been recognized if the Partitioned Business had filed separate tax returns. For income tax purposes, the Partitioned Business, through CSL Group, has net operating loss carryforwards of $8.4 million which expire through 2006. F-29 CSL GROUP, INC. AND SUBSIDIARIES AS PARTITIONED FOR SALE TO SNH/CSL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. FAIR VALUE OF FINANCIAL INSTRUMENTS The fair values of certain financial liabilities are shown below:
2000 1999 ------------------- ------------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE -------- -------- -------- -------- (IN THOUSANDS) Debt, net of capital leases......... $239,348 $243,718 $195,352 $186,705
Valuations for secured debt are determined based on the expected future payments discounted at risk-adjusted rates. The fair values of other notes are estimated to be equal to their carrying value. The fair value of all of the Partitioned Business' other financial assets and liabilities are assumed to equal their carrying amounts. In 1999, the Partitioned Business recorded a pre-tax charge of $1.7 million, which is included in other operating costs and expenses, to fully reserve a second mortgage note receivable due to uncertainty in the collectibility of the note. 10. CONTINUING LIFECARE CONTRACTS Residents at two of the communities are offered continuing care life contracts that provide reduced monthly rental rates in exchange for significant security deposits, which become partially or totally non-refundable over time. At the Pueblo Norte senior living community, two types of continuing care contracts are currently offered to new residents. One contract provides that 10% of the resident admission fees is non-refundable upon occupancy. The remaining 90% of the resident admission fees becomes non-refundable at a rate of 1 1/2% per month over the subsequent 60 months and is amortized over the expected life of the resident. The second contract type provides that the resident admission fee is 30% non-refundable and 70% fully refundable. The non-refundable portions are amortized over the expected life of the resident. The liability for the refundable portion of the admission fees at December 29, 2000 and December 31, 1999 is $5,161,000 and $4,237,000, respectively, and is included in other liabilities on the Partitioned Business's consolidated balance sheets. The non-refundable portion of the admission fees at December 29, 2000 and December 31, 1999 totaled $2,820,000 and $1,888,000, respectively and is included in other liabilities on the Partitioned Business's consolidated balance sheets. Three other types of continuing care agreements are in effect at Pueblo Norte with existing residents but are no longer offered to new residents. One agreement provides that the resident admission fee is 10% non-refundable and 90% fully refundable. Each resident is entitled to 70 free days of care in the health center based on a prescribed formula. The second type of agreement provides that the resident admission fee is 1% refundable and 99% non-refundable. The non-refundable portion of the resident admission fees are amortized over the expected life of the resident. The liability at December 29, 2000 and December 31, 1999 for the non-refundable portion of these contracts is $3,208,000 and $4,131,000, respectively, and is included in other liabilities on the Partitioned Business's consolidated balance sheets. At two additional senior living communities, lifecare contracts are in effect with existing residents, but no longer offered to new residents. The agreements provide that the resident admission fees are F-30 CSL GROUP, INC. AND SUBSIDIARIES AS PARTITIONED FOR SALE TO SNH/CSL PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 10. CONTINUING LIFECARE CONTRACTS (CONTINUED) either fully refundable or non-refundable. As of December 29, 2000 and December 31, 1999, the refundable portion of these contracts was $965,000 in both years, and the non-refundable portion of these contracts was $618,000 and $1,428,000, respectively, and are included in other liabilities on the Partitioned Business's consolidated balance sheets. 11. LITIGATION On June 15, 1995, the Russell F. Knapp Revocable Trust (the "Plaintiff") filed a complaint in the United States District Court for the Southern District of Indiana (the "Indiana Court") against the general partner of one of CSL Group's subsidiary partnerships, CCC Retirement Partners, LP, formerly Forum Retirement Partners, LP, ("FRP"), alleging breach of the partnership agreement, breach of fiduciary duty, fraud, insider trading and civil conspiracy/aiding and abetting. On February 4, 1998, the Plaintiff, MSLS, the general partner, CSL Group, Host Marriott and Crestline Capital entered into a Settlement and Release Agreement (the "Settlement Agreement"), pursuant to which Host Marriott agreed to purchase, at a price of $4.50 per unit, the partnership units of each limited partner electing to join in the Settlement Agreement. CSL Group held 79% of the outstanding limited partner units in the partnership at that time. Host Marriott and CSL Group also agreed to pay as much as an additional $.75 per unit (the "Additional Payment") to the settling limited partners (the "Settling Partners"), under certain conditions, in the event that CSL Group within three years following the date of settlement initiates a tender offer for the purchase of units not presently held by CSL Group or the Settling Partners. On February 5, 1998, the Indiana Court entered an order approving the dismissal of the Plaintiff's case. In connection with the Settlement Agreement, CSL Group acquired 2,141,795 limited partner units in 1998 for approximately $9,638,000, increasing CSL Group's ownership interest in FRP to approximately 93%. In 1999, CSL Group and FRP completed a merger pursuant to a consent solicitation whereby the partnership unit holders received the right to receive cash consideration for each limited partnership unit from CSL Group. In connection with this merger, CSL Group acquired the remaining limited partnership units for approximately $6,158,000. Also, CSL Group paid the Settling Partners an Additional Payment in 1999 of approximately $557,000 pursuant to the merger transaction. As of December 29, 2000, CSL Group had a liability of $247,000 representing cash consideration for the remaining untendered FRP limited partnership units. The purchase price of the units for both transactions approximated fair value, and accordingly, no portion of the purchase price has been expensed. F-31 EX-8.1 3 a2060299zex-8_1.txt EXHIBIT 8.1 EXHIBIT 8.1 October 1, 2001 Senior Housing Properties Trust 400 Centre Street Newton, Massachusetts 02458 Ladies and Gentlemen: In connection with the stock purchase agreement entered into on August 9, 2001 by and among Senior Housing Properties Trust, a Maryland real estate investment trust (the "Company"), SNH/CSL Properties Trust, a Maryland real estate investment trust and one of the Company's wholly owned subsidiaries, Crestline Capital Corporation, a Maryland corporation ("Crestline"), and CSL Group, Inc., an Indiana corporation ("CSL"), providing for the purchase of all the outstanding capital stock of CSL and certain other subsidiaries of Crestline, and with the filing of a Registration Statement on Form S-1 by Five Star Quality Care, Inc., a Maryland corporation wholly owned by the Company ("Five Star"), on September 21, 2001 (the "Form S-1"), the following opinion is furnished to you to be filed with the Securities and Exchange Commission (the "SEC") as Exhibit 8.1 to the Company's Current Report on Form 8-K ("Form 8-K"), to be filed within one week of the date hereof, under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). We have acted as counsel for the Company in connection with its Registration Statement on Form S-3, File No. 333-60392 (the "Registration Statement"), under the Securities Act of 1933, as amended (the "Act"). We have reviewed originals or copies, certified or otherwise identified to our satisfaction, of corporate records, certificates and statements of officers and accountants of the Company and of public officials, and such other documents as we have considered relevant and necessary in order to furnish the opinion hereinafter set forth. In doing so, we have assumed the genuineness of all signatures, the legal capacity of natural persons, the authenticity of all documents submitted to us as originals, the conformity to original documents of all documents submitted to us as certified or photostatic copies, and the authenticity of the originals of such documents. Specifically, and without limiting the generality of the foregoing, we have reviewed: (i) the declaration of trust and the by-laws, each as amended and restated, of the Company; (ii) the charter and the by-laws of Five Star; (iii) the Form S-1 including the section therein captioned "Federal Income Tax Considerations"; (iv) the Form 8-K including the section therein captioned "Supplementary Federal Income Tax Considerations"; and (v) the Company's Annual Report on Form 10-K for the year ended December 31, 2000 filed under the Exchange Act (the "Annual Report") including the section therein captioned "Federal Income Tax Considerations." The opinion set forth below is based upon the Internal Revenue Code of 1986, as amended, the Treasury Regulations issued thereunder, published administrative interpretations thereof, and judicial decisions with respect thereto, all as of the date hereof (collectively, the "Tax Laws"). No assurance can be given that the Tax Laws will not change. In preparing the discussions with respect to Tax Laws in the section of the Annual Report captioned "Federal Income Tax Considerations", as supplemented by the section of the Form 8-K captioned "Supplementary Federal Income Tax Considerations", we have made certain assumptions and expressed certain conditions and qualifications therein, all of which assumptions, conditions and qualifications are incorporated herein by reference. With respect to all questions of fact on which our opinion is based, we have assumed the initial and continuing truth, accuracy and completeness of: (i) the information set forth in the Annual Report, the Form 8-K, and in the documents incorporated therein by reference; and (ii) representations made to us by officers of the Company or contained in the Annual Report or the Form 8-K, in each such instance without regard to qualifications such as "to the best knowledge of" or "in the belief of." We have relied upon, but not independently verified, the foregoing assumptions. If any of the foregoing assumptions are inaccurate or incomplete for any reason, or if the transactions described in the Form S-1 or the Form 8-K are consummated in a manner that is inconsistent with the manner Senior Housing Properties Trust October 1, 2001 Page 2 contemplated therein, our opinion as expressed below may be adversely affected and may not be relied upon. Based upon and subject to the foregoing, we are of the opinion that the discussions with respect to Tax Laws matters in the section of the Annual Report captioned "Federal Income Tax Considerations" as supplemented by the discussions in the section of the Form 8-K captioned "Supplementary Federal Income Tax Considerations" in all material respects are accurate and fairly summarize the Tax Laws issues addressed therein, and hereby confirm that the opinions of counsel referred to in said sections represent our opinions on the subject matter thereof. Our opinion above is limited to the matters specifically covered hereby, and we have not been asked to address, nor have we addressed, any other matters or any other transactions. Further, we disclaim any undertaking to advise you of any subsequent changes of the matters stated, represented or assumed herein or any subsequent changes in the Tax Laws. We hereby consent to the incorporation of this opinion by reference as an exhibit to the Registration Statement and to the reference to our firm in the Form 8-K and in the Registration Statement. In giving such consent, we do not thereby admit that we come within the category of persons whose consent is required under Section 7 of the Act or under the rules and regulations of the SEC promulgated thereunder. Very truly yours, SULLIVAN & WORCESTER LLP EX-10.1 4 a2060299zex-10_1.txt EXHIBIT 10.1 EXHIBIT 10.1 STOCK PURCHASE AGREEMENT among SENIOR HOUSING PROPERTIES TRUST SNH/CSL PROPERTIES TRUST CRESTLINE CAPITAL CORPORATION and CSL GROUP, INC. Dated as of August 9, 2001 TABLE OF CONTENTS
PAGE SECTION 1. DEFINITIONS AND INTERPRETATIONS........................................................................1 1.1. Certain Definitions....................................................................1 1.2. Interpretation.........................................................................9 SECTION 2. SALE AND PURCHASE OF STOCK............................................................................10 2.1. Sale and Purchase of Stock, Etc.......................................................10 2.2. Deposit...............................................................................10 2.3. Purchase Price Adjustments and Payment................................................10 2.4. The Closing...........................................................................11 2.5. Post Closing Distributions............................................................11 2.6. Option to Purchase Lexington, Lafayette and Boynton Beach.............................12 SECTION 3. REPRESENTATIONS AND WARRANTIES OF CLJ AND CSL.........................................................12 3.1. Organization, Good Standing and Power of CLJ..........................................13 3.2. Organization; Qualification of CSL....................................................13 3.3. Subsidiaries and Affiliates...........................................................13 3.4. Capitalization of CSL.................................................................13 3.5. Authorization; Validity of Agreement; Corporate Action................................14 3.6. Consents and Approvals; No Violations.................................................14 3.7. Books and Records.....................................................................15 3.8. Financial Statements; No Undisclosed Liabilities......................................15 3.9. Absence of Certain Changes............................................................16 3.10. Litigation............................................................................16 3.11. Compliance with Laws and Permits......................................................16 3.12. Assets................................................................................17 3.13. Hazardous Materials...................................................................18 3.14. Contracts and Commitments.............................................................19 3.15. Employee Benefit Plans................................................................19 3.16. Employee Matters......................................................................19 3.17. Insurance.............................................................................19 3.18. Certain Payments......................................................................20 3.19. Taxes.................................................................................20 3.20. FF&E Reserves, Mortgage Reserves and Working Capital..................................23 3.21. Broker's or Finder's Fee..............................................................23 3.22. Supplements to Disclosure Schedule....................................................23 SECTION 4. REPRESENTATIONS AND WARRANTIES OF SNH AND ACQ. SUB....................................................24 4.1. Due Organization, Good Standing and Power.............................................24 4.2. Authorization and Validity of Agreement...............................................24 4.3. Consents and Approvals; No Violations.................................................24 4.4. Financial Statements..................................................................25 4.5. Bankruptcy............................................................................25 4.6. Litigation............................................................................25 4.7. Broker's or Finder's Fee..............................................................25
i TABLE OF CONTENTS (continued)
PAGE SECTION 5. ACCESS AND TRANSACTIONS PRIOR TO CLOSING DATE.........................................................25 5.1. Access to Information Concerning Properties and Records...............................25 5.2. Title Matters.........................................................................27 5.3. Survey Matters........................................................................27 5.4. Environmental and Engineering Reports.................................................28 5.5. Conduct of the Business of the Acquired Companies Pending the Closing Date............28 5.6. Conversion of Certain Acquired Companies..............................................30 5.7. Cooperation...........................................................................31 5.8. Dividends; Distributions..............................................................32 5.9. No Solicitation of Other Offers.......................................................32 5.10. Notification of Certain Matters.......................................................33 5.11. HSR Act Filing........................................................................33 5.12. Public Announcements..................................................................34 5.13. CLJ Stockholder Approval..............................................................34 SECTION 6. CONDITIONS............................................................................................34 6.1. Conditions to Each Party's Obligations................................................34 6.2. Conditions to Obligations of CLJ and CSL..............................................36 6.3. Conditions to Obligations of SNH and ACQ. SUB.........................................37 SECTION 7. NATURE AND SURVIVAL OF REPRESENTATIONS AND WARRANTIES; INDEMNIFICATIONS; TAX MATTERS..................39 7.1. Survival of Representations, Warranties, etc..........................................39 7.2. CLJ's Agreement to Indemnify..........................................................39 7.3. SNH's Agreement to Indemnify..........................................................40 7.4. Third Party Claims....................................................................40 7.5. Purchase Price Adjustment.............................................................41 SECTION 8. TERMINATION...........................................................................................41 8.1. Termination...........................................................................41 8.2. Effect of Termination.................................................................43 SECTION 9. MISCELLANEOUS PROVISIONS..............................................................................44 9.1. Notices...............................................................................44 9.2. Schedules and Exhibits................................................................45 9.3. Computation of Time...................................................................45 9.4. Assignment: Successors in Interest....................................................45 9.5. No Third-Party Beneficiaries..........................................................45 9.6. Expenses..............................................................................46 9.7. Investigations........................................................................46 9.8. Number; Gender........................................................................46 9.9. Captions..............................................................................46 9.10. Amendments............................................................................47 9.11. Integration: Waiver...................................................................47
ii TABLE OF CONTENTS (continued)
PAGE 9.12. Governing Law.........................................................................47 9.13. Consent to Jurisdiction...............................................................47 9.14. Severability..........................................................................48 9.15. Counterparts..........................................................................48 9.16. SNH Limitation of Liability...........................................................48 9.17. ACQ. SUB Limitation of Liability......................................................48 9.18. CLJ Limitation of Liability...........................................................48
iii STOCK PURCHASE AGREEMENT THIS STOCK PURCHASE AGREEMENT ("AGREEMENT") is made and entered into as of August 9, 2001, among SENIOR HOUSING PROPERTIES TRUST ("SNH"), a Maryland real estate investment trust, with its principal office located in Newton, Massachusetts, SNH/CSL PROPERTIES TRUST ("ACQ. SUB"), a Maryland real estate investment trust, with its principal office located in Newton, Massachusetts, CRESTLINE CAPITAL CORPORATION ("CLJ"), a Maryland corporation, with its principal office located in Bethesda, Maryland, and CSL GROUP, INC. ("CSL"), an Indiana corporation, with its principal office located in Bethesda, Maryland. RECITALS: CLJ is the record and beneficial owner of all of the issued and outstanding equity securities of CSL, CCC Boynton Beach, Inc., a Delaware corporation ("CCC BOYNTON") and CCC Senior Living Corporation, a Delaware corporation ("CCC SENIOR LIVING"). CLJ and certain of its subsidiaries are engaged in the business of owning (or leasing) and operating the 32 senior living communities listed in EXHIBIT A (collectively, the "COMMUNITIES"), which Communities are managed by Marriott Senior Living Services, Inc. and its wholly owned subsidiaries. SNH is the record and beneficial owner of all of the issued and outstanding equity securities of ACQ. SUB. On the terms and conditions set forth in this Agreement, CLJ desires to sell and ACQ. SUB desires (i) to purchase and acquire the Communities by means of acquiring all of the issued and outstanding equity securities of CSL, CCC Boynton and CCC Senior Living, and (ii) to lease all of the Communities to an entity to be designated by SNH ("TENANT"). In consideration of the foregoing, and the representations, warranties, covenants and agreements set forth in this Agreement, the parties agree as follows: SECTION 1. DEFINITIONS AND INTERPRETATIONS 1.1. CERTAIN DEFINITIONS. For purposes of this Agreement, except as otherwise provided or unless the context clearly requires otherwise, the terms set forth below shall have the meanings set forth below: (1) "Acquired Company": CSL, each CSL Subsidiary, CCC Boynton and CCC Senior Living. (2) "ACQ. SUB": SNH/CSL Properties Trust, a Maryland real estate investment trust, which is 100% owned by SNH. (3) "Affiliate": of any Person shall mean any Person directly or indirectly controlling, controlled by, or under common control with, such Person; provided that, for the purposes of this definition, "control" (including with correlative meanings, the terms "controlled by" and "under common control with"), as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities or partnership interests, by contract or otherwise. (4) "Agreement": this Stock Purchase Agreement as amended or otherwise modified from time to time in accordance with its terms. (5) "Alternative Proposal": as defined in SECTION 5.9(b). (6) "Antitrust Division": as defined in SECTION 5.11. (7) "Articles of Incorporation": the Articles of Incorporation of CSL, as amended through the date hereof. (8) "Asset": as defined in SECTION 3.12(a). (9) "Bankers Trust Line": a general line of credit from Bankers Trust to CLJ, which line of credit is secured by, INTER ALIA, the stock of CSL and certain of its Subsidiaries and mortgages on certain of the Properties listed in SECTION 1.1(65) of the Disclosure Schedule, and guaranteed by certain of the CSL Subsidiaries. (10) "Boynton Beach Mortgage Loan": the indebtedness secured by a Lien on the property of Senior Living of Boynton Beach Limited Partnership, listed on SECTION 1.1(10) to the Disclosure Schedule. (11) "Business Day": a day, other than a Saturday or a Sunday, on which banking institutions in the State of Maryland are required to be open. (12) "By-laws": the By-laws of CSL, as amended through the date hereof. (13) "Capital Leases": any capital lease of any of the Acquired Companies listed on SECTION 1.1(13) to the Disclosure Schedule. (14) "CCC Boynton": as defined in the Recitals. (15) "CCC Boynton Stock": as defined in SECTION 2.1. (16) "CCC Senior Living": as defined in the Recitals. (17) "CCC Senior Living Stock": as defined in SECTION 2.1. (18) "CLJ Woodlands Bonds": as defined in SECTION 3.12(a)(ix). (19) "Closing": the closing which will take place as described in SECTION 2.4. (20) "Closing Date": the date on which the Closing occurs. -2- (21) "Code": the Internal Revenue Code of 1986, as amended. (22) "Communities": as defined in the Recitals. (23) "Consent": any consent, registration, approval, authorization, waiver or similar affirmation by or of, or filing with or notification to, a Person pursuant to any Contract, Law, Order or Permit. (24) "Consent Reduction Amount": in the case of (A) the failure to obtain the Consent referred to in SECTION 6.1(c) with respect to CCC Boynton, the sum of $150,000; (B) the failure to obtain the Consent referred to in SECTION 6.1(c) relating to the Communities known as Lafayette at Country Place and/or Lexington at Country Place, an amount equal to that determined by multiplying the Purchase Price (less $150,000 but before any other adjustment), by a fraction, the numerator of which is EBITDAR with respect to such Community for the fiscal year ended December 28, 2001 less that portion of contributions made to the FF&E Reserves attributable to that Community for the fiscal year ended December 28, 2001 and the denominator of which is EBITDAR with respect to all Communities for the fiscal year ended December 28, 2001 less the total contributions made to the FF&E Reserves for all Communities for the fiscal year ended December 28, 2001. (25) "Contract": any written agreement, arrangement, commitment, contract, indenture, instrument, lease, license or other obligation of any kind or character, or other obligation that is binding on any Person or its capital stock, properties or business. (26) "CSL Stock": as defined in SECTION 2.1. (27) "CSL Subsidiary": each Person which is a direct or indirect Subsidiary of CSL and listed on SECTION 1.1(27) of the Disclosure Schedule. (28) "Deposit": as defined in SECTION 2.2. (29) "Disclosure Schedule": as defined in SECTION 3. (30) "EBITDAR": earnings before interest, taxes, depreciation, amortization and rent. (31) "Environmental Claims": any and all administrative, regulatory or judicial actions, suits, demands, demand letters, claims, liens, notices of noncompliance or violation, investigations or proceedings under any Environmental Law or any permit issued under any such Environmental Law including without limitation (A) any and all claims by governmental or regulatory authorities for enforcement, cleanup, removal, response, remedial or other actions or damages pursuant to any applicable Environmental Law and (B) any and all claims by any third party seeking damages, contribution, indemnification, cost recovery, compensation or injunctive relief resulting from Hazardous Materials or arising from alleged injury or threat of injury to health, safety or the environment. (32) "Environmental Law": any federal, state, foreign or local statute, law, rule, regulation, ordinance, guideline, policy, code or rule of common law in effect and in each case as amended as of the date hereof and the Closing Date, and any judicial or administrative -3- interpretation thereof applicable to any Acquired Company or its operations or property as of the date hereof and the Closing Date, including any judicial or administrative order, consent decree or judgment, relating to the environment, health, safety or Hazardous Materials, including the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, 42 U.S.C.ss. 9601 ET SEQ.; the Resource Conservation and Recovery Act, as amended, 42 U.S.C.ss. 6901 ET SEQ.; the Federal Water Pollution Control Act, as amended, 33 U.S.C.ss. 1251 ET SEQ.; the Toxic Substances Control Act, 15 U.S.C.ss. 2601 ET SEQ.; the Clean Air Act, 42 U.S.C.ss. 7401 ET SEQ.; Occupational Safety and Health Act, 29 U.S.C. 651 ET SEQ.; Oil Pollution Act of 1990, 33 U.S.C.ss. 2701 ET SEQ.; the Safe Drinking Water Act, 42 U.S.C.ss. 300f ET SEQ., and their state and local counterparts and equivalents. (33) "ERISA": as defined in SECTION 3.15. (34) "ERISA Affiliate": as defined in SECTION 3.15. (35) "Excess Life Care Amounts": any amounts paid after June 20, 1997 to any of the Acquired Companies for so-called "continuing care contracts" (whether or not refundable). (36) "FF&E Reserves": as defined in the Operating Agreements. (37) "FTC": as defined in SECTION 5.11. (38) "GAAP": generally accepted accounting principles as in effect from time to time in the United States. (39) "GMAC Fee": the fee due GMAC in an amount equal to 1% of the outstanding principal balance, as of the Closing Date, of the GMAC Mortgage Loans in connection with the assumption of the GMAC Mortgage Loans/change of control. (40) "GMAC Mortgage Loans": collectively, the Mortgage Loans listed as items 1 through 5 on SECTION 1.1(62) of the Disclosure Schedule. (41) "Governmental Entity": a court, arbitral tribunal, administrative agency or commission or other governmental or other regulatory authority or agency. (42) "Ground Lease": the ground lease described in SECTION 1.1(42) of the Disclosure Schedule. (43) "Hazardous Materials": any (A) petroleum or petroleum products, radioactive materials, asbestos in any form that is or could become friable, urea formaldehyde foam insulation, transformers or other equipment that contain dielectric fluid containing levels of polychlorinated biphenyls, and radon gas; (B) chemicals, materials or substances defined as or included in the definition of "hazardous substances," "hazardous wastes," "hazardous materials," "extremely hazardous wastes," "extremely hazardous substances," "restricted hazardous wastes," "toxic substances," "toxic pollutants," or words of similar import, under any applicable Environmental Law; and (C) other chemical, material or substance, exposure to which is prohibited, limited or regulated by any Governmental Entity. -4- (44) "HMC": Host Marriott Corporation, a Maryland corporation. (45) "HPT": Hospitality Properties Trust, a Maryland real estate investment trust. (46) "HSR Act": as defined in SECTION 3.6. (47) "Indemnified Party": as defined in SECTION 7.4(a). (48) "Indemnifying Party": as defined in SECTION 7.4(a). (49) "Interim Balance Sheet": defined in SECTION 3.8(a). (50) "IRS": the United States Internal Revenue Service. (51) "Knowledge": an individual will be deemed to have "Knowledge" of a particular fact or other matter if without further inquiry such individual is actually aware of such fact or other matter; and an entity (other than an individual) will be deemed to have "Knowledge" of a particular fact or other matter if any individual who is currently serving as a director, officer, a manager whose title includes the term "director," partner, executor, or trustee of such entity (or in any similar capacity) has Knowledge of such fact or other matter. In no event will the Knowledge of MSLS or any "independent director" of any CSL Subsidiary be imputed to CLJ, CSL or any of their respective officers, other directors or agents. (52) "Lakewood Loan Documents": as defined in SECTION 3.12(a)(xi). (53) "Law": any federal, state, local or foreign law, statute, ordinance, rule, regulation, order, judgment or decree, administrative or judicial decision, and any other executive or legislative proclamation. (54) "Lease": the master lease agreement (or collectively, the individual leases) dated the Closing Date, to be entered into as of the Closing Date by and between each Acquired Company which owns the Communities and Tenant, such master lease agreement (or individual leases, as the case may be) to be in form and substance satisfactory to SNH and ACQ. SUB on the one hand, and Tenant on the other. (55) "Lien": any interest in property, whether such interest is based on common law, statute, court decision or contract and including, without limitation, any mortgage, pledge, security interest, lease, encumbrance (including any easement, exception, reservation or limitation, right of way or the like), lien, purchase option, call or right, or charge of any kind (including any agreement to give or permit any of the foregoing), any conditional sale or other title retention agreement, any lease of property (whether real, personal or mixed) which is required, in accordance with GAAP, to be recorded by the lessee as the acquisition of an asset and the incurrence of a liability, and the filing of any financing statement under the Uniform Commercial Code or personal property security legislation of any jurisdiction. (56) "Losses": as defined in SECTION 7.2(a). -5- (57) "Marriott Agreements": collectively, the Operating Agreements, the Noncompetition Agreement, the MI Indemnity Agreement, the Pooling Agreements and the Transition Agreements. (58) "Material Adverse Effect": any adverse change in the business, assets, liabilities, financial condition or results of operations of the Acquired Companies taken as a whole (provided, that a matter or matters taken together shall be deemed to have a material adverse change in the business, assets, liabilities, financial condition or results of operations only if such matter or matters have resulted in or are reasonably likely to have or result in an adverse impact of at least $10,000,000 of value or a $1,000,000 reduction in net annual cash flow from the Properties, the termination of any Marriott Agreement (other than the Noncompetition Agreement), or any material adverse effect on the ability of CLJ or CSL to perform its respective obligations under this Agreement or to consummate the transactions contemplated hereby). The term "Material Adverse Effect" shall not include (i) any change, circumstance, event or consummation of the transactions contemplated by the Agreement or (ii) changes in general economic conditions or financial markets (including fluctuations in the price of the shares of common stock of CLJ or conditions in the business sectors in which the Acquired Companies operate not disproportionally affecting the Acquired Companies). (59) "MGCL": the Maryland General Corporation Law. (60) "MI": Marriott International, Inc., a Delaware corporation. (61) "MI Indemnity Agreement": the Indemnity Agreement among MSLS, MI, HMC Senior Communities, Inc. (the predecessor in interest to CLJ) and HMC dated as of June 21, 1997, as modified by a letter agreement dated June 21, 1997. (62) "Mortgage Loans": any indebtedness for borrowed money or for the deferred purchase price of property or services that is secured by a Lien on the property or assets of any Acquired Company, listed on SECTION 1.1(62) to the Disclosure Schedule, other than indebtedness secured by fixtures, furniture and equipment and leases for the same that in either case are incurred or entered into by MSLS in the ordinary course of business and in accordance with the terms of the Operating Agreements. The term "Mortgage Loan" does not include indebtedness under the Bankers Trust Line (provided that all indebtedness thereunder is repaid at or prior to Closing) or the Boynton Beach Mortgage Loan. (63) "Mortgage Reserves": any and all deposits, escrows and reserves required by holders of Mortgage Loans or lessors under Capital Leases. (64) "MSLS": Marriott Senior Living Services, Inc., a Delaware corporation. (65) "New Loan": means indebtedness in the principal amount of not less than $150,000,000 nor more than $175,000,000 to be incurred after the date of this Agreement, but prior to the Closing Date, by CSL and/or one or more of the CSL Subsidiaries and secured by a mortgage(s) on one or more Properties listed in SECTION 1.1(65) of the Disclosure Schedule, the proceeds of which shall be paid as a dividend or otherwise distributed to CLJ in accordance with Section 5.8. -6- (66) "Nomura Mortgage Loan": the Mortgage Loan listed as item 6 on SECTION 1.1(62) of the Disclosure Schedule. (67) "Noncompetition Agreement": the Amended and Restated Noncompetition Agreement dated as of December 28, 1998 among HMC, CLJ, Forum Group, Inc. (predecessor to CSL), MSLS and MI. (68) "Operating Agreements": collectively, the Operating Agreements between CSL, any CSL Subsidiary (and/or their respective Subsidiaries) or Senior Living of Boynton Beach Limited Partnership, as owner and MSLS, as operator and listed in SECTION 1.1(68) of the Disclosure Schedule. (69) "Order": any administrative decision or award, decree, injunction, judgment, order, quasi-judicial decision or award, ruling, or writ of any federal, state, local or foreign or other Governmental Entity. (70) "Organizational Documents": any of (a) the articles or certificate of incorporation and the by-laws of a corporation or other equivalent organizational documents; (b) the partnership agreement and any statement of partnership of a general partnership; (c) the limited partnership agreement and the certificate of limited partnership; (d) any charter, certificate or similar document adopted or filed in connection with the creation, formation, or organization of a Person; (e) the operating agreement of a limited liability company; and (f) any amendment to any of the foregoing. (71) "Party": SNH, ACQ. SUB, CSL or CLJ, and "Parties" shall mean each of SNH, ACQ. SUB, CSL and CLJ. (72) "Permit": any federal, state, local or foreign governmental approval, authorization, certificate, license, permit or exemption to which any Person is a party or that is or may be binding upon or inure to the benefit of any Person or its securities, properties or business. (73) "Permitted Liens": collectively (i) Liens securing the Mortgage Loans, the New Loan and the Boynton Beach Mortgage Loan, (ii) Liens set forth in SECTION 1.1(73) of the Disclosure Schedule, (iii) any Liens for Taxes not yet due or delinquent; (iv) any statutory encumbrance arising in the ordinary course of business by operation of law with respect to a liability that is not yet due or delinquent; (v) any applicable zoning regulation or ordinance or other governmental laws, ordinances and regulations, provided they do not prohibit or impair in any material respect the use of a Property as a functioning senior living community; (vi) any imperfection of title or similar non-monetary Lien that, individually or in the aggregate with other such Liens, has not, and would not be reasonably expected to, impair marketability and does not impair, in any material respect, the use of a Property as a functioning senior living community; (vii) any Lien created by MSLS which it is obliged to remove pursuant to the terms of the Operating Agreements; and (viii) Liens on fixtures, furniture and equipment securing indebtedness (including capitalized leases) incurred or entered into by MSLS in the ordinary course of business and in accordance with the terms of the Operating Agreements. (74) "Person": any individual, corporation, limited liability company, partnership, joint venture, trust, association, organization, Governmental Entity or other entity. -7- (75) "Pooling Agreements": collectively, the Pooling Agreements between MSLS and HMC Senior Communities, Inc. (predecessor in interest to CLJ) listed in SECTION 1.1(75) of the Disclosure Schedule. (76) "Properties": all the real property and improvements owned or leased, directly or indirectly, by any Acquired Company and described in SECTION 3.12(A)(II) of the Disclosure Schedule and constituting one or more of the Communities, each a "Property", together with related furnishings, fixtures and equipment. (77) "Prior Tax Matters Agreements": as defined in SECTION 3.19(a). (78) "Purchase Price": $600,000,000, adjusted as provided in SECTION 2.3 and SECTION 6.1(C). (79) "Subsidiary": with respect to any party, any corporation, limited liability company, partnership, limited partnership, or other business association or entity, at least a majority of the voting securities or economic interests of which is directly or indirectly owned or controlled by such party or by any one or more of its Subsidiaries. (80) "Survey": as defined in SECTION 5.3. (81) "Tax" or "Taxes": all taxes imposed by any federal, state, local or foreign governmental authority, including, but not limited to, income, gross receipts, excise, profits, AD VALOREM, net worth, value added, service, special assessments, workers' compensation, utility, severance, production, excise, stamp, occupation, premiums, windfall profits, real or personal property, sales, gain, use, license, custom duty, unemployment, capital stock, transfer, franchise, payroll, withholding, alternative minimum, social security, and estimated taxes, and other taxes, fees or assessments of a similar nature, and shall include interest, penalties or additions attributable thereto. (82) "Tax Allocation Agreement": as defined in SECTION 6.1(f). (83) "Tax Returns": all returns, reports, estimates, information statements, declarations and other filings required or permitted to be filed with any taxing authority related to Taxes. (84) "Tenant": as defined in the Recitals. (85) "Title Company": as defined in SECTION 5.2. (86) "Title Commitments": as defined in SECTION 5.2. (87) "Transfer Taxes": all Taxes imposed on or resulting from the sale of the CSL Stock, the CCC Boynton Stock or the CCC Senior Living Stock or the conversion of the Acquired Companies pursuant to SECTION 5.6 that are in the nature of (i) real property transfer Taxes, including Taxes levied upon the transfer of stock or other equity interests in an entity on account of such entity's direct or indirect ownership of real estate, (ii) excise, sales, use, valued added, registration stamp, recording, documentary, conveyancing, transfer or (iii) similar Taxes, -8- in each case including any deficiencies, interest, penalties, additions to Tax or additional amounts, but in all cases excluding Taxes imposed on income. (88) "Transition Agreements": the agreements listed in SECTION 1.1(88) of the Disclosure Schedule. (89) "Treasury Regulations": the Treasury Regulations promulgated under the Code, including proposed and temporary regulations. (90) "Unsecured Loans": any indebtedness for borrowed money or for the deferred purchase price of property or services that is not secured by a Lien on the property or assets of any Acquired Company, listed in SECTION 1.1(90) of the Disclosure Schedule unless incurred or entered into on behalf of an Acquired Company by MSLS in the ordinary course of business and in accordance with the terms of the Operating Agreements. The term Unsecured Loans shall not include intercompany loans between or among the Acquired Companies all of which shall be discharged prior to Closing. (91) "Working Capital": the working capital controlled by MSLS, relating to operation of the Properties and required to be maintained pursuant to the Operating Agreements. 1.2. INTERPRETATION. (1) When a reference is made in this Agreement to a section or article, such reference shall be to a section or article of this Agreement unless otherwise clearly indicated to the contrary. (2) Whenever the words "include", "includes" or "including" are used in this Agreement, they shall be deemed to be followed by the words "without limitation." (3) The words "hereof", "herein" and "herewith" and words of similar import shall, unless otherwise stated, be construed to refer to this Agreement as a whole and not to any particular provision of this Agreement, and article, section, paragraph, exhibit and schedule references are to the articles, sections, paragraphs, exhibits and schedules of this Agreement unless otherwise specified. (4) The plural of any defined term shall have a meaning correlative to such defined term, and words denoting any gender shall include all genders. Where a word or phrase is defined herein, each of its other grammatical forms shall have a corresponding meaning. (5) A reference to any party to this Agreement or any other agreement or document shall include such party's successors and permitted assigns. (6) A reference to any legislation or to any provision of any legislation shall include any amendment, modification or re-enactment thereof, any legislative provision substituted therefor and all regulations and statutory instruments issued thereunder or pursuant thereto. (7) The parties have participated jointly in the negotiation and drafting of this Agreement. In the event an ambiguity or question of intent or interpretation arises, this -9- Agreement shall be construed as if drafted jointly by the parties, and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any provision of this Agreement. SECTION 2. SALE AND PURCHASE OF STOCK 2.1. SALE AND PURCHASE OF STOCK, ETC. At the Closing, in consideration of the Purchase Price to be paid by SNH to CLJ, (i) CLJ shall sell to ACQ. SUB, and ACQ. SUB shall purchase from CLJ, all of the issued and outstanding capital stock of CSL (the "CSL STOCK"), CCC Boynton (the "CCC BOYNTON STOCK") and CCC Senior Living (the "CCC SENIOR LIVING STOCK"), in each case free and clear of all Liens, and (ii) CLJ shall assign to SNH or its designee the CLJ Woodland Bonds (unless terminated prior to closing), the Lakewood Loan Documents, the Pooling Agreements, the MI Indemnity Agreement, the Transition Agreements, all rights of CLJ under Section 7.16 of the Stock Purchase Agreement dated as of June 17, 1997 between HMC and MSLS and all rights of CLJ in respect of any expansion projects referenced in Section 7.14 of such Stock Purchase Agreement and (to the extent contemplated by the Tax Allocation Agreement) the Prior Tax Matters Agreements, in each case free and clear of all Liens. At Closing, CSL will own all the issued and outstanding equity securities of each of the CSL Subsidiaries, free and clear of all Liens other than those Liens listed on SECTION 2.1 of the Disclosure Schedule. 2.2. DEPOSIT. On the date of this Agreement, SNH shall deposit $7,500,000 (the "DEPOSIT") with American Title Company to be held pursuant to the terms of an Escrow Agreement in the form of EXHIBIT B. Except as otherwise provided in SECTION 8.2, on the Closing Date the Deposit will be paid to CLJ and applied to and constitute a portion of the portion of the Purchase Price paid by wire transfer. 2.3. PURCHASE PRICE ADJUSTMENTS AND PAYMENT. (a) The Purchase Price shall be reduced by (a) the sum of (A) the aggregate unpaid principal amount, together with accrued and unpaid interest, of all Mortgage Loans, Capital Leases (unless the Communities known as Lexington at Country Place and Lafayette at Country Place are not acquired as a result of the failure to obtain Consents), Unsecured Loans and the New Loan, in each case, as of the Closing Date, (B) the amount by which the Acquired Companies (other than CCC Boynton) have funded less than $4,707,092 of owner-funded capital expenditures required under the Operating Agreements for fiscal year 2001 (other than FF&E Reserves), as of the Closing Date, (C) any deficiency in Mortgage Reserves or amounts due for real estate taxes, insurance or other expenses separately accounted for by CLJ attributable to such expenses (and not provided for under the Operating Agreements) for any period(s) prior to the Closing Date, (D) an amount equal to the Excess Life Care Amounts not recognized as income pursuant to GAAP as of the Closing Date and (E) the remaining -10- payments to which holders of the preferred depositary units representing preferred limited partner interests in Forum Retirement Partners, L.P., a Delaware limited partnership, are entitled but which have not been paid to such holders as of the Closing Date, and shall be increased by (b) the sum of (A) the amount of capital expenditures required under the Operating Agreements for fiscal year 2002 (other than FF&E Reserves) which the Acquired Companies (other than CCC Boynton) have funded, provided SNH approved such additional capital expenditures to the extent of any approval rights in the Operating Agreements, in each case, as of the Closing Date, (B) all New Loan costs, including the fees and expenses paid to the lenders by or for the account of CLJ or the Acquired Companies prior to the Closing Date in connection with the New Loan (with CLJ to notify SNH in writing, upon receipt of invoices from the lenders or their counsel, of the amount and the basis for such fees and expenses) but without duplication for any amounts paid under SECTION 9.6, (C) without duplication, all prepaid interest under the Mortgage Loans, the Unsecured Loans and the Capital Leases, and all prepaid rent under the Ground Leases, in each case to the extent attributable to the period after the Closing Date, and that portion of the Mortgage Reserves attributable to interest for the period after the Closing Date, and (D) that portion of Mortgage Reserves and any other prepayments of or deposits for real estate taxes, insurance or other expenses separately accounted for by CLJ attributable to such expenses (and not provided for under the Operating Agreements) for any period(s) after the Closing Date. The Purchase Price will be subject to further adjustment as provided in SECTION 6.1(c) and to the extent necessary to allocate costs incurred by either Party in connection with the transaction to comply with the provisions of SECTION 9.6. (b) The Purchase Price (adjusted as provided in SECTION 2.3(a) and SECTION 6.1(c)) shall be paid as follows: $25,000,000 by delivery on the Closing Date of SNH's promissory note in the form of EXHIBIT C and the balance and all other amounts due at Closing shall be paid by SNH on the Closing Date by wire transfer of immediately available funds to CLJ to an account specified by CLJ to SNH at least two (2) Business Days prior to the Closing Date. 2.4. THE CLOSING. Subject to the terms and conditions of this Agreement, the Closing shall take place at the offices of Sullivan & Worcester LLP, in Boston, Massachusetts at 9:00 a.m. (local time), on January 31, 2002, or, if later, the date on which all conditions set forth in SECTION 6 have been satisfied, but not later than June 30, 2002, or at such other time, date or place as the Parties may agree. 2.5. POST CLOSING DISTRIBUTIONS. The owner's distribution under any Operating Agreement or Pooling Agreement for the four week fiscal period in which the Closing Date occurs shall be prorated between CLJ and SNH based on the number of days in such fiscal period preceding the Closing Date (in the case of CLJ) or on or after the Closing Date (in the case of SNH). If after the Closing Date, CSL or any CSL Subsidiary shall receive any owner's distribution under any Operating Agreement or Pooling Agreement for (i) the 2001 fiscal year, (ii) any four week fiscal period in the 2002 fiscal -11- year that precedes the Closing Date, or (iii) the four week fiscal period in which the Closing Date occurs, SNH and ACQ. SUB shall cause such amount to be remitted promptly to CLJ (or the applicable portion of such amount in the case of clause (iii)). SNH and ACQ. SUB shall use commercially reasonable efforts to enforce the provisions of the Operating Agreements and Pooling Agreements that require the distributions described in this SECTION 2.5. 2.6. OPTION TO PURCHASE LEXINGTON, LAFAYETTE AND BOYNTON BEACH. If, because of the failure to obtain the Consents referred to in SECTION 6.1(c) with respect to the Communities known as Lafayette at Country Place, Lexington at Country Place and/or Boynton Beach (the "APPLICABLE CONSENTS"), such Community and the relevant CSL Subsidiary or CCC Boynton is excluded from the transactions contemplated hereby, CLJ and CSL shall continue to use commercially reasonable efforts to obtain the Applicable Consent, shall cause the relevant CSL Subsidiary or CCC Boynton to comply with SECTION 5.5 and hereby grant SNH an option to purchase all the issued and outstanding equity of such CSL Subsidiary or CCC Boynton, or, at the election of SNH, all of the assets of such CSL Subsidiary or CCC Boynton, for a price equal to the relevant Consent Reduction Amount less the aggregate unpaid principal amount, together with accrued and unpaid interest, of the related Capital Lease, and such purchase shall be deemed to have been made with the benefit of the representations, warranties and covenants contained in this Agreement; provided that if SNH exercises such option before the Applicable Consents have been obtained, SNH shall indemnify CLJ from any loss, cost or expense that CLJ incurs to the extent attributable to the failure to obtain the Applicable Consents before the exercise of such option, and SNH shall not be entitled to the benefit of the representations and warranties to the extent pertaining to the Applicable Consents. Such option shall expire on the eighteen month anniversary of the Closing Date and may be exercised by written notice from SNH to CLJ given no less than 60 days prior to the requested purchase date. Subject to the prior receipt of the Applicable Consent for any excluded Community and the relevant CSL Subsidiary or CCC Boynton Beach, CLJ may require SNH or its designee to purchase all the issued and outstanding equity of such CSL Subsidiary or CCC Boynton (or at the election of SNH, all of the assets of such CSL Subsidiary or CCC Boynton), for a price equal to the relevant Consent Reduction Amount less the aggregate unpaid principal amount, together with accrued and unpaid interest, of the related Capital Lease, and such purchase shall be deemed to have been made with the benefit of the representations, warranties and covenants contained in this Agreement. CLJ's right to require such purchase shall expire on the eighteen month anniversary of the Closing Date and may be exercised by written notice from CLJ to SNH given no less than 60 days prior to the requested purchase date. SECTION 3. REPRESENTATIONS AND WARRANTIES OF CLJ AND CSL Except as specifically set forth in the disclosure schedule prepared by CLJ and CSL and delivered to SNH simultaneously with the execution hereof (the "DISCLOSURE SCHEDULE"), CLJ and CSL jointly and severally represent and warrant to SNH and ACQ. SUB that all of the statements contained in this SECTION 3 are true as of the date of this Agreement (or, if made as of a specified date, as of such date), and will be true as of the Closing Date as though made on the -12- Closing Date. Each exception set forth in the Disclosure Schedule and each other response to this Agreement set forth in the Disclosure Schedule is identified by reference to, or has been grouped under a heading referring to, a specific individual section of this Agreement and, except as otherwise specifically stated with respect to such exception, relates only to such section. 3.1. ORGANIZATION, GOOD STANDING AND POWER OF CLJ. CLJ is a corporation duly organized, validly existing and in good standing under the laws of the State of Maryland and has all requisite corporate power and authority to own, lease and operate its properties and to carry on its business as now being conducted. 3.2. ORGANIZATION; QUALIFICATION OF CSL. CSL (a) is a corporation duly organized, validly existing and in good standing under the laws of its state of incorporation; (b) has full corporate power and authority to carry on its business as it is now being conducted and to own and lease the properties and assets it now owns and leases; and (c) is duly qualified to do business as a foreign corporation and is in good standing in every jurisdiction in which ownership of property or the conduct of its business requires such qualification, except where the failure to do so would not, individually or in the aggregate, have a Material Adverse Effect. CSL has heretofore delivered to SNH complete and correct copies of the Articles of Incorporation and By-laws of CSL as presently in effect. 3.3. SUBSIDIARIES AND AFFILIATES. SECTION 3.3 of the Disclosure Schedule sets forth for each current CSL Subsidiary, and for each of CCC Boynton and CCC Senior Living, its name, type of entity, jurisdiction of incorporation or formation, capitalization, the names of the record holders of its equity interests and the jurisdictions in which it is qualified to do business. Except as set forth in SECTION 3.3 of the Disclosure Schedule, CSL currently does not own, directly or indirectly, any capital stock or other equity interests in any Person. Except as set forth in SECTION 3.3 of the Disclosure Schedule, all the equity interests in each CSL Subsidiary are owned directly or indirectly by CSL, free and clear of all Liens, and are validly issued, fully paid and nonassessable, and there are no outstanding options, rights or agreements of any kind relating to the issuance, sale or transfer of any capital stock or other equity securities of any CSL Subsidiary. All the capital stock of CCC Boynton and CCC Senior Living is owned directly by CLJ, free and clear of all Liens, and is validly issued, fully paid and nonassessable, and there are no outstanding options, rights or agreements of any kind relating to the issuance, sale or transfer of any capital stock or other equity securities of CCC Boynton or CCC Senior Living. Each of the CSL Subsidiaries, CCC Boynton and CCC Senior Living is duly organized, validly existing and in good standing under the laws of its state of organization, and is duly qualified to do business and in good standing in every jurisdiction in which ownership of property or the conduct of its business requires such qualification, except where the failure to do so would not, individually or in the aggregate, have a Material Adverse Effect. 3.4. CAPITALIZATION OF CSL. The authorized capital stock of CSL consists of 100 shares of common stock, no par value, of which 100 shares are issued and outstanding. All the issued and outstanding capital -13- stock of CSL has been duly authorized, validly issued, fully paid and non-assessable, is owned beneficially and of record by CLJ, and, except for the pledge of the CSL Stock securing obligations under the Bankers Trust Line, is free and clear of any Liens. None of the outstanding capital stock of CSL has been issued in violation of any federal or state securities Laws or any preemptive right or rights to subscribe for or purchase its capital stock or other securities. There is no indebtedness issued and outstanding having general voting rights or debt convertible into capital stock or other securities of CSL having such rights. Except as set forth above, (a) there is no capital stock or other securities of CSL authorized, issued or outstanding; (b) there are no securities outstanding which are convertible into or exercisable or exchangeable for common stock or other securities of CSL; and (c) there are no outstanding options, rights, Contracts, warrants, subscriptions, conversion rights or other agreements or commitments of any character pursuant to which CSL may be required to purchase, redeem, issue or sell any of its capital stock or other securities of CSL or any CSL Subsidiary. 3.5. AUTHORIZATION; VALIDITY OF AGREEMENT; CORPORATE ACTION. Subject to SECTION 3.6(B), each of CLJ and CSL has full power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. Subject to SECTION 3.6(B), the execution, delivery and performance by each of CLJ and CSL of this Agreement and the consummation by it of the transactions contemplated hereby have been duly authorized by their respective Boards of Directors and no other action on the part of CLJ or CSL is necessary to authorize the execution and delivery by CLJ or CSL of this Agreement or the consummation by it of the transactions contemplated hereby. Except as described in SECTION 3.6(b), no vote of, or consent by, the holders of any capital stock issued by CLJ or CSL is necessary to authorize the execution and delivery by CLJ or CSL of this Agreement or the consummation by it of the transactions contemplated hereby. This Agreement has been duly executed and delivered by each of CLJ and CSL and, assuming due and valid authorization, execution and delivery hereof by SNH and ACQ. SUB, this Agreement is a valid and binding obligation of each of CLJ and CSL enforceable against each of CLJ and CSL in accordance with its terms, except (a) as limited by applicable bankruptcy, insolvency, reorganization, moratorium, and other similar laws of general application affecting enforcement of creditors' rights generally and (b) the availability of the remedy of specific performance or injunctive or other forms of equitable relief may be subject to equitable defenses and would be subject to the discretion of the court before which any proceeding therefor may be brought. 3.6. CONSENTS AND APPROVALS; NO VIOLATIONS. Except for (a) the Consents as may be required under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR ACT"); (b) the approval of the sale of the CSL Stock by the holders of the common stock of CLJ; (c) compliance with the requirements of each of the Marriott Agreements (including, without limitation, Section 18 of the several Operating Agreements and of Section 2 of the Noncompetition Agreement); (d) the Consents listed in SECTION 6.1(c) of the Disclosure Schedule; and (e) Consents required for healthcare Permits (including Medicare and Medicaid provider agreements), none of the execution, delivery or performance of this Agreement by CLJ or CSL, or the consummation by CLJ or CSL of any of the transactions contemplated hereby, will (i) conflict with or result in any breach of any provision of the Organizational Documents of CLJ or any Acquired Company, (ii) require any -14- Consent of any Governmental Entity, or (iii) violate any Contract, Law, Order or Permit to which CLJ or any Acquired Company is a party or that is binding on or affects any of their properties or assets, excluding, however, from the foregoing clauses (ii) and (iii), such Consents, the failure of which to obtain would not, and violations, breaches or defaults, the occurrence of which would not, in either case individually or in the aggregate, have a Material Adverse Effect. SNH and ACQ. SUB acknowledge that (A) the representation and warranty set forth in this SECTION 3.6, insofar as pertaining to the conversion of certain Acquired Companies pursuant to SECTION 5.6, is given only to the Knowledge of CLJ and (B) no representation is given with respect to any Consents required in connection with the Leases. 3.7. BOOKS AND RECORDS. For the period from and after January 1, 1998: (i) the books of account of the Acquired Companies are complete and correct in all material respects and have been maintained in accordance with sound business practices; (ii) each Acquired Company has made and kept books, records and accounts which, in reasonable detail, accurately and fairly reflect its transactions and the dispositions of its assets and to permit preparation of financial statements in conformity with GAAP; (iii) the stock ledger (or equivalent partnership or limited liability company records) of each of the Acquired Companies is complete and correct; (iv) the minute books (or equivalent partnership or limited liability company records) of each of the Acquired Companies contain accurate and complete records in all material respects of all meetings held of, and corporate (or equivalent) action taken by, the stockholders (partners or members) and the Boards of Directors (general partners or managers) of the respective companies; and (v) no meeting of any such stockholders (partners or members) or Board of Directors (general partners or managers) has been held for which minutes have not been prepared and are not contained in such minute books. At the Closing, the Acquired Companies will have possession of their respective books and records. 3.8. FINANCIAL STATEMENTS; NO UNDISCLOSED LIABILITIES. (a) The unaudited balance sheet of each Acquired Company as of June 15, 2001 (the "INTERIM BALANCE SHEET") and the related statements of income of each Acquired Company for the fiscal period then ended, complete and correct copies of which shall be furnished to SNH on or before September 15, 2001, present fairly, in all material respects, the financial condition and results of operations of such Acquired Company as at such date and for such period, as the case may be. (b) The audited consolidated balance sheets of CSL and its Subsidiaries as at January 1, 1999, December 31, 1999 and December 29, 2000, and the related consolidated statements of income and cash flows for the fiscal years then ended, complete and correct copies of which shall be furnished to SNH on or before September 15, 2001, present fairly, in all material respects, the consolidated financial condition and results of operations and cash flows of CSL and its Subsidiaries as at such dates and for such fiscal years, as the case may be. (c) Except (i) as and to the extent of the amounts specifically reflected or reserved on the Interim Balance Sheet, (ii) obligations under Contracts and other -15- liabilities entered into in the ordinary course of business and consistent with past practice and not in excess of current requirements which are not required by GAAP to be reflected on the Interim Balance Sheet, and (iii) liabilities and obligations incurred in the ordinary course of business consistent with past practice since the date of the Interim Balance Sheet, no Acquired Company has any liabilities or obligations of any nature (whether absolute, accrued, contingent or otherwise) that would be required to be reflected on a consolidated balance sheet of the Acquired Company or in the notes thereto prepared in accordance with GAAP. (d) On the Closing Date, all real property owned or leased by the Acquired Companies will continue to be owned or leased by the Acquired Companies "AS IS and WHERE IS", but subject to no liabilities (whether absolute, accrued, known, or unknown, contingent or otherwise and whether due or to become due) other than (i) the Ground Lease, Capital Leases, the Mortgage Loans, the Unsecured Loans, the Boynton Beach Mortgage Loan and the New Loan, (ii) liabilities incurred by MSLS in the ordinary course of business in accordance with the Operating Agreements and (iii) those liabilities set forth on the appropriate Title Commitment for the Property (provided that the exclusion provided in this clause (iii) shall not limit the right of SNH to object to any such liability nor limit any obligation of CLJ to cure any title exception objected to by SNH under SECTION 5.2 or 5.3). (e) The financial statements referred to in this SECTION 3.8 have been prepared in accordance with GAAP consistently applied throughout the periods involved, except as set forth in the notes thereto. 3.9. ABSENCE OF CERTAIN CHANGES. Since June 15, 2001, (a) there has not occurred any event, change, effect, fact, circumstance or other occurrence which has had, or which could reasonably be expected to have, a Material Adverse Effect; (b) the business of each Acquired Company has been conducted only in the ordinary course consistent with past practice; and (c) no Acquired Company has engaged in any material transaction or entered into any material agreement outside the ordinary course of business. 3.10. LITIGATION. Neither CLJ nor CSL has received written notice of and, to the Knowledge of each of CLJ and CSL, no action or proceeding is pending or threatened and no investigation looking toward such an action or proceeding has begun, which (a) questions the validity of this Agreement or any action taken or to be taken pursuant hereto; (b) will have a Material Adverse Effect; (c) result in or subject any Acquired Company or any of the Properties to a material liability; or (d) involves any material condemnation or eminent domain proceedings against any of the Properties. 3.11. COMPLIANCE WITH LAWS AND PERMITS. To the Knowledge of each of CLJ and CSL, (a) the Acquired Companies, the Properties and the use and operation of the Properties do not violate any material Laws including, without -16- limitation, those relating to construction, occupancy, zoning, adequacy of parking, environmental protection, occupational health and safety and fire safety applicable thereto; and (b) except as set forth in SECTION 3.11 of the Disclosure Schedule, there are presently in effect all material Permits (including all healthcare licenses) necessary to operate the businesses of the Acquired Companies and for the current use, occupancy and operation of the Properties. Neither CLJ nor CSL has received written notice of any threatened request, application, proceeding, plan, study or effort which would materially adversely affect the present use or zoning of any of the Properties or which would modify or realign any adjacent street or highway. 3.12. ASSETS. (a) The assets being acquired, directly or indirectly, by SNH and ACQ. SUB pursuant to SECTION 2.1 hereof (collectively, the "ASSETS") consist of (1) the CSL Stock, the CCC Boynton Stock and the CCC Senior Living Stock and (2) the following assets of the Acquired Companies (including certain assets of CLJ that are to be sold, transferred and assigned to SNH or its designee at Closing as contemplated by SECTION 2.1): (i) as to CSL, the equity securities of each of the CSL Subsidiaries; (ii) the real property owned or leased, directly or indirectly by an Acquired Company and described in SECTION 3.12(a)(ii) of the Disclosure Schedule (which Section identifies the Acquired Company that so owns or leases such property); (iii) the general partnership interest of CCC Boynton in Senior Living of Boynton Beach Limited Partnership; (iv) the interest of CCC Senior Living as the independent member of CCFL Senior Living LLC, CCOP Senior Living LLC, CCCP Senior Living LLC, CCSL Senior Living LLC and CCDE Senior Living LLC; (v) the rights and interests of the Acquired Companies under the Marriott Agreements, the Ground Lease, and the Capital Leases; (vi) the FF&E Reserves and the Mortgage Reserves; (vii) the Working Capital; (viii) except as set forth in SECTION 3.12(b) of the Disclosure Schedule with respect to any Property (and except for any items subject to a lease entered into by MSLS in the ordinary course of business and in accordance with the Operating Agreements), all furniture, fixtures and equipment and all supplies used in connection with such Property; -17- (ix) all the outstanding bonds issued in respect of the Woodlands Community (unless terminated prior to closing), $16,765,000 of which are held by Panther Holdings Level I, L.P., a Delaware limited partnership and a CSL Subsidiary and the remaining $15,450,000 of which are currently held by CLJ (and will be assigned in accordance with SECTION 2.1) (the "CLJ WOODLANDS BONDS") ; (x) the rights and interests of the Acquired Companies in respect of the agreements listed in SECTION 3.12(a)(x) of the Disclosure Schedule; (xi) a promissory note in the original principal amount of $3,166,451 dated December 31, 1997 made by Senior Living of Lakewood, LLC, together with a Loan Agreement dated December 31, 1997 and the Loan Documents, as defined therein (collectively, the "LAKEWOOD LOAN DOCUMENTS") to which the Parties agree to ascribe no value; and (xii) the books and records of each Acquired Company referenced in SECTION 3.7. (b) Except (i) for Permitted Liens, and (ii) as disclosed in SECTION 3.12(b) of the Disclosure Schedule and on the Title Commitment for each Property (subject to the parenthetical in clause (iii) of SECTION 3.8(d)), to the Knowledge of CLJ and CSL, at the Closing CLJ and each Acquired Company will have good and marketable title, free and clear of all Liens, to all of its Assets, other than Assets that are leased or licensed by an Acquired Company, with respect to which such Acquired Company has valid and enforceable leases or licenses under which there exists no default, event of default or event which, with notice or lapse of time or both, would constitute a default, except for such defaults which have not had or are not reasonably likely to have, either individually or in the aggregate, a Material Adverse Effect. 3.13. HAZARDOUS MATERIALS. Except as disclosed to SNH in writing or as described in any environmental report identified in SECTION 3.13 of the Disclosure Schedule, true and complete copies of which have been furnished to SNH, to the Knowledge of CLJ and CSL, none of the Acquired Companies nor any tenant or other occupant or user of any Property, or any portion thereof, has stored or disposed of (or engaged in the business of storing or disposing of) or has released or caused the release of any Hazardous Materials on any Property or any portion thereof, the removal of which is required or the maintenance of which is regulated, prohibited or penalized by any Environmental Law, and, to the Knowledge of CLJ and CSL, except as disclosed to SNH in writing or as set forth in any environmental report identified in SECTION 3.13 of the Disclosure Schedule, each Property is free from any such Hazardous Materials, except any such materials maintained in accordance with applicable Environmental Law. -18- 3.14. CONTRACTS AND COMMITMENTS. Other than the Marriott Agreements, the Ground Lease, the Capital Leases, the agreements evidencing or securing the Mortgage Loans, the Unsecured Loans and the Boynton Beach Mortgage Loan (which agreements are listed on SECTIONS 1.1(62), 1.1(90) and 1.1(10) to the Disclosure Schedule), the agreements evidencing or securing the New Loan, the Prior Tax Matters Agreements, matters shown on the Title Commitments, Medicare and Medicaid provider agreements, and agreements entered into by MSLS, or by the Acquired Companies at the direction of MSLS, in the ordinary course of business and in accordance with the Operating Agreements for the Properties, and other than the matters set forth in SECTION 3.14 of the Disclosure Schedule there are no material Contracts affecting any of the Acquired Companies which will be binding on the Acquired Companies subsequent to the Closing Date. 3.15. EMPLOYEE BENEFIT PLANS. No Acquired Company sponsors, maintains or contributes or has maintained or contributed to any: deferred compensation, incentive compensation, stock purchase, stock option or other equity compensation plan, program, agreement or arrangement; severance or termination pay, medical, surgical, hospitalization, life insurance or other "welfare" plan, fund or program (within the meaning of Section 3(1) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")); profit-sharing, stock bonus or other "pension" plan, fund or program (within the meaning of Section 3(2) of ERISA); employment, termination or severance agreement; Contract with any officer or director; or any other employee benefit plan, fund, program, agreement or arrangement; provided that the foregoing representation is given only as to the Knowledge of CLJ and CSL insofar as relating to the period prior to June 21, 1997. No Acquired Company nor any trade or business, whether or not incorporated, that together with any Acquired Company would be deemed a "single employer" within the meaning of Section 4001(b) of ERISA (an "ERISA AFFILIATE") has incurred any liability under Title IV of ERISA that has not been satisfied in full, and no condition exists that presents a material risk of any such liability being incurred by an Acquired Company. 3.16. EMPLOYEE MATTERS. Since June 20, 1997, no Acquired Company has had any employees. 3.17. INSURANCE. Each Acquired Company has policies of insurance of the type and in amounts customarily carried by Persons conducting businesses or owning assets similar to those of the Acquired Companies. All such policies are in full force and effect, all premiums due thereon have been paid and the Acquired Companies are otherwise in compliance in all material respects with the terms and provisions of such policies. Furthermore, except as would not, individually or in the aggregate, have a Material Adverse Effect, to the Knowledge of CLJ and CSL, (a) no Acquired Company has received any notice of cancellation or non-renewal of any such policy or arrangement nor is the termination of any such policies or arrangements threatened, (b) there is no claim pending under any of such policies or arrangements as to which coverage has been questioned, denied or disputed by the underwriters of such policies or arrangements, (c) no -19- Acquired Company has received any written notice from any of its insurance carriers that any insurance premiums will be increased in the future or that any insurance coverage presently provided for will not be available to it in the future on substantially the same terms as now in effect and (d) none of such policies or arrangements provides for any retrospective premium adjustment, experienced-based liability or loss sharing arrangement affecting any Acquired Company. 3.18. CERTAIN PAYMENTS. No Acquired Company, or director, officer or agent of any Acquired Company or, to the Knowledge of CLJ and CSL, any other Person associated with or acting for or on behalf of CLJ or CSL, has directly or indirectly (a) made any contribution, gift, bribe, rebate, payoff, influence payment, kickback, or other payment to any Person, private or public, regardless of form, whether in money, property, or services (i) to obtain favorable treatment in securing business, (ii) to obtain special concessions or for special concessions already obtained, for or in respect of any Acquired Company, or (iii) in violation of any Law; or (b) established or maintained any fund or asset that has not been recorded in the books and records of the Acquired Companies; provided that the foregoing representation is given only as to the Knowledge of CLJ and CSL insofar as relating to the period prior to June 21, 1997. No representation is made under this SECTION 3.18 as to any "independent director" of any CSL Subsidiary. 3.19. TAXES. (a) With respect to periods ending after December 28, 1998, all material Tax Returns required to be filed with respect to each of the Acquired Companies have been timely filed and such Tax Returns are complete and accurate in all material respects. All material Taxes required to be paid by or on behalf of the Acquired Companies (other than Taxes for which CLJ or the Acquired Companies are indemnified) have been paid when due and payable or, to the extent of Taxes not yet due and payable, required estimated Tax payments have been made in respect thereof. With respect to periods ending after December 28, 1998, no request has been made for an extension of time within which to file any Tax Return in respect of any of the Acquired Companies, which Tax Return is due and has not yet been filed; to CLJ's Knowledge, none of CLJ, its Subsidiaries, or any Acquired Company has after December 28, 1998 requested an extension of time within which to file any Tax Return in respect of any of the Acquired Companies, which Tax Return is due and has not yet been filed. After December 28, 1998, none of CLJ, its Subsidiaries, or any Acquired Company has received written notice from any governmental agency in a jurisdiction in which a particular Acquired Company does not file a Tax Return stating that such Acquired Company is or may be subject to taxation by that jurisdiction. There are no Liens on any of the assets of any Acquired Company with respect to Taxes, other than statutory liens for Taxes not yet due and payable. The responsibility for filing Tax Returns and paying Taxes for CLJ and its Subsidiaries for periods prior to December 29, 1998 (and certain periods which straddle December 28, 1998) is addressed in a Tax Matters Agreement, dated as of June 21, 1997, by and among MI, MSLS, HMC, HMC Senior Communities, Inc., and Forum Group, Inc. (the predecessor of CSL), and/or a Tax Sharing Agreement, dated as of December 28, 1998 by and among HMC, Host Marriott L.P. and CLJ (collectively, the "PRIOR TAX -20- MATTERS AGREEMENTS"). Each of CLJ and CSL, and to the Knowledge of CLJ and CSL (except as disclosed on SECTION 3.19(a) of the Disclosure Schedule) each other party thereto, has complied in all material respects with each of the Prior Tax Matters Agreements, and each such Prior Tax Matters Agreement is a valid and binding obligation of each of the parties thereto enforceable in accordance with its terms. After December 28, 1998, each of CLJ, its Subsidiaries, and the Acquired Companies have taken all actions necessary to, and none of them have failed to take any actions necessary to, preserve and enforce all material rights which CLJ, its Subsidiaries, or the Acquired Companies may have or may have had under each Prior Tax Matters Agreement, including without limitation the rights to have parties other than CLJ, its Subsidiaries, or the Acquired Companies bear responsibility for Tax Returns and Taxes in respect of the Acquired Companies in respect of Tax periods (including partial periods and straddle periods) covered by the Prior Tax Matters Agreements. There is no claim pending or threatened by any party to any Prior Tax Matters Agreement to the effect (i) that any of CLJ, its Subsidiaries or the Acquired Companies has failed to duly comply with the terms of such Prior Tax Matters Agreement or (ii) that such party does not bear responsibility under such Prior Tax Matters Agreement for Tax Returns or Taxes in respect of the Acquired Companies for periods (including partial periods or straddle periods) prior to December 29, 1998. (b) With respect to periods ending after December 28, 1998, except as disclosed on SECTION 3.19(b) of the Disclosure Schedule (i) no deficiencies for any material Taxes have been proposed, assessed or asserted in writing in respect of any Tax Returns filed by or on behalf of any Acquired Company or claimed in writing to be due by any taxing authority or otherwise that have not been settled and paid in full; (ii) other than Tax Returns relating to sales and use Taxes and personal property Taxes wherein the contested Taxes for all such Tax Returns in the aggregate do not exceed $200,000, no Tax Return with respect to any Acquired Company has been or is currently being audited by the IRS or other taxing authority (whether foreign or domestic); (iii) none of CLJ, CSL, or any Acquired Company has executed or filed with the IRS or any other taxing authority (whether foreign or domestic) any agreement, waiver, or other document extending, or having the effect of extending, the period for assessment or collection of any Taxes, which extension or waiver is still in effect, and except for the Prior Tax Matters Agreements, no Acquired Company has entered into any tax allocation or sharing agreement with any other entity; (iv) each of CLJ and CSL has delivered to SNH correct and complete copies of all examination reports, statements of deficiencies and similar documents prepared by the IRS or any other taxing authority (whether foreign or domestic) that was received by CLJ or any of its Subsidiaries and involving any Acquired Company and a material amount of Taxes; (v) all final adjustments made by the IRS with respect to any Tax Return involving any Acquired Company have been reported to the relevant state, local, or foreign taxing authorities to the extent required by Law. Except under the Prior Tax Matters Agreements, (i) no requests for ruling or determination letters filed by CLJ or any Acquired Company are pending with any taxing authority, and (ii) no Acquired Company has any liability to any Person with respect to Taxes paid, owed or to be paid for periods of time during which any Acquired Company or any predecessor thereof were members of a consolidated group other than the consolidated group of which CLJ is the common parent. No Acquired Company is bound by any -21- currently effective private ruling, closing agreement, or similar agreement with any Taxing Authority relating to Taxes. (c) No Acquired Company has filed a consent pursuant to Section 341(f) of the Code, or agreed to have Section 341(f)(2) of the Code apply to any disposition of a subsection (f) asset (as such term is defined in Section 341(f)(4) of the Code) owned by it. No Acquired Company has a permanent establishment in any foreign country or operates or conducts business through any branch in any foreign country. No Acquired Company has agreed to or is required to make any adjustment pursuant to Section 481(a) of the Code by reason of a change in the accounting method initiated by CLJ or any Acquired Company, and neither CLJ nor CSL has any Knowledge that the IRS has proposed any such adjustment or change in accounting method. (d) Each of CSL and CLJ is a "United States person" within the meaning of Section 7701(a)(30) of the Code. (e) No Acquired Company is or has been a "reporting corporation" subject to the information reporting and record maintenance requirements of Section 6038A of the Code and the Treasury Regulations thereunder. No Acquired Company or predecessors by merger or consolidation of any of them has within the past three (3) years been a party to a transaction intended to qualify under Section 355 of the Code or under so much of Section 356 of the Code as relates to Section 355 of the Code. (f) SNH has been provided access by CLJ and CSL to true and complete copies of (i) relevant portions of income tax audit reports, statements of deficiencies, closing or other agreements received by or on behalf of CLJ or any Acquired Company relating to any material amount of Taxes owed by any Acquired Company, and (ii) all material federal, state, local and foreign income, franchise and value added Tax Returns and sales, use and property Tax Returns, together with all schedules and attachments thereto, for each Acquired Company for periods ending after December 28, 1998. (g) Except for those Acquired Companies listed in SECTION 3.19(g) of the Disclosure Schedule, each Acquired Company is (and through the Closing will remain) for federal income tax purposes either a partnership or a disregarded entity that is not separate from its owner, in each case pursuant to Treasury Regulation Section 301.7701-3, and to the extent allowed under applicable Law, each such Acquired Company is (and through the Closing will remain) similarly classified for state and local income tax purposes. No Acquired Company is classified for federal income tax purposes as a publicly traded partnership under Section 7704(b) of the Code. (h) Neither CSL nor any Acquired Company owns 10% or more, by vote or value, of the stock or securities of any one issuer, except for stock or securities in an Acquired Company. -22- 3.20. FF&E RESERVES, MORTGAGE RESERVES AND WORKING CAPITAL. (a) SECTION 3.20(a) of the Disclosure Schedule contains a true, accurate and complete description of all property comprising the FF&E Reserves as of June 15, 2001, and such FF&E Reserves have, to the Knowledge of CLJ and CSL, been maintained in accordance with the Operating Agreements. (b) SECTION 3.20(b) of the Disclosure Schedule contains a true, accurate and complete description of all property comprising the Mortgage Reserves as of July 13, 2001, and such Mortgage Reserves have, to the Knowledge of CLJ and CSL, been maintained in accordance with the documents governing the Mortgage Loans and the Capital Leases. (c) SECTION 3.20(c) of the Disclosure Schedule contains a true, accurate and complete description of all Working Capital as of July 13, 2001, and the Working Capital has, to the Knowledge of CLJ and CSL, been maintained in accordance with the Operating Agreements. 3.21. BROKER'S OR FINDER'S FEE. Except for Deutsche Banc Alex. Brown, no agent, broker, Person or firm acting on behalf of CLJ or CSL is, or will be, entitled to any fee, commission or broker's or finder's fees from CLJ or any Acquired Company, or from any Person controlling, controlled by, or under common control with CLJ or any Acquired Company, in connection with this Agreement or any of the transactions contemplated hereby. 3.22. SUPPLEMENTS TO DISCLOSURE SCHEDULE. From time to time prior to the Closing Date, CLJ will promptly supplement or amend the Disclosure Schedule with respect to any matter arising which, if existing or occurring at the date of this Agreement would have been required to have been set forth in the Disclosure Schedule or which is necessary to correct the information set forth therein which has been rendered inaccurate. The delivery of any such supplement or amendment shall not in any way constitute a waiver by SNH of any requirement that the representations and warranties of CLJ and CSL be true and correct on the date of this Agreement and on the Closing Date or of any of the conditions set forth in SECTION 6, provided that the disclosure in any such supplement or amendment of any matter arising after the date of this Agreement shall not form the basis of a claim for misrepresentation or breach of a representation under SECTION 7. -23- SECTION 4. REPRESENTATIONS AND WARRANTIES OF SNH AND ACQ. SUB SNH and ACQ. SUB each hereby represent and warrant to CLJ and CSL as follows: 4.1. DUE ORGANIZATION, GOOD STANDING AND POWER. SNH is a real estate investment trust duly organized, validly existing and in good standing under the laws of the State of Maryland and has all requisite power and authority to own, lease and operate its properties and to carry on its business as now being conducted. ACQ. SUB is a Maryland real estate investment trust, duly organized, validly existing and in good standing under the laws of the State of Maryland and has all requisite power and authority to own, lease and operate its properties and to carry on its business as now being conducted. 4.2. AUTHORIZATION AND VALIDITY OF AGREEMENT. Each of SNH and ACQ. SUB has full power and authority to execute and deliver this Agreement, to perform its obligations hereunder and to consummate the transactions contemplated hereby. The execution, delivery and performance of this Agreement by each of SNH and ACQ. SUB, and the consummation by it of the transactions contemplated hereby, have been duly authorized and approved by its Board of Trustees. No other action on the part of SNH or ACQ. SUB is necessary to authorize the execution, delivery and performance of this Agreement by SNH or ACQ. SUB and the consummation of the transactions contemplated hereby. This Agreement has been duly executed and delivered by SNH and ACQ. SUB and is a valid and binding obligation of SNH and ACQ. SUB, enforceable against SNH and ACQ. SUB in accordance with its terms, except that (a) such enforcement may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights generally and (b) the availability of the remedy of specific performance or injunctive or other forms of equitable relief may be subject to equitable defenses and would be subject to the discretion of the court before which any proceeding therefor may be brought. 4.3. CONSENTS AND APPROVALS; NO VIOLATIONS. Except for any filings required under the HSR Act, Consents required for healthcare Permits, and Consents required in connection with the Lease, none of the execution, delivery or performance of this Agreement by SNH or ACQ. SUB, or the consummation by SNH or ACQ. SUB of any of the transactions contemplated hereby will (i) conflict with or result in any breach of any provision of the Organizational Documents of SNH or ACQ. SUB, (ii) require any Consent of any Governmental Entity, or (iii) violate any Contract, Law, Order or Permit applicable to SNH, ACQ. SUB or any of their properties or assets, excluding from the foregoing clauses (ii) and (iii), such Consents, violations, breaches or defaults which would not, individually or in the aggregate, have a material adverse effect on SNH or ACQ. SUB. -24- 4.4. FINANCIAL STATEMENTS. The audited consolidated balance sheets of SNH and its Subsidiaries as at December 31, 2000, and the related consolidated statements of income and cash flows for the fiscal year then ended, complete and correct copies of which have been furnished to CLJ, present fairly, in all material respects, the consolidated financial condition and results of operations and cash flows of SNH and its Subsidiaries as at such date and for such fiscal year, as the case may be. 4.5. BANKRUPTCY. None of SNH, ACQ. SUB or their Subsidiaries are now, or have in the past three years has been: a debtor in any bankruptcy or similar proceeding, insolvent, made an assignment for the benefit of creditors, or the subject of a receivership. None of SNH, ACQ. SUB or any of their Subsidiaries is contemplating any of the foregoing or is aware of any credible threat by any third party to file an involuntary bankruptcy petition against any of them. 4.6. LITIGATION. Neither SNH nor ACQ. SUB has received written notice of and, to the Knowledge of SNH and ACQ. SUB, no action or proceeding is pending or threatened and no investigation looking toward such an action or proceeding has begun, which (a) questions the validity of this Agreement or any action taken or to be taken pursuant thereto; (b) will have a material adverse effect on SNH or ACQ. SUB; or (c) result in or subject SNH or ACQ. SUB to a material liability. 4.7. BROKER'S OR FINDER'S FEE. Except for UBS Warburg LLC, no agent, broker, Person or firm acting on behalf of SNH or ACQ. SUB is, or will be, entitled to any fee, commission or broker's or finder's fees from SNH or ACQ. SUB or from any Person controlling, controlled by, or under common control with, SNH or ACQ. SUB in connection with this Agreement or any of the transactions contemplated hereby. SECTION 5. ACCESS AND TRANSACTIONS PRIOR TO CLOSING DATE 5.1. ACCESS TO INFORMATION CONCERNING PROPERTIES AND RECORDS. (a) Between the date of this Agreement and the Closing Date, CLJ and CSL shall, and shall cause each Acquired Company to, upon reasonable notice, afford SNH, and its counsel, accountants, consultants, financing sources and other authorized representatives, reasonable access, during normal business hours, to employees of CLJ familiar with the business of the Acquired Companies and the Properties, to perform due diligence investigations and to examine the books of account and records of the Acquired Companies, including, without limitation, all Contracts affecting the Properties, and make copies thereof, at such reasonable times as SNH or its representatives may request by notice to CLJ (which notice may be oral). No such investigation shall affect the -25- representations and warranties made by CLJ and CSL in this Agreement. Each of CLJ and CSL agrees to cause its officers and the employees of CLJ, in a manner consistent with the fulfillment of their ongoing duties and obligations, to furnish such data and other information and respond to such inquiries as SNH and its representatives shall from time to time reasonably request. (b) Between the date of this Agreement and the Closing Date, SNH shall, upon reasonable notice, afford CLJ, and its counsel, accountants, consultants, financing sources and other authorized representatives, access to employees of SNH familiar with the business of SNH and ACQ. SUB, to perform due diligence investigations and to examine the books of account and records of SNH and ACQ. SUB, and make copies thereof, at such reasonable times as CLJ or its representatives may request by notice to SNH (which notice may be oral). No such investigation shall affect the representations and warranties made by SNH or ACQ. SUB in this Agreement. SNH agrees to cause its officers and the employees of SNH and ACQ. SUB, in a manner consistent with the fulfillment of their ongoing duties and obligations, to furnish such data and other information and respond to such inquiries as CLJ and its representatives shall from time to time reasonably request. (c) Unless otherwise required by Law, SNH shall keep confidential, and cause its counsel, accountants, consultants and other authorized representatives to keep confidential, any nonpublic information obtained pursuant to this SECTION 5.1; notwithstanding the foregoing, however, SNH shall not be required to keep confidential information that (i) is already in its possession (unless such information has been received from CLJ pursuant to the Confidentiality Agreement among CLJ, SNH, HPT and HRPT Properties Trust dated December 5, 2000, as amended by a letter dated July 31, 2001), or (ii) becomes generally available to the public other than as a result of a disclosure by SNH, HPT or HRPT Properties Trust, or (iii) becomes available to SNH on a non-confidential basis from a source other than an Acquired Company or CLJ (provided that SNH has no Knowledge that such source obtained such information subject to confidentiality restrictions). (d) Unless otherwise required by Law, CLJ shall keep confidential, and cause its counsel, accountants, consultants and other authorized representatives to keep confidential, any nonpublic information obtained pursuant to this SECTION 5.1; notwithstanding the foregoing, however, CLJ shall not be required to keep confidential information that (i) is already in its possession (unless such information has been received from SNH pursuant to the Confidentiality Agreement between CLJ and SNH dated February 20, 2001), or (ii) becomes generally available to the public other than as a result of a disclosure by CLJ or an Acquired Company, or (iii) becomes available to CLJ on a non-confidential basis from a source other than SNH (provided that CLJ has no Knowledge that such source obtained such information subject to confidentiality restrictions). -26- 5.2. TITLE MATTERS. Prior to the execution of this Agreement, SNH has ordered from American Title Company (the "TITLE COMPANY") and directed the Title Company promptly to deliver to SNH and CLJ a preliminary title commitment, having an effective date after the date of this Agreement, for an ALTA extended owner's policy of title insurance with respect to each of the Properties, together with complete and legible copies of all instruments and documents referred to as exceptions to title (collectively, the "TITLE COMMITMENTS"). On or before September 30, 2001 (which date shall be extended for an additional period of fifteen days upon the written request of SNH, provided that SNH is proceeding in good faith), SNH shall give CLJ notice of any title exceptions (other than Permitted Liens) which adversely affect any of the Properties in any material respect and as to which SNH reasonably objects, and CLJ shall, within ten Business Days of its receipt of such notice, notify SNH whether CLJ elects to take such action as may be required to cause such exceptions to be removed from the Title Commitments. If CLJ elects to remove the title exception objected to by SNH, such title exception shall be removed from the Title Commitment at or prior to Closing. If CLJ elects not to remove the title exception, SNH shall, within five Business Days of its receipt of notice of CLJ's election not to remove the title exception, elect whether to terminate this Agreement. If SNH does not so terminate this Agreement, the objected to exception shall become a Permitted Lien. 5.3. SURVEY MATTERS. Prior to the execution of this Agreement, SNH has arranged for the preparation of an ALTA survey with respect to each of the Properties (the "SURVEYS"), by a licensed surveyor in the jurisdiction in which each of the Properties is located, which (i) contains an accurate legal description, (ii) shows the exact location, dimension and description (including applicable recording information) of all utilities, easements, encroachments and other physical matters affecting such Property, the number of striped parking spaces located thereon and all applicable building set-back lines, (iii) states whether the applicable Property is located within a 100-year flood plain and (iv) includes a certification in a form reasonably acceptable to SNH, addressed to SNH, the Title Company and any other persons requested by SNH. SNH will deliver a copy of each Survey promptly to CLJ. On or before September 30, 2001 (which date shall be extended for an additional period of fifteen days upon the written request of SNH, provided that SNH is proceeding in good faith), SNH shall give CLJ notice of any matters shown on the Surveys (other than Permitted Liens) which adversely affect any of the Properties in any material respect and as to which SNH reasonably objects, and CLJ shall, within ten Business Days of its receipt of such notice, notify SNH whether CLJ elects to take such action as may be required to cause such matter to be remedied. If CLJ elects to remedy the matter objected to by SNH, such matter shall be remedied at or prior to Closing. If CLJ elects not to remedy such matter, SNH shall, within five Business Days of its receipt of notice of CLJ's election not to remedy the matter, elect whether to terminate this Agreement. If SNH does not so terminate this Agreement, the objected to exception shall become a Permitted Lien. -27- 5.4. ENVIRONMENTAL AND ENGINEERING REPORTS. Prior to the date of this Agreement, CLJ has delivered to SNH, all environmental audits, evaluations, assessments, studies or tests and engineering reports (with respect to roofs, electric, mechanical and structural elements of the Properties) in their possession. After the date hereof, SNH may arrange for the preparation of additional environmental audits, evaluations, assessments, studies or tests and engineering reports with respect to any of the Properties. SNH will direct each firm preparing such audit or report to deliver a copy of such audit or report promptly to CLJ. On or before September 30, 2001 (which date shall be extended for an additional period of fifteen days upon the written request of SNH, provided that SNH is proceeding in good faith), SNH shall give CLJ notice of any matters shown thereon which adversely affect any of the Properties in any material respect and as to which SNH reasonably objects, and CLJ shall, within ten Business Days of its receipt of such notice, notify SNH whether CLJ elects to take such action as may be required to cause such matter to be remedied. If CLJ elects to remedy the matter objected to by SNH, such matter shall be remedied at or prior to Closing, or, if such matter cannot be completed by Closing, CLJ shall promptly begin such remediation and diligently pursue completion through and, if necessary, after Closing. If CLJ elects not to remedy such matter, SNH shall, within five Business Days of its receipt of notice of CLJ's election not to remedy the matter, elect whether to terminate this Agreement. 5.5. CONDUCT OF THE BUSINESS OF THE ACQUIRED COMPANIES PENDING THE CLOSING DATE. Except as specifically contemplated by this Agreement, or as set forth in SECTION 5.5 of the Disclosure Schedule, or as required in connection with obtaining the New Loan, and unless CLJ obtains SNH's prior written approval in each instance, until the earlier of (i) the termination of this Agreement or (ii) the Closing Date: (1) CLJ shall and shall cause each Acquired Company to conduct its operations only according to its ordinary and usual course of business consistent with past practice and shall use all commercially reasonable efforts to preserve intact their current business operations, maintain their material Contracts, and maintain satisfactory relationships with lessors, lessees, suppliers, customers, joint venture partners and others having business relationships with them; and (2) no Acquired Company shall: (a) except as required by SECTION 5.6, make any change in or amendment to its Organizational Documents other than amendments to change the name of an Acquired Company or amendments or other changes that are ministerial or immaterial to such Acquired Company; (b) issue or sell, or authorize the issuance or sale of, any shares of its capital stock or any other equity securities, or issue or sell, or authorize the issuance or sale of, any securities convertible into, or options, warrants or rights to purchase or subscribe to, or enter into or create any Contract with respect to the issuance or sale of, any shares of its capital stock or any other equity securities, or make any other changes in its capital structure; -28- (c) sell or pledge or agree to sell or pledge any stock or other equity interest owned by it in any other Person; (d) declare, pay or set aside any dividend or other distribution or payment with respect to, or split, combine, redeem or reclassify, or purchase or otherwise acquire, any shares of its capital stock or its other securities; provided the Acquired Companies (i) shall pay a dividend or other distribution to CLJ in an aggregate amount equal to the proceeds (after reduction for expenses) of the New Loan required by SECTION 5.8, (ii) may make distributions of net income to CLJ and (iii) may upstream all cash in the CSL Subsidiaries and CCC Boynton to CLJ; (e) enter into any Contract which is reasonably expected to involve payment or receipts by any Acquired Company in excess of $100,000 during any twelve month period, or, in cases where the Acquired Company is the party responsible for such payment, which is not terminable without penalty upon 30 days notice, provided, however, that nothing in this SECTION 5.5 shall be deemed to prohibit (i) MSLS as agent for any Acquired Company from entering into any such Contract on behalf of such Acquired Company to the extent contemplated by the Operating Agreements or (ii) CSL or any CSL Subsidiary from purchasing an interest rate cap or other hedge device in respect of the GMAC Mortgage Loans out of monies held as part of the Mortgage Reserves for such purpose, and the remaining balance of such part of the Mortgage Reserves, if released, may be distributed or paid to CLJ; (f) grant any options to purchase common stock or provide for compensation or fringe benefits to any of its directors or officers; enter into any employment, consulting or severance agreement or arrangement with any Person; (g) other than in the ordinary course of business and draws taken under CLJ's corporate lines of credit, transfer, lease, license, guarantee, sell, mortgage, pledge, dispose of, encumber or subject to any Lien (except as contemplated by SECTION 5.7(b)) any of the Properties or any other material assets or incur or modify any indebtedness or other material liability; issue any debt securities or assume, guarantee or endorse or otherwise as an accommodation become responsible for the obligations of any Person; or make any loan or other extension of credit; (h) sell, assign, transfer, license or modify or amend any rights to any intellectual property owned by or licensed to any Acquired Company, except in the ordinary course of business consistent with past practice; (i) agree to the settlement of any material claim or litigation, other than settlements agreed to by MSLS on behalf of any Acquired Company to the extent contemplated by the Operating Agreements; (j) make or rescind any material Tax election or settle or compromise any material Tax liability (except as permitted to MSLS in the ordinary course of business and in accordance with the Operating Agreements); -29- (k) make any material change in its accounting principles, practices or methods; (l) (A) incur any indebtedness for borrowed money or guarantee any such indebtedness of another Person (except as contemplated by SECTION 5.7(b)) or (B) make any loans or advances to any other Person, other than to CSL or any CSL Subsidiary; provided, however, that CSL and its Subsidiaries may make draws under the Bankers Trust Line, in any amount, provided that such draws are repaid at or prior to Closing; (m) pay, discharge or satisfy any liabilities other than the payment, discharge or satisfaction of any liabilities in the ordinary course of business if now due and payable and consistent with past practice; (n) delay or postpone the payment of accounts payable or other liabilities, other than in the ordinary course of business consistent with past practice; (o) other than such actions as are permitted to be taken by MSLS in the ordinary course of business and in accordance with the Operating Agreements, take any action, engage in any transaction or enter into any agreement which could reasonably be expected to cause (A) any of the conditions in SECTION 6 not to be satisfied, or (B) a Material Adverse Effect; (p) other than in the ordinary course of business, and except for such actions as may be taken by MSLS in the ordinary course of business and in accordance with the Operating Agreements, modify, amend or terminate any material Contract to which it is a party or waive any of its material rights or claims; or (q) agree, in writing or otherwise, to take any of the foregoing actions. 5.6. CONVERSION OF CERTAIN ACQUIRED COMPANIES. On or before the date the Acquired Companies make a distribution or pay a dividend of the proceeds of the New Loan to CLJ, and subject to the receipt of applicable Consents under the Mortgage Loans, the Unsecured Loans, the Capital Leases and the Ground Leases and from partners of the relevant entities, each of the Acquired Companies listed in SECTION 5.6 of the Disclosure Schedule shall be reorganized as a business trust organized under the laws of the State of Maryland so that each such Acquired Company (as reorganized) shall for United States federal income and (to the extent allowed under applicable Law) state and local income tax purposes be classified as a disregarded entity that is not separate from its owner pursuant to Treasury Regulations Section 301.7701-3; PROVIDED that if, after the date hereof, CLJ identifies a material state or local tax liability that would be incurred by CLJ if an identified Acquired Company were to be reorganized as a business trust organized under the laws of the State of Maryland, such Acquired Company shall instead be reorganized as a Delaware limited liability company that would be classified as a disregarded entity that is not separate from its owner pursuant to Treasury Regulations Section 301.7701-3 unless SNH shall agree to indemnify CLJ against such tax liability. None of CLJ, CSL or any Acquired Company shall take or permit any action to materially modify such tax classification. -30- 5.7. COOPERATION. (a) Subject to the terms and conditions provided herein, each of CLJ, CSL, ACQ. SUB and SNH shall, and CLJ shall cause each Acquired Company to, cooperate and use their reasonable best efforts to take, or cause to be taken, all appropriate action, and to make, or cause to be made, all filings necessary, proper or advisable under applicable Laws to consummate and make effective the transactions contemplated by this Agreement, including, without limitation, all their reasonable best efforts to obtain, prior to the Closing Date, all Permits and Consents as are necessary for consummation of the transactions contemplated by this Agreement. (b) Each of CLJ and CSL shall, and CLJ shall cause each Acquired Company to, and SNH shall, and shall cause ACQ. SUB to, cooperate and use their reasonable best efforts to take, or cause to be taken, all appropriate action, and to execute and deliver, or cause to be executed and delivered all such instruments and documents necessary or desirable in connection with the New Loan, on such business terms as are reasonably acceptable to each of CLJ and SNH and evidenced by instruments and documents which are substantially the same as those evidencing the GMAC Mortgage Loans. (c) Each of CLJ and CSL shall, and CLJ shall cause each Acquired Company to conduct negotiations with MSLS relating to capital expenditure budgets required by the Operating Agreements for each of the Properties for fiscal year 2002, jointly with SNH and ACQ. SUB. (d) SNH shall cooperate with CLJ in providing all necessary information concerning SNH and its Subsidiaries (i) as required by applicable Law including, without limitation, audited financial statements for CLJ to distribute to its shareholders in connection with seeking approval of the transactions contemplated by this Agreement and in connection with other reports required to be filed by CLJ with the Securities and Exchange Commission and (ii) to the extent required in connection with obtaining any Consents (including Consents under the Mortgage Loans, the Unsecured Loans, the Capital Leases and the Ground Leases) required to consummate the transactions contemplated hereby and to obtain the New Loan. (e) CLJ and CSL shall and CLJ shall cause each Acquired Company to cooperate with SNH in providing all necessary information concerning CLJ and its Subsidiaries (i) as required by applicable Law, including, without limitation, additional unaudited and audited financial statements in connection with the distribution by SNH to its shareholders of the equity of the Tenant and other reports required to be filed by SNH with the Securities and Exchange Commission and (ii) to the extent required in connection with obtaining any Consents (including Consents under the Mortgage Loans, the Unsecured Loans, the Capital Leases and the Ground Leases) required to consummate the transactions contemplated hereby and to obtain the New Loan. (f) If the Consent of HMC, as guarantor of the Unsecured Loan in respect of the Leisure Park Community, identified as item 31 in SECTION 3.12(a)(ii) of the -31- Disclosure Schedule, pursuant to a Guaranty Agreement dated December 1, 1997 in favor of Marine Midland Bank, is required to permit the transactions contemplated by this Agreement, SNH will agree to replace HMC as the guarantor of such Unsecured Loan. If such replacement is not permitted, CLJ will use commercially reasonable efforts to obtain the Consent of HMC prior to Closing, if required. If SNH does not replace HMC as the guarantor, SNH shall indemnify CLJ for the liability of CLJ to HMC (if any) to reimburse HMC for payments made by HMC as guarantor. (g) SNH agrees to replace CLJ as guarantor or indemnitor, as the case may be under the several Guaranties of Recourse Obligations and Environmental Indemnity Agreements (each dated July 3, 2000 or July 28, 2000) each executed by CLJ for the benefit of GMAC in respect of a GMAC Mortgage Loan, subject to the Consent of GMAC. If such Consent is not obtained by the Closing Date with respect to any such Guaranty of Recourse Obligations or Environmental Indemnity Agreement, SNH agrees to indemnify CLJ against any payment made or required to be made by it as guarantor or indemnitor after the Closing Date in accordance with the terms of such Guaranty of Recourse Obligations or Environmental Indemnity Agreement. 5.8. DIVIDENDS; DISTRIBUTIONS. The Acquired Companies will declare and pay dividends and/or make distributions to CLJ in an aggregate amount equal to the proceeds (after reduction for transaction expenses) of the New Loan not later than one Business Day prior to the Closing Date. Such dividends or other distributions shall be treated by the Parties as "distributions" to CLJ for federal income tax purposes under Sections 301, 857(a)(2), and 857(d)(3) of the Code, and under Treasury Regulations 1.1502-13 and 1.1502-33. Solely for federal income (and, to the extent allowable under applicable Law, state and local) tax purposes, such dividends or other distributions shall not be treated by the Parties as part of the Purchase Price. 5.9. NO SOLICITATION OF OTHER OFFERS. (a) Until this Agreement has been terminated in accordance with SECTION 8 (and the payments, if any, required to be made by CLJ in connection with such termination pursuant to SECTION 8.2 have been made), none of CLJ, CSL, any of their respective Affiliates, nor any of their respective officers (or other senior management employees), directors, representatives, consultants, investment bankers, attorneys, accountants and other agents (collectively, the "REPRESENTATIVES") shall Knowingly (i) encourage, solicit, initiate or facilitate the making of, or take any other action to facilitate any inquiries or the making of any proposal that constitutes, or may reasonably be expected to lead to, any Alternative Proposal, (ii) participate in any way in discussions or negotiations with, or furnish or disclose any nonpublic information to, any Person (other than SNH) in connection with any Alternative Proposal, or (iii) enter into any agreement, letter of intent or similar document contemplating or otherwise relating to any Alternative Proposal; provided, however, that this SECTION 5.9(a) shall not prohibit CLJ, CSL or the Representatives from: (i) complying with all applicable laws, rules and regulations, including Rules 14d-9 and 14e-2 under the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT") or publicly disclosing the existence of an Alternative Proposal to -32- the extent required by applicable law, or (ii) furnishing non-public information to, or entering into discussions or negotiations with, or accepting an Alternative Proposal from, any person or entity in connection with an unsolicited bona fide written proposal or proposals from any person or entity relating to an Alternative Proposal if CLJ determines in good faith based upon the advice of counsel that such action is required in order for CLJ to comply with its fiduciary obligations under the MGCL. If CLJ or CSL shall receive any offer to purchase (or any request for non-public information concerning CSL's assets in connection with a potential offer to purchase such assets), which it determines it must respond to, it shall (i) inform SNH that an offer or request has been received, and (ii) furnish to SNH the identity of the offeror or Person making the request, and a description of the material terms thereof. (b) As used herein, "ALTERNATIVE PROPOSAL" shall mean (i) any written proposal or offer from any Person relating to any direct or indirect acquisition or purchase of a substantial amount of assets of any Acquired Company or of any class of equity securities of any Acquired Company (including any transaction in the nature of a management acquisition or "going private" transaction involving the Acquired Companies), (ii) any tender offer or exchange offer that, if consummated, would result in any Person beneficially owning any shares of equity securities of any Acquired Company, (iii) any merger, consolidation, business combination, sale of substantially all the assets, recapitalization, liquidation, dissolution or similar transaction effecting the transfer of any Acquired Company or (iv) any other transaction that relates to the Acquired Companies, the consummation of which could reasonably be expected to impede, interfere with, prevent or materially delay the purchase of the CSL Stock, the CCC Boynton Stock or the CCC Senior Living Stock contemplated hereby or any other transaction that relates to the Acquired Companies that could reasonably be expected to dilute materially the benefits to SNH of the transactions contemplated hereby; PROVIDED, HOWEVER, that no proposal or offer or other transaction described in any of clauses (i) through (iii) above that occurs after the eighteen month period referred to in Section 2.6 and that involves one of the Communities or CSL Subsidiaries or CCC Boynton that was excluded from the transaction in accordance with SECTION 6.1(c) shall constitute an Alternative Proposal. 5.10. NOTIFICATION OF CERTAIN MATTERS. CLJ shall give prompt notice to SNH, and SNH shall give prompt notice to CLJ, of the occurrence, or failure to occur, of any event, which occurrence or failure to occur would be likely to cause any representation or warranty contained in this Agreement to be untrue in any material respect at any time from the date of this Agreement to the Closing. Each of CLJ and SNH shall give prompt notice to the other party of any notice or other communication from any third party alleging that the consent of such third party is or may be required in connection with the transactions contemplated by this Agreement. 5.11. HSR ACT FILING. SNH and CLJ shall, as promptly as practicable, file, or cause to be filed, any required notification and report forms under the HSR Act with the Federal Trade Commission (the -33- "FTC") and the Antitrust Division of the United States Department of Justice (the "ANTITRUST DIVISION") in connection with the transactions contemplated by this Agreement, and will use all commercially reasonable efforts to respond as promptly as practicable to all inquiries received from the FTC or the Antitrust Division for additional information or documentation and to cause the waiting periods under the HSR Act to terminate or expire at the earliest possible date. SNH and CLJ will each furnish to the other such necessary information and reasonable assistance as the other may reasonably request in connection with its preparation of necessary filings or submissions to any governmental or regulatory agency, including, without limitation, any filings necessary under the provisions of the HSR Act. 5.12. PUBLIC ANNOUNCEMENTS. CLJ and SNH shall consult with each other before issuing any press release or otherwise making any public statements with respect to the transactions contemplated by this Agreement and shall not issue any such press release or make any such public statement prior to such consultation and review by the other party of such release or statement or without the prior consent of the other party, which consent shall not be unreasonably withheld or delayed; provided, however, that a party may, without the prior consent of the other party, issue such press release or make such public statement as may be required by Law or any listing agreement with a national securities exchange or automated quotation system which CLJ or SNH is a party to, if it has used all reasonable efforts to consult with the other party and to obtain such party's consent but has been unable to do so in a timely manner. 5.13. CLJ STOCKHOLDER APPROVAL. CLJ shall submit this Agreement and the transactions contemplated by this Agreement for the approval by its stockholders at a special meeting of stockholders to be held not later than March 31, 2002 (provided that such date may be postponed to not later than June 30, 2002 upon the written request of CLJ, provided that CLJ is proceeding in good faith), and, subject to the fiduciary duties of its Board of Directors, CLJ shall recommend approval of this Agreement and the transactions contemplated by this Agreement and shall use its reasonable business efforts to obtain stockholder approval. SECTION 6. CONDITIONS 6.1. CONDITIONS TO EACH PARTY'S OBLIGATIONS. The respective obligations of each Party to consummate the transactions contemplated hereby shall be subject to the fulfillment or waiver (subject to applicable Law) at or prior to the Closing of each of the following conditions: (a) APPROVAL OF SALE OF STOCK. The sale of the CSL Stock to ACQ. SUB pursuant to this Agreement shall have been approved and adopted by the requisite vote of or consent by the holders of common stock of CLJ entitled to vote thereon in accordance with applicable Law and CLJ's Organizational Documents. -34- (b) HSR ACT. Any waiting period (and any extension thereof) under the HSR Act applicable to the transactions contemplated hereby shall have expired or been terminated and no action shall have been instituted by the Antitrust Division or the FTC challenging or seeking to enjoin the consummation of the transactions contemplated hereby, which action shall have not been withdrawn or terminated. (c) CONSENTS. All Consents (i) listed in SECTION 6.1(c) of the Disclosure Schedule, (ii) that are required in connection with the Lease, (iii) that pertain to the conversion of certain of the Acquired Companies in accordance with Section 5.6, and (iv) relating to healthcare Permits (including Medicare and Medicaid provider agreements) shall have been obtained and shall (to the extent required) contemplate and permit the Lease; provided if, using commercial reasonable efforts, CLJ is unable to obtain one or more of the Consents referenced on SECTION 6.1(c) of the Disclosure Schedule for CCC Boynton, Lexington at Country Place or Lafayette at Country Place (A) the Purchase Price shall be reduced by the relevant Consent Reduction Amount, (B) the relevant CSL Subsidiary and Community shall be deleted from the definitions of Communities, Properties, CSL Subsidiaries and from the description of the Assets and (C) the Acquired Companies shall be relieved from and indemnified against any liabilities of CCC Boynton or CCC of Kentucky, Inc., as the case may be, on terms acceptable to SNH, whereupon the conditions of obtaining those Consents (subject to the provisions of SECTION 2.6) is deemed waived. To the extent modifications to the Lease are reasonably required to obtain any Consent required pursuant to this Agreement, so long as such modifications do not (taking into account the plan of SNH to spin off Tenant as a separate public company) affect the qualification of SNH or any Subsidiary of SNH as a "real estate investment trust" or a "qualified REIT subsidiary", as the case may be, under the Code, SNH will not, and will cause Tenant not to, unreasonably decline to make such modifications. (d) INJUNCTION. No preliminary or permanent injunction, judgment or other order shall have been issued by any federal, state or foreign court or by any Governmental Entity and be in effect on the Closing Date which prohibits, restrains, restricts or enjoins the consummation of the transactions contemplated by this Agreement. (e) STATUTES. No federal, state or foreign statute, law, rule, regulation, executive order, judgment, decree or order of any kind shall have been enacted, entered, promulgated or enforced by any court or Governmental Entity which prohibits, restrains, restricts or enjoins the consummation of the transactions contemplated by this Agreement or has the effect of making the transactions contemplated by this Agreement illegal. (f) TAX ALLOCATION AGREEMENT. CLJ, CSL, the Acquired Companies, ACQ. SUB and SNH shall have entered into a Tax Allocation Agreement in the form of EXHIBIT D. (g) MARRIOTT AGREEMENTS. The Marriott Agreements shall be in full force and effect on the Closing Date (except for the Noncompetition Agreement and the Transition Agreements, so long as such agreements have been terminated without -35- expense or liability to any of the Acquired Companies); MI, MSLS and HMC, as the case may be, shall have given their Consent to the assignment of the Operating Agreements to Tenant, the assignment of the Pooling Agreements to CSL, the assignment of the MI Indemnity Agreement to SNH and given such other Consents as are required in connection with the transactions contemplated by this Agreement. CLJ and CSL, on the one hand, and SNH, ACQ. SUB and Tenant, on the other, shall have fully complied with all applicable provisions of the Marriott Agreements; provided the Marriott Agreements shall have been amended to provide that neither SNH nor any Subsidiary of SNH shall be subject to any agreement not to compete or which would otherwise limit the conduct of their businesses and further provided that if, in connection with any Consent, MI, MSLS or HMC shall require any modification of or supplement to any of the Marriott Agreements or shall impose any other condition on their Consent, such modification, supplement or condition shall be in form and substance acceptable to SNH. 6.2. CONDITIONS TO OBLIGATIONS OF CLJ AND CSL. The obligations of CLJ and CSL to consummate the transactions contemplated hereby shall be subject to the fulfillment (or waiver by CLJ and CSL) at or prior to the Closing of each of the following conditions: (a) REPRESENTATIONS AND WARRANTIES. The representations and warranties of SNH and ACQ. SUB set forth in this Agreement shall be true and correct in all material respects as of the date of this Agreement and as of the Closing Date, provided, however, that such representations and warranties shall be deemed to be true and correct unless the failure or failures of such representations and warranties to be so true and correct, without regard to any materiality qualifiers contained therein, individually or in the aggregate, results or could reasonably be likely to result in a material adverse effect on the ability of SNH or ACQ. SUB to consummate the transactions contemplated by this Agreement. (b) LEASE AMENDMENTS. The subleases (and the related pledge agreements) between CLJ and HPT listed in SECTION 6.2(b) of the Disclosure Schedule for the properties known as CYBM and RIBM hotels shall have been amended as provided in EXHIBIT E; the costs and expenses of HPT in connection therewith shall have been paid by SNH and the costs and expenses of HMC in connection therewith shall have been paid by CLJ. (c) COVENANTS. SNH and ACQ. SUB shall have complied in all material respects with their respective obligations under the terms of this Agreement. (d) CERTIFICATE. CLJ shall have received a certificate signed by the president and chief financial officer of SNH certifying to the fulfillment of the conditions set forth above in this SECTION 6.2. (e) OPINION OF COUNSEL. CLJ shall have received an opinion of Sullivan & Worcester LLP, counsel to SNH and ACQ. SUB, in form and substance reasonably acceptable to CLJ. -36- 6.3. CONDITIONS TO OBLIGATIONS OF SNH AND ACQ. SUB. The obligations of SNH and ACQ. SUB to consummate the transactions contemplated hereby shall be subject to the fulfillment (or waiver by SNH) at or prior to the Closing Date of each of the following conditions: (a) REPRESENTATIONS AND WARRANTIES. The representations and warranties of CSL and CLJ set forth in this Agreement shall be true and correct as of the date of this Agreement and as of the Closing Date, provided, however, that such representations and warranties shall be deemed to be true and correct unless the failure or failures of such representations and warranties to be so true and correct, without regard to any materiality qualifiers contained therein, individually or in the aggregate, results or could reasonably be likely to result in a Material Adverse Effect. (b) COVENANTS. CLJ and CSL shall have complied in all material respects with their obligations under the terms of this Agreement. (c) ESTOPPEL CERTIFICATES. SNH shall have received estoppel certificates dated within sixty (60) days of the Closing Date executed by (i) each lender holding a Mortgage Loan, the lessor under the Ground Lease and each lessor under a Capital Lease, which shall specify the principal and interest balance outstanding and/or future rent(s), the amount of the Mortgage Reserves and other reserves held by such lender or lessor, and the date of the most recent payment thereunder, the prepayment premium (for the GMAC Mortgage Loans only), if any, and shall confirm whether a notice of default has been sent to the applicable borrower or lessee, and shall otherwise be in a form reasonably acceptable to SNH; and (ii) MI and/or MSLS with respect to each of the Operating Agreements, which shall specify the FF&E Reserves balance as of the end of the 2001 fiscal year and amounts due for owner funded capital expenditures for the 2001 fiscal year and the capital expenditures budget (including separately, those expenditures expected to be paid from the FF&E Reserve and those expected to be paid by owners) for the 2002 fiscal year, and shall confirm whether a notice of default has been sent to the applicable Acquired Company, and shall otherwise be in a form reasonably acceptable to SNH. (d) TITLE INSURANCE; ABSENCE OF LIENS. The Title Company shall be prepared, subject only to payment of the applicable premiums, to issue title insurance policies, or endorsements thereto, to the Acquired Companies, insuring title to the Properties is vested in the Acquired Companies, pursuant to ALTA title insurance policies in form and substance reasonably satisfactory to SNH, subject only to the Permitted Liens, or such other exceptions as may be approved by SNH. No Liens shall exist on any Assets (including the CSL Stock, the CCC Boynton Stock and the CCC Senior Living Stock), except for Permitted Liens and Liens disclosed in SECTIONS 2.1 or 3.12(b) of the Disclosure Schedule, and the CSL Subsidiaries that guarantied the Bankers Trust Line shall have been released as guarantors thereunder. (e) OPERATING AGREEMENTS. The Operating Agreements shall be in full force and effect on the Closing Date, the FF&E Reserves shall have been fully funded -37- through the Closing Date as required by the Operating Agreements, Working Capital shall have been maintained in a manner consistent with past practice and shall be at customary levels on the Closing Date and all amounts due MI/MSLS with respect to any of the Properties, whether arising under the Operating Agreements or otherwise, shall have been paid in full on the Closing Date. (f) MORTGAGE RESERVES. The Mortgage Reserves shall have been fully funded through the Closing Date as required by the Mortgage Loans and the Capitalized Leases. (g) CONVERSION OF CERTAIN ACQUIRED COMPANIES. Not later than two Business Days prior to the Closing Date (and in any event prior to the closing of the New Loan) each of the Acquired Companies listed in SECTION 5.6 of the Disclosure Schedule shall have been reorganized as a business trust organized under the laws of the State of Maryland (or, subject to the proviso to the first sentence of SECTION 5.6, a Delaware limited liability company) in accordance with SECTION 5.6. (h) CLOSING OF NEW LOAN. The New Loan shall have closed, and New Loan proceeds of not less than $150,000,000 and not more than $175,000,000 (before reduction for all transaction expenses associated with the New Loan) shall have been disbursed to one or more of the Acquired Companies, not later than two Business Days prior to the Closing Date. (i) DIVIDENDS; DISTRIBUTIONS. The Acquired Companies shall have declared and paid dividends and/or made distributions to CLJ in an aggregate amount equal to the proceeds (after reduction for all transaction expenses associated with the New Loan) of the New Loan not later than one Business Day prior to the Closing Date. (j) PRIOR TAX MATTERS AGREEMENTS. MI, MSLS, HMC and Host Marriott L.P., as the case may be, shall have consented to the assignment by CLJ of certain of its rights under the Prior Tax Matters Agreements to SNH pursuant to the Tax Allocation Agreement and shall have confirmed the Prior Tax Matters Agreements are in force and effect. (k) WOODLANDS. The limited partnership interests in Panther Holdings Level I, L. P., a Delaware limited partnership ("PANTHER HOLDINGS") that are not owned by an Acquired Company on the date hereof shall either have been acquired by an Acquired Company prior to the Closing Date, or CLJ shall have entered into an agreement with SNH in form reasonably acceptable to SNH pursuant to which CLJ shall agree to indemnify SNH for 50% of the actual costs incurred by SNH or its Affiliates after the Closing Date to purchase or redeem such limited partnership interests in Panther Holdings; provided that CLJ's obligation to pay such costs shall be limited to $250,000. (l) GABLES. CLJ shall have either paid the Contingent Purchase Price payable under Section 1.2.3 of the Agreement for Purchase and Sale for the Community known as Gables of Winchester dated as of December 10, 1997 on or prior to the Closing Date, or CLJ shall have entered into an agreement with SNH in form reasonably -38- acceptable to SNH pursuant to which CLJ shall agree to indemnify SNH for any amounts payable or paid by SNH or its Affiliates after the Closing Date pursuant to such provision. (m) CERTAIN RESIGNATIONS. The existing officers, directors and managers of each of the Acquired Companies shall have resigned effective as of the Closing Date (provided that any "independent" manager or director of any Acquired Company will only be required to resign if s/he is replaced with another qualified "independent" manager or director). (n) CERTIFICATE. SNH shall have received a certificate signed on behalf of CLJ and CSL by their respective chief executive officers and chief financial officers certifying to the fulfillment of the conditions set forth above in this SECTION 6.3. (o) OPINION OF COUNSEL. SNH shall have received an opinion of Arnold & Porter, counsel to CLJ, in form and substance reasonably acceptable to SNH. SECTION 7. NATURE AND SURVIVAL OF REPRESENTATIONS AND WARRANTIES; INDEMNIFICATIONS; TAX MATTERS 7.1. SURVIVAL OF REPRESENTATIONS, WARRANTIES, ETC. All representations and warranties of the parties set forth in this Agreement, and the rights of the parties to seek indemnification with respect thereto, shall survive the Closing. Such representations and warranties, and the rights of the parties to seek indemnification with respect thereto, shall expire, except with respect to claims asserted prior to and pending at the time of expiration, twelve (12) months following the Closing provided that the representations and warranties contained in SECTIONS 3.1, 3.2, 3.3 and 3.4 shall survive indefinitely (or if indefinite survival is not permitted by law, then for the maximum period permitted by applicable law) and provided further that the representations and warranties contained in SECTIONS 3.13 and 3.19 shall survive until the expiration of the applicable statute of limitations (including any waivers or extensions thereof). All such representations and warranties shall be deemed to have been given and made on the date hereof and as of the Closing Date. 7.2. CLJ'S AGREEMENT TO INDEMNIFY. (a) Subject to SECTION 7.1, CLJ shall defend, indemnify and hold harmless SNH, its Affiliates and their respective officers, trustees, employees and agents (the "SNH INDEMNITEE"), from and against and in respect of any and all losses, damages, liabilities, deficiencies, taxes, costs and expenses including, without limitation, interest, penalties, and reasonable attorney's fees and expenses (collectively, "LOSSES"), asserted against, relating to, imposed upon or incurred by the SNH Indemnitee resulting from, arising out of, or in connection with: (i) any breach by CLJ or CSL of any of their respective representations or warranties contained in this Agreement; (ii) any breach by CLJ or CSL of any of their respective covenants, agreements or obligations contained in -39- this Agreement and (iii) any and all actions, suits, proceedings, claims, demands, assessments and judgments incident to any of the foregoing. (b) Anything in this SECTION 7 to the contrary notwithstanding: (i) no amounts of indemnity shall be payable as a result of a claim, unless and until the SNH Indemnitee has suffered, incurred, sustained or become subject to Losses with respect thereto in excess of $500,000 in the aggregate, and (ii) the indemnification obligations of CLJ in respect of the Losses indemnified against shall not exceed the Purchase Price. 7.3. SNH'S AGREEMENT TO INDEMNIFY. (a) Subject to SECTION 7.1, SNH shall defend, indemnify and hold harmless CLJ, its Affiliates and their respective, officers, directors, employees and agents (the "CLJ INDEMNITEE"), against and in respect of any Losses resulting from: (i) any breach by SNH of any of its representations or warranties contained in this Agreement; (ii) any breach by SNH of any of its covenants, agreements or obligations contained in this Agreement and (iii) any and all actions, suits, proceedings, claims, demands, assessments and judgments incident to any of the foregoing. (b) Anything in this SECTION 7 to the contrary notwithstanding, no amounts of indemnity shall be payable as a result of a claim, unless and until the CLJ Indemnitee has suffered, incurred, sustained or become subject to Losses with respect thereto in excess of $500,000 in the aggregate. 7.4. THIRD PARTY CLAIMS. (a) Promptly after the receipt by any party hereto of notice of any claim, action, suit or proceeding of any third party which is subject to indemnification hereunder, such party ("INDEMNIFIED PARTY") shall give written notice of such claim to the party obligated to provide indemnification hereunder ("INDEMNIFYING Party"), stating the nature and basis of such claim and the amount thereof, to the extent known. Failure of the Indemnified Party to give such notice shall not relieve the Indemnifying Party from any liability which it may have on account of its indemnification obligation or otherwise, except to the extent that the Indemnifying Party is materially prejudiced thereby. (b) The Indemnifying Party shall be entitled to elect to participate in the defense of and, if it so chooses, to assume the defense of such claim, action, suit or proceeding with counsel selected by the Indemnifying Party and reasonably satisfactory to the Indemnified Party. Upon any such election by the Indemnifying Party to assume the defense of such claim, action, suit or proceeding, the Indemnifying Party shall not be liable for any legal or other expenses subsequently incurred by the Indemnified Party in connection with the defense thereof, PROVIDED, HOWEVER, that (i) if the Indemnified Party shall have reasonably concluded that separate counsel is required because a conflict of interest would otherwise exist, then the Indemnified Party shall have the right to select separate counsel to participate in the defense of such action on its behalf, at the expense of the Indemnifying Party and (ii) the Indemnified Party may, at its option and at its own expense, participate in such defense and employ counsel separate from the counsel -40- employed by the Indemnifying Party. The Indemnifying Party shall be liable for the reasonable fees and expenses of counsel employed by the Indemnified Party for any period in which the Indemnifying Party has not assumed the defense thereof (other than during any period in which the Indemnified Party failed to give the notice provided above). The parties shall use commercially reasonable efforts to minimize Losses from claims by third parties and shall act in good faith in responding to, defending against, settling or otherwise dealing with such claims, notwithstanding any dispute as to liability as between the parties under this SECTION 7. The parties shall also cooperate in any such defense, give each other full access to all non-privileged information relevant thereto and make employees and other representatives available on a mutually convenient basis to provide additional information and explanation of any material provided hereunder. Whether or not the Indemnifying Party shall have assumed the defense, the Indemnifying Party shall not be obligated to indemnify the Indemnified Party hereunder for any settlement entered into without the Indemnifying Party's prior written consent, which consent shall not be unreasonably withheld or delayed. Unless the sole relief is monetary damages which are payable in full by the Indemnifying Party, the Indemnifying Party shall not settle any claim without the prior written consent of the Indemnified Party, which consent shall not be unreasonably withheld or delayed. 7.5. PURCHASE PRICE ADJUSTMENT. Any amount paid by CLJ on the one hand, or SNH on the other hand, to the other pursuant to this SECTION 7 will be treated for federal income tax purposes as an adjustment to the Purchase Price. SECTION 8. TERMINATION 8.1. TERMINATION. This Agreement may be terminated at any time (subject to the provisions of this SECTION 8.1) prior to the Closing Date: (a) by mutual agreement of CLJ and SNH; (b) by either SNH or CLJ, in writing, if for any reason (other than a default by the noticing Party) the Closing has not occurred by June 30, 2002, except that no Party shall have the right to terminate under this SECTION 8.1(b) if the conditions precedent to such Party's obligation to close have been or at Closing would be satisfied or have been waived by such Party and such Party has nonetheless failed or refused to close; (c) by either SNH or CLJ in writing, if there shall be any order, writ, injunction or decree of any court or governmental or regulatory agency binding on SNH and/or CSL or CLJ, which prohibits or restrains SNH and/or CSL or CLJ from consummating the transactions contemplated by this Agreement, provided that SNH and CSL and CLJ shall have used their commercially reasonable efforts to have any such -41- order, writ, injunction or decree lifted and the same shall not have been lifted within 90 days after entry, by any such court or governmental or regulatory agency; (d) by CLJ in writing: (i) if the conditions set forth in SECTIONS 6.1 and 6.2 shall not have been complied with or performed and such noncompliance or nonperformance shall not have been cured or eliminated (or by its nature cannot be cured or eliminated) by SNH or otherwise by June 30, 2002; (ii) if, by September 15, 2001, HPT shall not have agreed, subject to the occurrence of the Closing, to satisfy the condition contained in SECTION 6.2(b) pursuant to an amendment acceptable to each of HPT and CLJ; (iii) if SNH shall have (i) failed to perform in any material respect its agreements contained in this Agreement required to be performed by it on or prior to the Closing Date or (ii) breached any of its representations or warranties contained in this Agreement, provided that the breach of such representations or warranties, without regard to any materiality qualifiers contained therein, individually or in the aggregate, results or could reasonably be likely to result in a material adverse effect on the ability of SNH or ACQ. SUB to consummate the transactions contemplated by this Agreement; (e) by SNH in writing: (i) pursuant to SECTION 5.2, SECTION 5.3 or SECTION 5.4; (ii) the conditions set forth in SECTIONS 6.1 and 6.3 shall not have been complied with or performed and such noncompliance or nonperformance shall not have been cured or eliminated (or by its nature cannot be cured or eliminated) by CLJ or otherwise by June 30, 2002; (iii) if CSL or CLJ shall have (i) failed to perform in any material respect its agreements contained in this Agreement required to be performed by it on or prior to the Closing Date, or (ii) breached any of its representations or warranties contained in this Agreement, provided that the breach of such representations or warranties, without regard to any materiality qualifiers contained therein, individually or in the aggregate, results or could reasonably be likely to result in a Material Adverse Effect; or (f) by either SNH or CLJ, in writing, (i) at any time following the rejection of this transaction by CLJ's shareholders or (ii) if CLJ accepts an Alternative Proposal. -42- 8.2. EFFECT OF TERMINATION. (a) If this Agreement is terminated by either SNH or CLJ pursuant to SECTION 8.1, this Agreement shall become void and there shall be no further obligation on the part of any of SNH, CSL or CLJ (except for the provisions of SECTION 9.6 and as set forth in this SECTION 8.2, which shall survive such termination). (b) If this Agreement is terminated by either SNH or CLJ pursuant to SECTION 8.1, except as provided in SECTION 8.2(g), the Deposit shall be paid to SNH. (c) If CLJ or SNH terminates this Agreement because, on or prior to December 14, 2001, CLJ's shareholders have rejected this transaction at a meeting of stockholders called to approve this transaction, CLJ shall immediately pay to SNH $7,500,000 by wire transfer of immediately available funds to an account designated by SNH. If thereafter CSL or substantially all of the Assets are sold or contracted for sale to a third party on or before August 9, 2003, then, on the date of the closing of such sale, CLJ will pay SNH an additional $7,500,000. (d) If CLJ or SNH terminates this Agreement because, after December 14, 2001, CLJ's shareholders have rejected this transaction at a meeting of stockholders called to approve this transaction, CLJ shall immediately pay to SNH $15,000,000 by wire transfer of immediately available funds to an account designated by SNH. (e) If CLJ or SNH terminates this Agreement because CLJ accepts an Alternative Proposal, CLJ shall immediately pay SNH $15,000,000 by wire transfer of immediately available funds to an account designated by SNH. (f) If SNH terminates this Agreement because any of the conditions set forth in SECTIONS 6.1 or 6.3 shall not have been complied with as a result of the willful acts or omissions of CLJ or an Acquired Company, CLJ shall immediately pay SNH a fee of $15,000,000 by wire transfer of immediately available funds to an account designated by SNH. (g) If CLJ terminates this Agreement because any of the conditions set forth in SECTIONS 6.1 or 6.2 shall not have been complied with as a result of the willful acts or omissions of SNH or if SNH fails to close because it does not have sufficient funds to pay the Purchase Price (other than as a result of the failure to obtain or close the New Loan), the Deposit shall be paid to CLJ and SNH shall immediately pay CLJ an amount by wire transfer of immediately available funds to an account designated by CLJ which, together with the Deposit, represents a fee of $15,000,000. -43- SECTION 9. MISCELLANEOUS PROVISIONS 9.1. NOTICES. Except where oral notice is specifically provided for herein, all notices, communications and deliveries required or permitted by this Agreement shall be made in writing signed by the Party making the same, shall specify the Section of this Agreement pursuant to which it is given or being made, and shall be deemed given or made (i) on the date delivered if delivered by telecopy or in person, (ii) on the third Business Day after it is mailed if mailed by registered or certified mail (return receipt requested) (with postage and other fees prepaid), or (iii) on the day after it is delivered, prepaid, to an overnight express delivery service that confirms to the sender delivery on such day, as follows: To SNH: Senior Housing Properties Trust 400 Centre Street Newton, Massachusetts 02458 Attn: David J. Hegarty, President and Chief Operating Officer Telecopy No.: (617) 796-8349 with a copy to (which shall not constitute notice): Sullivan & Worcester LLP One Post Office Square Boston, Massachusetts 02109 Attn: Richard Teller Telecopy No.: (617) 338-2880 -44- To CSL or CLJ: c/o Crestline Capital Corporation 6600 Rockledge Drive, Suite 600 Bethesda, Maryland 20817 Attn: Tracy M. J. Colden, Senior Vice President and General Counsel Telecopy No.: (240) 694-2040 with a copy to (which shall not constitute notice): c/o Crestline Capital Corporation 6600 Rockledge Drive, Suite 600 Bethesda, Maryland 20817 Attn: Larry K. Harvey, Senior Vice President and Treasurer Telecopy No.: (240) 694-2286 or to such other representative or at such other address of a Party as such Party may furnish to the other Party by notice similarly given. 9.2. SCHEDULES AND EXHIBITS. The Schedules, Exhibits and all documents expressly referred to in this Agreement, are incorporated into this Agreement and are made a part of this Agreement as if set out in full. 9.3. COMPUTATION OF TIME. Whenever the last day for the exercise of any privilege or the discharge of any duty under this Agreement shall fall upon a day other than a Business Day, the Party having such privilege or duty may exercise such privilege or discharge such duty on the next succeeding day which is a regular Business Day. 9.4. ASSIGNMENT: SUCCESSORS IN INTEREST. No assignment or transfer by SNH, CSL or CLJ, of its rights and obligations under this Agreement prior to the Closing shall be made except with the prior written consent of the other Party. This Agreement shall be binding upon and shall inure to the benefit of the Parties and their permitted successors and assigns, and any reference to a Party shall also be a reference to a permitted successor or assign. 9.5. NO THIRD-PARTY BENEFICIARIES. With the exception of the Parties, there shall exist no right of any person, including, without limitation, creditors of CSL or CLJ, to claim a beneficial interest in this Agreement or any rights occurring by virtue of this Agreement. -45- 9.6. EXPENSES. Except as otherwise provided below, CLJ (for itself and CSL) and SNH (for itself and ACQ. SUB) shall each pay their own attorneys', accountants' and other advisors' fees and costs, costs of internal personnel and filing fees charged by a governmental authority with respect to filings made by such Party in connection with the transactions contemplated by this Agreement. SNH shall pay: (i) the GMAC Fee and all other fees and expenses incurred in connection with the assumption or termination of the GMAC Mortgage Loans; (ii) all costs for Permits relating to healthcare licensing of the Communities arising out of the transactions contemplated by this Agreement (which shall not include costs incurred in connection with such Permits not being in full force and effect as of the date of this Agreement, which costs shall be paid by CLJ); (iii) all fees and costs (including any Transfer Taxes) incurred in connection with the conversion of any Subsidiaries pursuant to SECTION 5.6 or in connection with the New Loan (without duplication for amounts by which the Purchase Price is increased pursuant to SECTION 2.3(a)(b)(B)) or as required in connection with the GMAC Mortgage Loans; (iv) the cost of any "Earnings and Profits" analysis; and (v) any prepayment penalty or fee, or other fees and costs incurred in connection with the prepayment of the Nomura Mortgage Loan. All other costs associated with the transactions contemplated by this Agreement and not paid for as provided above in this SECTION 9.6, including, without limitation, filing fees paid in connection with filings under the HSR Act, Transfer Taxes, title insurance premiums, costs of surveys and environmental reports, any fees or costs paid to obtain the Consent of any Person (whether or not listed in SECTION 6.1(c) of the Disclosure Schedule), and the fees and costs incurred in connection with preparing audited financial statements pursuant to SECTION 3.8(b) of this Agreement, shall be paid one-half by SNH and one-half by CLJ, provided that fees paid to obtain the Consent of any Person (other than the GMAC Fee) including without limitation, any fees paid or costs incurred in connection with the matters set forth in SECTIONS 5.7(f) and 6.3(k), but excluding fees paid by either SNH or CLJ and referred to in SECTION 6.2(b) shall not be incurred by either Party (if included as a fee or cost to be paid under this sentence) without the consent of the other, such consent not to be unreasonably withheld. 9.7. INVESTIGATIONS. The respective representations and warranties of CSL, CLJ and SNH contained in this Agreement or in any Schedule, certificate, or other document delivered by any Party prior to Closing shall not be deemed waived or otherwise affected by any investigation made by a Party. 9.8. NUMBER; GENDER. Whenever the context so requires, the singular number shall include the plural and the plural shall include the singular, and the gender of any pronoun shall include the other genders. 9.9. CAPTIONS. The titles, captions and table of contents contained in this Agreement are inserted in this Agreement only as a matter of convenience and for reference and in no way define, limit, extend or describe the scope of this Agreement or the intent of any provision of this Agreement. Unless otherwise specified to the contrary, all references to Sections are references to Sections of this -46- Agreement and all references to Schedules and Exhibits are references to Schedules and Exhibits to this Agreement. 9.10. AMENDMENTS. To the extent permitted by Law, this Agreement may be amended by a subsequent writing signed by all of the Parties upon the approval of the general partner, board of directors or board of trustees, as the case may be, of each of the Parties. 9.11. INTEGRATION: WAIVER. This Agreement supersedes all negotiations, agreements and understandings among the Parties with respect to the subject matter of this Agreement (except (i) the, Confidentiality Agreement among CLJ, SNH, HPT and HRPT Properties Trust dated December 5, 2000, as amended by a letter dated July 31, 2001 and (ii) by a Confidentiality Agreement dated as of February 20, 2001 between SNH and CLJ, each of which shall continue in full force and effect) and constitutes the entire agreement among the Parties. The failure of any Party at any time or times to require performance of any provisions of this Agreement shall in no manner affect the right to enforce the same. No waiver by any Party of any conditions, or of the breach of any term, provision, warranty, representation, agreement or covenant contained in this Agreement, whether by conduct or otherwise, in any one or more instances shall be deemed or construed as a further or continuing waiver of any such condition or breach of any other term, provision, warranty, representation, agreement or covenant contained in this Agreement. 9.12. GOVERNING LAW. This Agreement is to be construed and enforced in accordance with, and the rights of the parties shall be governed by, the law of the State of Maryland (without giving effect to any laws or rules relating to conflicts of laws that would cause the application of the laws of any jurisdiction other than the State of Maryland). 9.13. CONSENT TO JURISDICTION. To the extent permitted by applicable Law, the Parties absolutely and irrevocably consent and submit to the nonexclusive jurisdiction of the courts of the State of Maryland and of any federal court located in said jurisdiction in connection with any actions or proceedings brought against a Party by any other Party arising out of or relating to the transactions contemplated by this agreement and hereby irrevocably agrees that all claims in respect of any such action or proceeding may be heard and determined in any such court. Each Party hereby waives and agrees not to assert in any such action or proceeding, in each case, to the fullest extent permitted by applicable Law, any claim that (a) it is not personally subject to the jurisdiction of any such court, (b) it is immune from any legal process (whether through service or notice, attachment prior to judgment, attachment in aid of execution, execution or otherwise) with respect to it or its property, or (c) any such suit, action or proceeding is brought in an inconvenient forum in any such action or proceeding. To the fullest extent permitted by applicable Law, each Party hereby absolutely and irrevocably waives trial by jury. -47- 9.14. SEVERABILITY. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction will, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions of this Agreement, and any such prohibition or unenforceability in any jurisdiction will not invalidate or render unenforceable such provision in any other jurisdiction. To the extent permitted by Law, the Parties waive any provision of law which renders any such provision prohibited or unenforceable in any respect. 9.15. COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original and all of which shall together be considered one and the same agreement, and it shall not be necessary in making proof of this Agreement or the terms of this Agreement to produce or account for more than one of such counterparts. 9.16. SNH LIMITATION OF LIABILITY. The Declaration of Trust of SNH, a copy of which is duly filed with the Department of Assessments and Taxation of the State of Maryland, provides that the name "Senior Housing Properties Trust" refers to the trustees under such Declaration of Trust collectively as trustees, but not individually or personally, and that no trustee, officer, shareholder, employee or agent of SNH shall be held to any personal liability, jointly or severally, for any obligation of, or claim against, SNH. All persons dealing with SNH in any way shall look only to the assets of SNH for the payment of any sum or the performance of any obligation. 9.17. ACQ. SUB LIMITATION OF LIABILITY. The Declaration of Trust of ACQ. SUB, a copy of which is duly filed with the Department of Assessments and Taxation of the State of Maryland, provides that the name "SNH/CSL Properties Trust" refers to the trustees under such Declaration of Trust collectively as trustees, but not individually or personally, and that no trustee, officer, shareholder, employee or agent of ACQ. SUB shall be held to any personal liability, jointly or severally, for any obligation of, or claim against, ACQ. SUB. All persons dealing with ACQ. SUB in any way shall look only to the assets of ACQ. SUB for the payment of any sum or the performance of any obligation 9.18. CLJ LIMITATION OF LIABILITY. No director, officer, shareholder, employee or agent of CLJ shall be held to any personal liability, jointly or severally, for any obligation of, or claim against, CLJ or its Subsidiaries hereunder. All persons dealing with CLJ in any way shall look only to the assets of CLJ for the payment of any sum or the performance of any obligation. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] -48- EXECUTED under seal as of the date first above written. SENIOR HOUSING PROPERTIES TRUST By: /s/ David J. Hegarty -------------------------------------------------- Name: David J. Hegarty Title: President SNH/CSL PROPERTIES TRUST By: /s/ David J. Hegarty -------------------------------------------------- Name: David J. Hegarty Title: President -49- CSL GROUP, INC. By: /s/ James L. Francis -------------------------------------------------- Name: James L. Francis Title: President CRESTLINE CAPITAL CORPORATION By: /s/ Bruce D. Wardinski -------------------------------------------------- Name: Bruce D. Wardinski Title: Chief Executive Officer and President -50- EXHIBIT A COMMUNITIES
-------------------------------------------------------------------- PROPERTY STATE -------------------------------------------------------------------- 1 Forum at Memorial Woods Texas -------------------------------------------------------------------- 2 Forum at Tucson Arizona -------------------------------------------------------------------- 3 Forum at Brookside Kentucky -------------------------------------------------------------------- 4 Forum at Overland Park Kansas -------------------------------------------------------------------- 5 Forum at Desert Harbor Arizona -------------------------------------------------------------------- 6 Forum at Park Lane Texas -------------------------------------------------------------------- 7 Forum at Deer Creek Florida -------------------------------------------------------------------- 8 Foulk Manor South Delaware -------------------------------------------------------------------- 9 Tiffany House Florida -------------------------------------------------------------------- 10 Fountainview Florida -------------------------------------------------------------------- 11 Coral Oaks Florida -------------------------------------------------------------------- 12 Springwood Court Florida -------------------------------------------------------------------- 13 Lafayette at Country Place Kentucky -------------------------------------------------------------------- 14 Lexington at Country Place Kentucky -------------------------------------------------------------------- 15 The Forum at Knightsbridge Ohio -------------------------------------------------------------------- 16 The Forum at Pueblo Norte Arizona -------------------------------------------------------------------- 17 The Forum at the Crossing Indiana -------------------------------------------------------------------- 18 Forwood Manor Delaware -------------------------------------------------------------------- 19 Remington Club I California -------------------------------------------------------------------- 20 Remington Club II California -------------------------------------------------------------------- 21 The Montebello on Academy New Mexico -------------------------------------------------------------------- 22 Foulk Manor North Delaware -------------------------------------------------------------------- 23 Millcroft Delaware -------------------------------------------------------------------- 24 Shipley Manor Delaware -------------------------------------------------------------------- 25 Park Summit at Coral Springs Florida -------------------------------------------------------------------- 26 The Montevista at Coronado Texas -------------------------------------------------------------------- 27 Myrtle Beach Manor South Carolina -------------------------------------------------------------------- 28 The Forum at Lincoln Heights Texas -------------------------------------------------------------------- 29 Leisure Park New Jersey -------------------------------------------------------------------- 30 The Gables at Winchester Massachusetts -------------------------------------------------------------------- 31 Forum at Woodlands Texas -------------------------------------------------------------------- 32 Boynton Beach Florida --------------------------------------------------------------------
EXHIBIT B ESCROW AGREEMENT THIS ESCROW AGREEMENT (this "Escrow Agreement") is made as of August 9, 2001 by and among Senior Properties Housing Trust ("SNH"), Crestline Capital Corporation ("CLJ"), and American Title Company (the "Escrow Agent"). R E C I T A L: SNH and CLJ have entered into a Stock Purchase Agreement (the "Agreement") dated as of August 9, 2001, an executed copy of which has been provided to the Escrow Agent, pursuant to which, INTER ALIA, SNH/CLS Properties Trust will acquire certain assets of CLJ on the terms and conditions set forth in the Agreement. Pursuant to the Agreement, SNH has agreed to deposit $7,500,000 into escrow upon execution of this Escrow Agreement subject to the terms and conditions set forth in the Agreement and in this Escrow Agreement. NOW, THEREFORE, the parties agree as follows: SECTION 1. DEFINED TERMS. Terms not otherwise defined herein shall have the respective meanings prescribed therefor in the Agreement. The following terms are defined in this Escrow Agreement: "Bank" is Bank One, N.A.. "Escrow Fund" is defined in Section 3 of this Escrow Agreement. SECTION 2. APPOINTMENT OF ESCROW AGENT. SNH and CLJ hereby appoint the Escrow Agent as the escrow agent to hold the Escrow Fund in accordance with the terms and conditions of this Escrow Agreement. SECTION 3. DELIVERY AND RECEIPT OF FUNDS. Simultaneously with the execution of this Escrow Agreement, SNH shall deliver to the Escrow Agent the sum of $7,500,000 in immediately available funds by wire transfer. The Escrow Agent shall open an escrow account in the name of the Escrow Agent at the Bank and shall deposit into such account such immediately available funds. The amount so deposited, including accrued interest thereon, is referred to as the "Escrow Fund." Receipt of the Escrow Fund from SNH is hereby acknowledged by the Escrow Agent. SECTION 4. INVESTMENT OF ESCROW FUND. Until distributed and released in accordance with the terms and conditions of this Escrow Agreement, the Escrow Agent shall invest the Escrow Fund in a so-called "money market" deposit fund with the Bank or in such other liquid, investment grade securities as may be specified in writing by SNH and CLJ (CLJ's consent to SNH's choice of investment shall not be unreasonably withheld). The parties must furnish any form W-9 and any authorization to invest required by Bank. SECTION 5. RELEASE OF ESCROW FUND. (a) Upon receipt of joint written notice from SNH and CLJ, Escrow Agent shall release all or such portion of the Escrow Fund as directed in such notice. (b) Upon receipt of written notice from SNH that the Agreement has been terminated pursuant to Section 8.1 of the Agreement and not pursuant to Section 8.2(f) of the Agreement, the Escrow Agent shall distribute and release the Escrow Fund to SNH in accordance with wire transfer information contained in the notice. (c) Upon receipt of written notice from CLJ that the Agreement has been terminated pursuant to Section 8.2(f) of the Agreement, the Escrow Agent shall distribute and release the Escrow Fund to CLJ in accordance with wire transfer information contained in the notice. (d) Upon receipt of written notice from SNH directing Escrow Agent to release all or a portion of the Escrow Fund to CLJ, Escrow Agent shall release all or such portion of the Escrow Fund to CLJ as so directed. Any notice given pursuant to this Section 5 shall contain a certification by the sending party that a copy of such notice has been concurrently sent to the other party. On the later of the second business day (by 2:00 PM, Eastern Standard Time) after receipt of the notice from the sending party or the date specified in the notice, provided that the Escrow Agent shall not have received a contrary instruction (by 2:00 PM, Eastern Standard Time on the later of the second business day after receipt of the notice from the sending party or the date specified in the notice) from the other party, the Escrow Agent shall deliver the Escrow Fund to the party so specified. If the Escrow Agent has received such a contrary instruction, it shall release the Escrow Fund only pursuant to a joint direction in writing of SNH and CLJ or pursuant to the decision of a court of competent jurisdiction. Upon distribution and release of the Escrow Fund, this Escrow Agreement shall be deemed terminated and the Escrow Agent shall be released and discharged from all further obligations hereunder. SECTION 6. DUTIES OF ESCROW AGENT. The acceptance by the Escrow Agent of its duties as such under this Escrow Agreement is subject to the following terms and conditions, which SNH and CLJ hereby agree shall govern and control with respect to the rights, duties, liabilities and immunities of the Escrow Agent: (a) The Escrow Agent acts hereunder as a depositary only, and is not responsible or liable in any manner whatever for any investment made pursuant to the provisions of Section 4 or any failure, refusal or inability of the Bank to release or make payment pursuant to the Escrow Agent's direction of said Escrow Fund, including by reason of insolvency or bankruptcy of the Bank. -2- (b) The Escrow Agent shall not be liable for acting upon any written notice, request, waiver, consent, receipt or other instrument or document which the Escrow Agent in good faith believes to be genuine and what it purports to be. (c) It is understood and agreed that the duties of the Escrow Agent hereunder are purely ministerial in nature and that it shall not be liable for any error of judgment, fact or law, or any act done or omitted to be done, except for its own willful misconduct, breach of fiduciary duty, bad faith or gross negligence or that of its officers, directors, employees and agents. The Escrow Agent's determination as to whether an event or condition has occurred, or been met or satisfied, or as to whether a provision of this Escrow Agreement has been complied with, or as to whether sufficient evidence of the event or condition or compliance with the provision has been furnished to it, shall not subject the Escrow Agent to any claim, liability or obligation whatsoever, even if it shall be found that such determination was improper and incorrect, provided, only, that the Escrow Agent and its officers, directors, employees and agents shall not have been guilty of willful misconduct, breach of fiduciary duty, bad faith or gross negligence in making such determination. (d) The Escrow Agent may consult with, and obtain advice from, legal counsel including its own officers, employees and partners in the event of any dispute or question as to the construction of any of the provisions hereof or its duties hereunder, and it shall incur no liability and shall be fully protected in acting in good faith in accordance with the opinion and instructions of such counsel. (e) In the event of any disagreement or lack of agreement between SNH and CLJ of which the Escrow Agent has knowledge, resulting or which might result in adverse claims or demands with respect to the Escrow Fund, the Escrow Agent shall be entitled, in its sole discretion, to refuse to comply with any claims or demands on it with respect thereto until such matter shall be resolved, and in so refusing, the Escrow Agent may elect to make no delivery or other disposition of the Escrow Fund, and in so doing the Escrow Agent shall not be or become liable in any way to either SNH or CLJ for its failure or refusal to comply with such claims or demands, and it shall be entitled to continue so to refrain from acting, and so to refuse to act, until all such claims or demands (i) shall have been finally determined by a court of competent jurisdiction, or (ii) shall have been resolved by the agreement of SNH and CLJ and the Escrow Agent shall have been notified thereof in writing. (f) The Escrow Agent may resign at any time upon giving ten (10) days' notice to SNH and CLJ and may appoint a successor escrow agent hereunder so long as such successor shall accept and agree to be bound by the terms of this Escrow Agreement and shall be acceptable to SNH and CLJ. It is understood and agreed that the Escrow Agent's resignation shall not be effective until a successor escrow agent agrees to be bound by the terms of this Escrow Agreement. SECTION 7. NO REPRESENTATIONS BY ESCROW AGENT. The Escrow Agent makes no representation as to the validity, value, genuineness, negotiability or collectibility of any security or other document or instrument held by or delivered to or by it. -3- SECTION 8. OBLIGATIONS OF ESCROW AGENT. The Escrow Agent shall be under no obligation to institute or defend any actions, suits or legal proceedings in connection herewith or take any other action likely to involve it in expense unless first indemnified to its reasonable satisfaction. SECTION 9. EXPENSES. The reasonable out-of-pocket expenses (including, without limitation, reasonable legal fees and disbursements) incurred by the Escrow Agent in the performance of its duties hereunder shall be reimbursed one-half by CLJ and one-half by SNH. Such reimbursement for out-of-pocket expenses shall be made by cash payment to the Escrow Agent from time to time upon its written request. The Escrow Agent shall have no right or lien with respect to the Escrow Fund for payment of such expenses. Except as otherwise herein or in the Agreement provided, each party shall pay its own expenses incident to the performance or enforcement of this Escrow Agreement, including all fees and expenses of its counsel for all activities of such counsel undertaken pursuant to this Escrow Agreement. All parties recognize that the cost to enforce or defend by Escrow Agent could be significant since the venue is Maryland and they agree to pay all costs that the Escrow Agent may so incur, including reasonable attorney's fees. SECTION 10. [Intentionally Omitted]. SECTION 11. ASSIGNMENT; SUCCESSORS AND ASSIGNS. This Escrow Agreement shall not be assignable by SNH or CLJ without the prior written consent of the other. Nothing in this Escrow Agreement expressed or implied is intended to or shall be construed to confer upon or create in any Person (other than the parties hereto and their permitted successors and assigns) any rights or remedies under or by reason of this Agreement, including without limitation any rights to enforce this Escrow Agreement. SECTION 12. SPECIFIC PERFORMANCE; OTHER RIGHTS AND REMEDIES. Each party recognizes and agrees that the other party's remedy at law for any breach of the provisions of this Escrow Agreement would be inadequate and agrees that for breach of such provisions, such party shall, in addition to such other remedies as may be available to it at law or in equity or as provided in this Escrow Agreement, be entitled to injunctive relief and to enforce its rights by an action for specific performance to the extent permitted by applicable law. Each party hereby waives any requirement for security or the posting of any bond or other surety in connection with any temporary or permanent award of injunctive, mandatory or other equitable relief. Nothing herein contained shall be construed as prohibiting either party from pursuing any other remedies available to it for such breach or threatened breach, including without limitation the recovery of damages. SECTION 13 ENTIRE AGREEMENT. This Escrow Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof and supersedes all prior agreements, arrangements, covenants, promises, conditions, understandings, inducements, representations and negotiations, expressed or implied, oral or written, between them as to such subject matter. SECTION 14. WAIVERS; AMENDMENTS. Anything in this Escrow Agreement to the contrary notwithstanding, amendments to and modifications of this Escrow Agreement may be made, required consents and approvals may be granted, compliance with any term, covenant, -4- agreement, condition or other provision set forth herein may be omitted or waived, either generally or in a particular instance and either retroactively or prospectively with, but only with, the written consent of the party entitled to the benefit thereof. SECTION 15. NOTICES. All notices and other communications which by any provision of this Escrow Agreement are required or permitted to be given shall be given in writing and shall be (a) sent by nationally recognized overnight courier service, (b) sent by facsimile confirmed by sending (by nationally recognized overnight courier service) written confirmation at substantially the same time, or (c) personally delivered to the receiving party. All such notices and communications shall be mailed, sent or delivered as follows: If to SNH, at: Senior Housing Properties Trust 400 Centre Street Newton, Massachusetts 02458 Attention: David J. Hegarty, President Facsimile: 617-796-8349 with a copy to (which shall not constitute notice): Sullivan & Worcester LLP One Post Office Square Boston, Massachusetts 02109 Attention: Richard Teller Facsimile: 617-338-2880 If to CLJ, at: c/o Crestline Capital Corporation. 6600 Rockledge Drive, Suite 600 Bethesda, Maryland 20817 Attn: Tracy M. J. Colden, Senior Vice President and General Counsel Facsimile: (240) 694-2040 with a copy to (which shall not constitute notice): c/o Crestline Capital Corporation. 6600 Rockledge Drive, Suite 600 Bethesda, Maryland 20817 Attn: Larry K. Harvey, Senior Vice President and Treasurer Facsimile: (240) 694-2286 -5- with a copy to (which shall not constitute notice): American Title Company (escrow agent) 6029 Belt Line Road Suite 250 Dallas, Texas 75254 Attn: Carole Badgett, Senior Vice President Facsimile (972) 789-8029 or to such other person(s) or facsimile number(s) or address(es) as the party to receive any such communication or notice may have designated by written notice to the other party. SECTION 16. SEVERABILITY. If any provision of this Escrow Agreement shall be held or deemed to be, or shall in fact be, invalid, inoperative, illegal or unenforceable as applied to any particular case in any jurisdiction or jurisdictions, or in all jurisdictions or in all cases, because of the conflicting of any provision with any constitution or statute or rule of public policy or for any other reason, such circumstance shall not have the effect of rendering the provision or provisions in question invalid, inoperative, illegal or unenforceable in any other jurisdiction or in any other case or circumstance or of rendering any other provision or provisions herein contained invalid, inoperative, illegal or unenforceable to the extent that such other provisions are not themselves actually in conflict with such constitution, statute or rule of public policy, but this Escrow Agreement shall be reformed and construed in any such jurisdiction or case as if such invalid, inoperative, illegal or unenforceable provision had never been contained herein and such provision reformed so that it would be valid, operative and enforceable to the maximum extent permitted in such jurisdiction or in such case. SECTION 17. COUNTERPARTS. This Escrow Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument, binding upon all the parties hereto. In pleading or proving any provision of this Escrow Agreement, it shall not be necessary to produce more than one of such counterparts. SECTION 18. SECTION HEADINGS. The headings contained in this Escrow Agreement are for reference purposes only and shall not in any way affect the meaning or interpretation of this Escrow Agreement. SECTION 19. GOVERNING LAW. This Escrow Agreement is to be construed and enforced in accordance with, and the rights of the parties shall be governed by, the laws of the State of Maryland (without giving effect to any laws or rules relating to conflicts of laws that would cause the application of the laws of any jurisdiction other than the State of Maryland). SECTION 20. CONSENT TO JURISDICTION. To the extent permitted by applicable law, the parties absolutely and irrevocably consent and submit to the nonexclusive jurisdiction of the courts of the State of Maryland and of any federal court located in said jurisdiction in connection with any actions or proceedings brought against a party by any other party arising out of or relating to this escrow agreement and hereby irrevocably agree that all claims in respect of any such action or proceeding may be heard and determined in any such court. Each party hereby waives and agrees not to assert in any such action or proceeding, in each case, to the fullest -6- extent permitted by applicable law, any claim that (a) it is not personally subject to the jurisdiction of any such court, (b) it is immune from any legal process (whether through service or notice, attachment prior to judgment, attachment in aid of execution, execution or otherwise) with respect to it or its property, or (c) any such suit, action or proceeding is brought in an inconvenient forum in any such action or proceeding. To the fullest extent permitted by applicable law, each party hereby absolutely and irrevocably waives trial by jury. SECTION 21. LIMITATION OF SNH LIABILITY. The Declaration of Trust of SNH, a copy of which is duly filed with the Department of Assessments and Taxation of the State of Maryland, provides that the name "Senior Housing Properties Trust" refers to the trustees under such Declaration of Trust collectively as trustees, but not individually or personally, and that no trustee, officer, shareholder, employee or agent of SNH shall be held to any personal liability, jointly or severally, for any obligation of, or claim against, SNH. All persons dealing with SNH in any way shall look only to the assets of SNH for the payment of any sum or the performance of any obligation. SECTION 22. LIMITATION OF CLJ LIABILITY. No director, officer, shareholder, employee or agent of CLJ shall be held to any personal liability, jointly or severally, for any obligation of, or claim against, CLJ or its Subsidiaries hereunder. All persons dealing with CLJ in any way shall look only to the assets of CLJ for the payment of any sum or the performance of any obligation. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] -7- IN WITNESS WHEREOF, the parties have caused this Agreement to be executed as a sealed instrument as of the date first above written. SENIOR HOUSING PROPERTIES TRUST By: ------------------------------------------------- CRESTLINE CAPITAL CORPORATION By: ------------------------------------------------- AMERICAN TITLE COMPANY, as Escrow Agent By: ------------------------------------------------- -8- EXHIBIT C PROMISSORY NOTE $25,000,000 [Closing Date] FOR VALUE RECEIVED, the undersigned, Senior Housing Properties Trust, a Maryland real estate investment trust ("SNH"), hereby promises to pay to the order of Crestline Capital Corporation, a Maryland corporation ("CLJ"), on or before the earlier of (i) January 31, 2004 and (ii) the date the indebtedness under a Loan Agreement dated as of September 1, 1995 by and among FGI Financing I Corporation, Forum Ohio HealthCare, Inc. and Nomura Asset Capital Corporation is repaid in full (the "Maturity Date"), the principal amount of Twenty-Five Million Dollars ($25,000,000) with interest (computed on the basis of a 360 day year and twelve 30 day months) on the unpaid principal hereof outstanding from time to time at the annual rate of 10% ("Interest"). In addition to all other rights contained in this promissory note (this "Note"), if any Event of Default (as defined herein) occurs and as long as an Event of Default continues, all obligations of SNH under this Note shall bear interest at the annual rate of Interest plus 3% ("Default Rate"). The Default Rate shall also apply from acceleration until the entire obligation or any judgment thereon is paid in full. Payments of principal of and interest on this Note shall be made to CLJ at 6600 Rockledge Drive, Suite 600, Bethesda, Maryland 20817, or to such other address as CLJ may direct by written notice to SNH. Payments of principal of and interest on this Note shall be made in lawful money of the United States of America. This Note will rank not less than pari passu in priority of payment with all other outstanding indebtedness for borrowed money of SNH, present or future, except indebtedness for borrowed money which is preferred as a result of being secured or as a matter of law. 1. PAYMENT. 1.1 PRINCIPAL AND INTEREST PAYMENT. Interest on this Note shall be payable by SNH in arrears in equal installments of ninety days' Interest on the last days of March, June, September and December each year. The principal of this Note shall be paid by SNH in its entirety, together with any interest accrued and unpaid thereon, on the Maturity Date. 1.2 PREPAYMENT. This Note may be prepaid in whole or in part at any time and from time to time without premium or penalty. -1- 1.3 APPLICATION OF PAYMENTS. All payments received on this Note shall be applied in the following order: first, to pay all costs of collection of the holder; then, to pay all accrued and unpaid Interest; and lastly to reduce the outstanding principal balance of the Note. 1.4 LATE CHARGE. If any payments are not timely made, SNH shall also pay a late charge equal to 5% of each payment past due for 15 or more days. 1.5 CERTIFICATE OF BORROWER. If at the time of any payment of Interest SNH does not have public stockholders, then together with such payment, SNH shall provide a certificate from its chief financial officer which states that no Event of Default (as defined below) has occurred. 2. DEFAULT. 2.1 EVENTS OF DEFAULT. If any of the following events (each an "Event of Default") shall have occurred: (a) SNH fails to pay any installment of Interest on this Note when the same shall become due and payable which failure continues for 5 days after notice from CLJ or fails to pay the principal of this Note when and as the same shall become due and payable; (b) SNH defaults in the payment of interest on or the principal of any indebtedness for borrowed money, the outstanding principal amount of which exceeds $10,000,000, beyond any period of grace provided with respect thereto; (c) The dissolution of, termination of existence of, appointment of a receiver for, assignment for the benefit of creditors of, or commencement of any bankruptcy or insolvency proceeding by or against SNH; or (d) The sale of substantially all of the business or assets of SNH or any merger or consolidation of SNH with or into another entity, where the purchaser or surviving entity has a net worth, determined in accordance with generally accepted accounting principles of less than $50,000,000, without the prior written consent of CLJ; then the unpaid balance of the principal of this Note, together with all interest accrued thereon shall become immediately due and payable without presentation, protest or notice of any kind. 2.2 WAIVER BY SNH. To the fullest extent permitted by applicable law, SNH hereby absolutely and irrevocably waives presentment, demand, notice, protest, and all other demands, notices and suretyship defenses generally, in connection with the delivery, acceptance, performance, default or enforcement of or under this Note. 2.3 COSTS AND EXPENSES OF COLLECTION. SNH covenants and agrees that if default be made in any payment of principal of or interest on this Note, it will pay to CLJ, such further amount as shall be sufficient to cover all costs and expenses of collection, including reasonable attorneys' fees. -2- 3. MISCELLANEOUS PROVISIONS. 3.1 GOVERNING LAW. This Note is to be construed and enforced in accordance with, and the rights of SNH and CLJ shall be governed by, the law of the State of Maryland (without giving effect to any laws or rules relating to conflicts of laws that would cause the application of the laws of any jurisdiction other than the State of Maryland). 3.2 NOTICES. All notices, communications and deliveries required or permitted by this Note shall be made in writing signed by the party making the same, shall be effective upon receipt and shall be delivered by telecopy, by hand, by registered or certified mail (return receipt requested) (with postage and other fees prepaid) or by an overnight express delivery service, as follows: To SNH: Senior Housing Properties Trust 400 Centre Street Newton, Massachusetts 02458 Attn: David J. Hegarty, President and Chief Operating Officer Telecopy No.: (617) 796-8349 with a copy to (which shall not constitute notice): Sullivan & Worcester LLP One Post Office Square Boston, Massachusetts 02109 Attn: Richard Teller Telecopy No.: (617) 338-2880 -3- To CLJ: c/o Crestline Capital Corporation 6600 Rockledge Drive, Suite 600 Bethesda, Maryland 20817 Attn: Tracy M. J. Colden, Senior Vice President and General Counsel Telecopy No.: (240) 694-2040 with a copy to (which shall not constitute notice): c/o Crestline Capital Corporation 6600 Rockledge Drive, Suite 600 Bethesda, Maryland 20817 Attn: Larry K. Harvey, Senior Vice President and Treasurer Telecopy No.: (240) 694-2286 or to such other representative or at such other address of a party as such party may furnish to the other party by notice similarly given. 3.3 SNH LIMITATION OF LIABILITY. The Declaration of Trust of SNH, a copy of which is duly filed with the Department of Assessments and Taxation of the State of Maryland, provides that the name "Senior Housing Properties Trust" refers to the trustees under such Declaration of Trust collectively as trustees, but not individually or personally, and that no trustee, officer, shareholder, employee or agent of SNH shall be held to any personal liability, jointly or severally, for any obligation of, or claim against, SNH. All persons dealing with SNH in any way shall look only to the assets of SNH for the payment of any sum or the performance of any obligation. EXECUTED under seal as of the date first above written. SENIOR HOUSING PROPERTIES TRUST By: -------------------------------------------------- -4- EXHIBIT D TAX ALLOCATION AGREEMENT TAX ALLOCATION AGREEMENT, dated as of _________, 2001, among Crestline Capital Corporation, a Maryland corporation, and any successor thereto ("CLJ"), Senior Housing Properties Trust, a Maryland real estate investment trust ("SNH"), CSL Group, Inc., an Indiana corporation, and any successor thereto ("CSL"), and their respective direct and indirect subsidiaries and affiliates. References herein to a "party" (or "parties") to this Agreement shall refer to CLJ, SNH, CSL, and where appropriate and the context so requires, their direct and indirect subsidiaries and affiliates. Any capitalized term not defined herein has the meaning given to it in the Stock Purchase Agreement. WHEREAS, CLJ and its subsidiaries, including CSL and its subsidiaries, have joined in filing consolidated federal Tax Returns and certain consolidated, combined or unitary state, local or foreign Tax Returns; WHEREAS, Host Marriott Corporation, a Delaware corporation ("Host Marriott"), pursuant to a Distribution Agreement dated as of December 28, 1998 (the "Distribution Agreement"), distributed approximately 93.6% of the outstanding common stock in CLJ on a PRO RATA basis to its stockholders (the "Distribution"); WHEREAS, in connection with the Distribution Agreement, Host Marriott and CLJ entered into a Tax Sharing Agreement dated as of December 28, 1998 (the "HM/CLJ Tax Sharing Agreement"), providing for allocations of and indemnifications with respect to certain liabilities for Taxes of Host Marriott and its subsidiaries and of CLJ and its subsidiaries; WHEREAS, in Section 3.(e) of the HM/CLJ Tax Sharing Agreement, CLJ was assigned certain rights arising under a Tax Matters Agreement dated as of June 21, 1997 among Host Marriott, Marriott International, Inc. ("MII"), Marriott Senior Living Services, Inc. ("Services"), HMC Senior Communities, Inc. and Forum Group, Inc. (the "Forum/MI Tax Matters Agreement"); WHEREAS, SNH, CLJ and CSL have entered into that certain Stock Purchase Agreement, dated as of August __, 2001 (the "Stock Purchase Agreement"), pursuant to which SNH through an acquisition subsidiary will acquire 100% of the capital stock of CSL and all of the outstanding equity securities of CCC Boynton Beach, Inc. and of CCC Senior Living Corporation; and WHEREAS, the parties hereto wish to provide for (i) allocations of, and indemnifications against, certain liabilities for Taxes, including Income Taxes and Other Taxes, (ii) the preparation and filing of Tax Returns on a basis consistent with prior practice and the payment of Taxes with respect thereto, and (iii) certain related matters; NOW THEREFORE, in consideration of their mutual promises, the parties hereby agree as follows: 1. DEFINITIONS. When used herein the following terms shall have the following meanings: "Acquired Companies" -- as defined in Section 1.1 of the Stock Purchase Agreement. "Affiliate" -- with respect to any corporation, partnership, limited liability company, business trust or other entity (the "given entity"), (i) each person, corporation, partnership, limited liability company, business trust or other entity that directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with, the given entity, provided that neither Host Marriott nor any subsidiary of Host Marriott shall be -2- considered an Affiliate of any party hereto, (ii) each corporation, partnership, limited liability company, business trust or other entity in which the given entity owns, directly or indirectly, through one or more intermediaries, at least 50% of the value of all outstanding equity interests, (iii) any partnership or limited liability company in which the given entity is the sole general partner or the sole managing member, or (iv) any successor of any of the above. For purposes of this definition, "control" means the possession, directly or indirectly, of (i) 50% or more of the voting power or value of outstanding equity interests, or (ii) the power to direct or cause the direction of the management of an entity, whether by contract or otherwise. "Affiliated Group" -- an affiliated group of corporations within the meaning of Code Section 1504(a) for the Taxable Period or, for purposes of any state, local or foreign income tax matters, any consolidated, combined or unitary group of corporations within the meaning of the corresponding provisions of Tax law for the jurisdiction in question. "CLJ" -- as defined in the preamble to this Agreement. "CLJ Group" -- CLJ and each corporation that joins with CLJ in filing a consolidated federal income tax return for CLJ's Taxable Period that includes the Closing Date. For purposes of this Agreement, the CLJ Group shall exist from the beginning of the day immediately after the Closing Date and shall exclude any Acquired Company with respect to the period after the Closing Date. "CLJ Member" -- a corporation that was immediately before the Transaction a Pre-Closing Member and is a member of the CLJ Group at the beginning of the day immediately after the Closing Date. -3- "CLJ Party" -- CLJ, each CLJ Member, and each Affiliate of CLJ or of a CLJ Member, where affiliation is determined after the Closing Date. "Closing Date" -- the date on which the Transaction closes, as defined in the Stock Purchase Agreement. "Code" -- the Internal Revenue Code of 1986, as amended, or any successor thereto, as in effect for the Taxable Year in question. "Combined Jurisdiction" -- for any Taxable Period, any state, local or foreign jurisdiction in which CLJ or a CLJ Affiliate (other than an Acquired Company) is included in a consolidated, combined, unitary or similar return with any Acquired Company for state, local or foreign Tax purposes. "CSL" -- as defined in the preamble to this Agreement. "Distribution" -- as defined in the preamble to this Agreement. "Distribution Agreement" -- as defined in the preamble to this Agreement. "Final Determination" -- (i) a decision, judgment, decree, or other order by a court of competent jurisdiction, which has become final and unappealable; (ii) a closing agreement or accepted offer in compromise under Code Sections 7121 or 7122, or comparable agreements under the laws of other jurisdictions; (iii) any other final settlement with the IRS or other Taxing Authority; (iv) the receipt of any refund; or (v) the expiration of an applicable statute of limitations. "Forum/MI Tax Matters Agreement" - as defined in the preamble to this Agreement. "Forum Tax Information" - as defined in the HM/CLJ Tax Sharing Agreement. -4- "HM/CLJ Tax Sharing Agreement" - as defined in the preamble to this Agreement. "Host Marriott" - as defined in the preamble to this Agreement. "Host Marriott Entity" or "Host Marriott Entities" - each or all of Host Marriott and every Affiliate of Host Marriott immediately prior to the Distribution. "Host Marriott Taxes" - any Taxes imposed upon or with respect to any Host Marriott Entity (including Taxes so imposed under the terms of the Forum/MI Tax Matters Agreement) for any Pre-Closing Taxable Period ending before, on or including the Distribution Date, excluding all Taxes allocable to CLJ or any of its Affiliates (including the Acquired Companies) under the terms of the HM/CLJ Tax Sharing Agreement. "Host Marriott Tax Information" - any information relating or pertaining to any Host Marriott Entity for any Pre-Closing Taxable Period ending before, on or including the Distribution Date, but excluding (i) any such information in the possession of CLJ, or in the possession of any Affiliate controlled by CLJ, or in the possession of any of the Acquired Companies, on or before the Closing Date, and (ii) any such information that is in, or may come into, the possession of CLJ or any then Affiliate of CLJ at any time after the Closing Date. "Host Marriott Tax Return(s)" - any Tax Returns required to be filed by or with respect to any Host Marriott Entity for any Pre-Closing Taxable Period ending before, on or including the Distribution Date, excluding all Tax Returns which CLJ is responsible for preparing or filing under the terms of the HM/CLJ Tax Sharing Agreement. "Income Tax(es)" -- with respect to any entity, any and all Taxes based upon or measured by net income, gross income, gross receipts or alternative minimum taxable income, regardless of whether denominated an "income tax," a "franchise tax," or otherwise, imposed by any -5- Taxing Authority, whether any such tax is imposed directly or through withholding or otherwise, together with any interest thereon and any related penalty, addition to tax or additional amount. "Income Tax Attribute" - any deduction, loss, adjustment, or other tax item or attribute, other than an Income Tax Credit, that can be used by a taxpayer to reduce its taxable income for purposes of determining its Income Tax liability (assuming for these purposes that the taxpayer has sufficient taxable income to fully utilize the deduction, loss or other tax attribute). "Income Tax Credit" - any credit, including without limitation any investment tax credit, foreign tax credit, targeted jobs credit, research and development credit, alternative minimum tax credit, or other credit, that can be used by a taxpayer to reduce its Income Tax liability (assuming for these purposes that the taxpayer has sufficient liability for Income Taxes to fully utilize the credits). "Information Return(s)" -- with respect to any entity, any and all reports, returns, declarations or other filings (other than Tax Returns) required to be supplied to any Tax Authority. "IRS" -- the United States Internal Revenue Service. "MII" - as defined in the preamble to this Agreement. "Other Tax(es)" -- with respect to any entity, any license, business privilege, payroll, employment, excise, severance, stamp, occupation, premium, windfall profits, environmental (including under Code Section 59A), customs duties, franchise, social security, unemployment, disability, real property, personal property, intangibles, sales, use, transfer, registration, value added, add-on minimum, or other tax of any kind whatsoever, whether any such tax is imposed directly or through withholding or otherwise, together with any interest thereon and any related -6- penalty, addition to tax or additional amount, provided, however, that the term "Other Tax(es)" shall not include Income Tax(es) and shall not include Transfer Taxes the responsibility for which is allocated in Section 9.6 of the Stock Purchase Agreement. "Overdue Rate" -- a rate of interest per annum that equals the prime rate, as reported in the Wall Street Journal for the period in which the Overdue Rate is applicable, plus 2.00%. "Post-Closing Straddle Period" -- with respect to any party's Straddle Period, the period beginning on the day immediately after the Closing Date and ending on the last day of the party's Taxable Year in which the Closing Date occurs. "Post-Closing Taxable Period" -- a party's Taxable Year that begins on or after the day immediately after the Closing Date. "Pre-Closing Affiliate" -- any Affiliate of any Pre-Closing Member, where affiliation is determined for all periods before the Closing Date. "Pre-Closing Group" -- CLJ and each corporation (including any Acquired Company) that joins with CLJ in filing a consolidated federal income tax return for CLJ's Taxable Period that includes the Closing Date. For purposes of this Agreement, the Pre-Closing Group shall terminate at the close of business on the Closing Date (except as otherwise provided in this Agreement). "Pre-Closing Member" -- a corporation (including any Acquired Company) that was a member of the Pre-Closing Group. "Pre-Closing Straddle Period" -- with respect to any party's Straddle Period, the period beginning on the first day of such Taxable Year and ending on the close of business on the Closing Date. -7- "Pre-Closing Taxable Period" -- a party's Taxable Year that ends at or before the close of business on the Closing Date. "Representative" -- with respect to any person or entity, any of such person's or entity's directors, officers, employees, agents, consultants, accountants, attorneys and other advisors. "Services" - as defined in the preamble to this Agreement. "SNH Party" -- SNH and any Affiliate of SNH, where affiliation is determined after the Closing Date. "Stock Purchase Agreement" -- as defined in the preamble to this Agreement. "Straddle Period" -- any party's Taxable Year beginning before and ending after the close of business on the Closing Date. "Tax(es)" -- collectively, Income Tax(es) and Other Tax(es). "Taxable Period" -- a party's Pre-Closing Taxable Period, Post-Closing Taxable Period or Straddle Period. "Taxable Year" -- a party's taxable year (which may be shorter than a full calendar or fiscal year), year of assessment or similar period with respect to which any Tax may be imposed. "Tax Benefit(s)" -- (i) in the case of an Income Tax Attribute, the sum of (a) the amount of the Income Tax Attribute multiplied by the sum of (x) if the Income Tax Attribute relates to a federal income Tax Return, the highest federal corporate Income Tax rate, and if the Income Tax Attribute does not relate to a federal income Tax Return, zero, and (y) highest applicable state corporate Income Tax rate, and (b) any interest received with respect to any related Tax refund or otherwise credited to the party that used the Income Tax Attribute; (ii) in the case of an -8- Income Tax Credit, 100% of the amount of the Income Tax Credit, plus any interest received with respect to any related Tax refund or otherwise credited to the party that used the Income Tax Credit; and (iii) in the case of any Other Tax, the amount by which the Tax liability of a corporation or other entity is actually reduced for any Taxable Period, plus any interest received with respect to any related Tax refund or otherwise credited to such corporation or entity. "Taxing Authority" -- the IRS and any other domestic or foreign governmental authority responsible for the administration of any Tax. "Tax Practices" -- the most recently applied policies, procedures and practices employed by CLJ or the Pre-Closing Group in the preparation and filing of, and positions taken on, any Tax Returns of CLJ or any Pre-Closing Member or Pre-Closing Affiliate for any Pre-Closing Taxable Period. "Tax Return(s)" -- all returns, reports, estimates, information statements, declarations and other filings relating to, or required to be filed with a Taxing Authority in connection with, the payments or refund of any Tax for any Taxable Period. "Transaction" -- the transactions contemplated by the Stock Purchase Agreement to occur at Closing. "Transfer Taxes" -- as defined in Section 1.1 of the Stock Purchase Agreement. 2. OBLIGATIONS, RESPONSIBILITIES AND RIGHTS OF CLJ, CSL AND SNH. (a) Preparation and Filing of Tax Returns (i) BY CLJ. Except for any Host Marriott Tax Return(s), CLJ shall prepare and timely file (or cause to be prepared and timely filed): -9- (A) all Tax Returns and Information Returns of the Pre-Closing Group, any Pre-Closing Member and any Pre-Closing Affiliate that are required to be filed on or before the Closing Date; (B) all Tax Returns and Information Returns of the Pre-Closing Group, any Pre-Closing Member and any Pre-Closing Affiliate for Pre-Closing Taxable Periods of the Acquired Companies that are not required to be filed on or before the Closing Date including, without limitation, CLJ's consolidated federal Income Tax Return for its Taxable Year that includes the Closing Date; (C) except as provided in Section 2(a)(ii)(A), all Tax Returns and Information Returns of the Pre-Closing Group, any Pre-Closing Member and any Pre-Closing Affiliate for Taxable Years of the Acquired Companies that include any Pre-Closing Straddle Periods; (D) except as provided in Section 2(a)(ii)(A), all state and local Tax Returns and state and local Information Returns of the Pre-Closing Group, any Pre-Closing Member and any Pre-Closing Affiliate for Straddle Periods of the Acquired Companies (for these purposes, the Pre-Closing Group shall be deemed to exist for each such Straddle Period and, to the extent not prohibited by applicable law, such state and local Tax Returns and state and local Information Returns shall be filed by treating each such Straddle Period as a single Taxable Year); -10- (E) except as provided in Section 2(a)(ii)(A), all Tax Returns and Information Returns of CLJ, the CLJ Group, any CLJ Member, and any then Affiliate of any CLJ Member for all of their Straddle Periods and all of their Post-Closing Taxable Periods; and (F) all Tax Returns and Information Returns not otherwise required to be filed by CLJ pursuant to paragraphs (A), (B), (C), (D) or (E) of this Section 2(a)(i) or by SNH pursuant to Section 2(a)(ii). (ii) BY SNH. SNH shall prepare and timely file or shall cause to be prepared and timely filed: (A) all Tax Returns and Information Returns of the SNH Parties for all Straddle Periods of the Acquired Companies except in any case that a jurisdiction requires or permits the filing of a Tax Return or Information Return for a Straddle Period of the Acquired Company that includes both one or more SNH Parties and one or more CLJ Parties, unless SNH has notified CLJ at least ninety (90) days before the initial due date of such return that SNH will file such Tax Return or Information Return, which notification, in the case of a Tax Return or Information Return the inclusion in which of any CLJ Party is permitted but not required, shall specify whether SNH will include any such CLJ Party in such return. -11- (B) any federal Income Tax Return reporting income of any Acquired Company for its Post-Closing Taxable Period beginning on the first day immediately following the Closing Date; (C) all other Tax Returns and Information Returns for the SNH Parties for any of their Post-Closing Taxable Periods beginning on the first day immediately following the Closing Date; and (D) all Tax Returns and Information Returns of the SNH Parties for any of their Post-Closing Taxable Periods (including without limitation the Post-Closing Taxable Periods described in Sections 2(a)(ii)(B) and (C), above). (b) PROVISION OF FILING INFORMATION. With respect to any matter directly related to any Acquired Company, or any Tax Return or Information Return that is to be filed by any SNH Party or CLJ Party, each party to this Agreement shall cooperate and assist the other party in connection with the preparation and filing of all Tax Returns and Information Returns that are required to be filed by a specified party pursuant to Section 2(a), including providing the party required to file such Tax Returns and Information Returns with (i) all necessary filing information in a manner consistent with past Tax Practices (whether or not a Tax Return or Information Return has previously been filed with respect to any Acquired Company) and (ii) all other information reasonably requested in connection with the preparation of such Tax Returns and Information Returns by the party responsible for preparing and filing such returns, in each case promptly after such request (which shall be within fourteen (14) days after such request or, if not -12- within such fourteen-day period, as soon as possible thereafter using all commercially reasonable efforts) and to the extent such information is in the possession of the party from which it is requested or can be obtained by the party for which it is requested with commercially reasonable efforts by that party. CLJ and SNH agree that (a) within 60 days after the Closing Date, CLJ shall provide SNH with all records, schedules, data, work product and other information then in the possession of CLJ (or any Affiliate of CLJ) that represent work done as of such date relating to the preparation of consolidated tax basis balance sheets for the Acquired Companies as of the Closing Date, (b) from and after 60 days after the Closing Date, CLJ shall provide SNH, within 14 days after SNH's request, any information in the possession of CLJ or its Affiliates reasonably deemed necessary by SNH (or SNH's Representative) to complete such consolidated tax basis balance sheets, and (c) CLJ shall assist, and cooperate with, SNH (or SNH's Representative) during the preparation of such consolidated tax basis balance sheets. Notwithstanding anything in this Section 2(b) to the contrary, CLJ shall not have any responsibility to provide to any SNH Party any Host Marriott Tax Information or Forum Tax Information, which information the SNH Parties shall seek directly from Host Marriott to the extent provided for in the Host Marriott Tax Matters Agreement (or from MII and Services pursuant to the Forum/MI Tax Matters Agreement), provided, however, that at SNH's written request, CLJ agrees to cooperate in good faith with the SNH Parties in their efforts to obtain such Host Marriott Tax Information (or Forum Tax Information) pursuant to the -13- terms of the HM/CLJ Tax Sharing Agreement and/or the Forum/MI Tax Matters Agreement. (c) TAXABLE YEAR. SNH and CLJ agree that, for all Tax purposes, (i) for the Pre-Closing Taxable Period of each Acquired Company that ends at the close of business on the Closing Date and for any other Pre-Closing Taxable Periods of each Acquired Company commencing after the Distribution Date, each Acquired Company shall be included in the consolidated federal Income Tax Return of the Pre-Closing Group for the Taxable Year that includes such Pre-Closing Taxable Period, subject to the "next day" rule set forth in Treas. Reg. Sec. 1.1502-76(b)(1)(ii)(B) (and, to the extent permitted by law and Section 2(a) hereof, in all corresponding consolidated, combined or unitary state or other Income Tax Returns of the Pre-Closing Group, to the extent the Pre-Closing Group (or a portion of such group) previously filed or elected to file such consolidated, combined or unitary state or other Income Tax Returns) and (ii) each Acquired Company shall either begin a new Taxable Year for purposes of such federal income and, to the extent permitted by law, state or other Taxes, on the day immediately after the Closing Date or, in any such case, beginning on such day as such Acquired Company or its income shall be included in a Tax Return of SNH. The parties further agree that, to the extent permitted by applicable law, all federal, state or other Tax Returns (including Income Tax Returns and Other Tax Returns) and all Information Returns shall be filed consistently with this position; provided, however, that with respect to any Acquired Company that was taxed as a partnership for federal tax purposes, solely for purposes of determining the -14- Taxable Period to which the Acquired Company's items of income, deduction, expense, loss, credit or other tax attributes are to be allocated, any Acquired Company that owns an interest in such Acquired Company shall be treated as selling or exchanging its entire interest in such Acquired Company immediately before the Closing and acquiring such interest at the beginning of the day immediately following the Closing Date, under the principles set forth in Treas. Reg. Sec. 1.1502-76(b)(2)(vi). (d) STRADDLE PERIOD TAXES. (i) For purposes of this Agreement, pursuant to Sections 2(a)(ii)(B) and 2(c), federal Income Taxes for SNH and any Acquired Company will not be reported in any Straddle Period or allocated pursuant to this Section 2(d). (ii) For purposes of this Agreement, Taxes of an Acquired Company (other than federal Income Taxes) for any Straddle Period of an Acquired Company shall be allocated between the Pre-Closing Straddle Period and Post-Closing Straddle Period in the following manner: (A) state and local Income Taxes shall be allocated between the Pre-Closing Straddle Period and Post-Closing Straddle Period based on the actual liability for Income Taxes of the Acquired Company after closing the books of the Acquired Company at the close of business on the Closing Date in a manner consistent with the reporting of federal taxable income pursuant to Sections 2(a)(ii)(B) and 2(c), and further taking into account SNH's status as a "real estate investment trust" under the Code and the provisions of Section 856(i) of the Code, and other federal or state and local provisions -15- concerning the Tax status of any SNH Party; and (B) Other Taxes shall be allocated between the Pre-Closing Straddle Period and Post-Closing Straddle Period on the basis of the actual transactions, events or activities (including, if applicable, days elapsed) that give rise to or create liability for such Other Taxes, and based on the periods with respect to which any Other Taxes that are imposed for the privilege of doing business may relate. (iii) SNH shall pay to CLJ, within fourteen (14) days after receipt of an executed Straddle Period Tax Return that has been prepared and filed by or on behalf of CLJ pursuant to Section 2(a)(i), the excess of (A) any amount allocated to any Acquired Company for its Post-Closing Straddle Period (based on the amount of Tax shown on such Tax Return, allocated as provided in Section 2(d)(ii)) plus any amount allocated to all SNH Parties that are not Acquired Companies on such Tax Return over (B) the amount of any estimated taxes previously paid by or on behalf of any SNH Party after the Closing to the relevant Taxing Authority with respect to such Tax with respect to the applicable Taxable Period. CLJ shall pay to SNH, within fourteen (14) days after receipt of an executed Straddle Period Tax Return that has been prepared and filed by or on behalf of SNH pursuant to Section 2(a)(ii), the excess of (A) any amount allocated to any Acquired Company for the Pre-Closing Straddle Period (based on the amount of Tax shown on such Tax Return, allocated as provided in Section 2(d)(ii)) plus any amount allocated to all CLJ Parties on such Tax -16- Return over (B) the amount of any estimated Taxes previously paid by or on behalf of any Pre-Closing Member or Pre-Closing Affiliate to the relevant Taxing Authority with respect to such Tax with respect to the applicable Taxable Period. (e) PAYMENT OF TAXES. CLJ shall pay (i) all Taxes (other than Host Marriott Taxes) shown to be due and payable on all Tax Returns filed by CLJ pursuant to Section 2(a)(i) hereof (except for any Taxes that are allocable to an Acquired Company for its Post-Closing Straddle Period under Section 2(d)(ii) or to an SNH Party that is not an Acquired Company, which Taxes shall be paid by SNH or CSL in the manner set forth in Section 2(d)(iii)), (ii) all Taxes (other than Host Marriott Taxes) that shall thereafter become due and payable with respect to all Tax Returns filed pursuant to Section 2(a)(i) for the applicable Taxable Periods as a result of a Final Determination (except for any Taxes that are allocable to an Acquired Company for its Post-Closing Straddle Period under Section 2(d)(ii) or to an SNH Party that is not an Acquired Company, which Taxes shall be paid by SNH or CSL in the manner set forth in Section 2(d)(iii)), (iii) all Taxes that are allocable to any Acquired Company for its Pre-Closing Straddle Period under Section 2(d)(ii) in the manner set forth in Section 2(d)(iii), and (iv) all Transfer Taxes for which CLJ is responsible under Section 9.6 of the Stock Purchase Agreement. SNH or CSL shall pay (i) all Taxes attributable to all Tax Returns filed by SNH or CSL pursuant to Section 2(a)(ii) hereof (except for any Taxes that are allocable to any Acquired Company for its Pre-Closing Straddle Period under Section 2(d)(ii) or to any CLJ Party, which Taxes shall be paid by CLJ in -17- the manner set forth in Section 2(d)(iii)), including without limitation (a) federal Income Taxes of the SNH Parties for the Acquired Companies' Post-Closing Taxable Period beginning on the first day immediately following the Closing Date as contemplated by Section 2(d)(i) and (b) all other Taxes of the SNH Parties for any of their Post-Closing Taxable Periods beginning on the first day immediately following the Closing Date, (ii) all Taxes that are allocable to any Acquired Company for its Post-Closing Straddle Period under Sections 2(d)(ii) in the manner set forth in Section 2(d)(iii), and (iii) all Transfer Taxes for which SNH is responsible under Section 9.6 of the Stock Purchase Agreement. (f) AMENDMENTS TO TAX RETURNS. No Tax Returns or Information Returns for any Pre-Closing Taxable Period or Straddle Period of any Acquired Company filed by CLJ or SNH may be amended without the consent of CLJ and SNH, which in each case shall not be unreasonably withheld; provided, however, that (i) SNH shall not be considered unreasonable in withholding such consent if such amendment would result in an increase in a Tax liability for which the SNH Parties have responsibility under this Agreement or would cause a material risk that SNH shall fail to qualify as a "real estate investment trust" under the Code (unless CLJ agrees to pay the SNH Parties an amount equal to the amount of such increase or to indemnify the SNH Parties for such failure to qualify, in which case a failure to consent will be considered unreasonable), (ii) CLJ shall not be considered unreasonable in withholding such consent if such amendment would result in an increase in a Tax liability for which CLJ has responsibility under this Agreement (unless SNH or CSL agrees to pay CLJ an amount equal to the amount -18- of such increase, in which case a failure to consent will be considered unreasonable), (iii) CLJ shall not be required to seek the consent of SNH if such amendment would not result in any adjustment to any Income Tax Attributes or Income Tax Credits, would not result in any increase in the Tax liability of any SNH Party for each Post-Closing Straddle Period and Post-Closing Taxable Period, and would not create any material risk that SNH shall fail to qualify as a "real estate investment trust" under the Code. (g) REFUNDS OF TAXES. (i) CLJ shall be entitled to (a) any refund of Taxes and any Tax Benefits realized as a result of a Final Determination with respect to all Tax Returns filed by (or caused to be prepared and filed by) CLJ pursuant to Section 2(a)(i) (except that the SNH Parties shall be entitled to any refund of, or Tax Benefit related to, any Taxes that are allocable to any Acquired Company for its Post-Closing Straddle Period under Section 2(d)(ii) or to any SNH Party that is not an Acquired Company) and (b) any refund of, and any Tax Benefit related to, any Taxes that are allocable to an Acquired Company for its Pre-Closing Straddle Period under Section 2(d)(ii). The SNH Parties shall be entitled to (a) any refund of Taxes and any Tax Benefit realized as a result of a Final Determination with respect to all Tax Returns filed by (or caused to be prepared and filed by) any SNH Party pursuant to Section 2(a)(ii) (except that CLJ shall be entitled to any refund of, or Tax Benefit related to, any Taxes that are allocable to an Acquired Company for its Pre-Closing Straddle Period under Section 2(d)(ii) or to -19- any CLJ Party) and (b) any refund of, and Tax Benefit related to, any Taxes that are allocable to an Acquired Company for its Post-Closing Straddle Period under Sections 2(d)(ii). Refunds attributable to a Tax Return shall be allocated between the Pre-Closing Straddle Period and Post-Closing Straddle Period and among the parties to such Tax Return on a basis consistent with the method used to allocate the Tax liability for such Tax Return under this Agreement. Notwithstanding the above, if and to the extent any refund of Taxes or other Tax Benefit for any Pre-Closing Taxable Period is required to be paid to Host Marriott pursuant to the HM/CLJ Tax Sharing Agreement or otherwise, none of CLJ, SNH or CSL (nor any Affiliate of any of them) shall be entitled to such refund of Tax or Tax Benefit. (ii) If any CLJ Party receives a Tax refund or Tax Benefit to which any SNH Party is entitled pursuant to this Agreement, CLJ shall pay (in accordance with Section 4) the amount of such Tax refund or Tax Benefit (including any interest received thereon) to SNH within fourteen (14) days of the receipt thereof. (iii) If any SNH Party receives a Tax refund or Tax Benefit to which any CLJ Party is entitled pursuant to this Agreement, CSL or SNH shall pay (in accordance with Section 4) the amount of such Tax refund or Tax Benefit (including any interest received thereon) to CLJ within fourteen (14) days of the receipt thereof. -20- EX-23.1 5 a2060299zex-23_1.txt EXHIBIT 23.1 EXHIBIT 23.1 [LOGO] CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the inclusion in this Form 8-K of our report dated August 31, 2001. It should be noted that we have not audited any financial statements of the company subsequent to December 29, 2000 or performed any audit procedures subsequent to the date of our report. /s/ Arthur Andersen LLP Vienna, VA October 1, 2001