-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MhNL8sWWcv4egFlYN/cYC7j5N8/XyJ+NZujtmUDY1D5PvHsjjlfmF5zVzE2NppUb sOTTfOgw5H1PpF/45r2r2A== 0000908737-02-000417.txt : 20021114 0000908737-02-000417.hdr.sgml : 20021114 20021114125006 ACCESSION NUMBER: 0000908737-02-000417 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20020930 FILED AS OF DATE: 20021114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIVE STAR QUALITY CARE INC CENTRAL INDEX KEY: 0001159281 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-SKILLED NURSING CARE FACILITIES [8051] IRS NUMBER: 043516029 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-16817 FILM NUMBER: 02823372 BUSINESS ADDRESS: STREET 1: 400 CENTRE STREET CITY: NEWTON STATE: MA ZIP: 02458 BUSINESS PHONE: 617 796 8387 MAIL ADDRESS: STREET 1: 400 CENTRE ST CITY: NEWTON STATE: MA ZIP: 02458 10-Q 1 fsqc10q_3rdq.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______________ to ______________ Commission File Number 001-16817 FIVE STAR QUALITY CARE, INC. (Exact name of Registrant as Specified in Its Charter) Maryland 04-3516029 (State or Other Jurisdiction of (IRS Employer Identification No.) Incorporation or Organization) 400 Centre Street, Newton, Massachusetts 02458 (Address of Principal Executive Offices) (Zip Code) 617-796-8387 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] Number of Common Shares outstanding at November 13, 2002: 8,452,633 shares of common stock, $0.01 par value.
FIVE STAR QUALITY CARE, INC. FORM 10-Q September 30, 2002 INDEX Page ---- PART I Financial Information --------------------- Item 1. Consolidated Financial Statements (unaudited) Consolidated Balance Sheet - September 30, 2002 and December 31, 2001 1 Consolidated Statement of Operations - Three and Nine Months Ended September 30, 2002 and 2001 2 Consolidated Statement of Cash Flows - Nine Months Ended September 30, 2002 and 2001 3 Notes to Consolidated Financial Statements 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Item 3. Quantitative and Qualitative Disclosures About Market Risk 15 Item 4. Controls and Procedures 15 Forward Looking Statements 16 PART II Other Information ----------------- Item 6. Exhibits and Reports on Form 8-K 17 Signatures 18 Certifications 19
Part I. Financial Information Item 1. Consolidated Financial Statements
FIVE STAR QUALITY CARE, INC. CONSOLIDATED BALANCE SHEET (dollars in thousands, except share amounts) September 30, December 31, 2002 2001 ------------------------------- (unaudited) Assets Current assets: Cash and cash equivalents $ 12,005 $ 24,943 Accounts receivable, net of reserve of $7,662 and $3,787 at September 30, 2002, and December 31, 2001, respectively 37,972 39,132 Due from Marriott Senior Living Services 4,620 -- Prepaid expenses and other current assets 4,370 1,054 ------------------------------- Total current assets 58,967 65,129 Property and equipment, net 53,083 2,914 Restricted cash 4,378 -- ------------------------------- $ 116,428 $ 68,043 =============================== Liabilities and Shareholders' Equity Current liabilities: Accounts payable and accrued expenses $ 23,170 $ 7,141 Accrued compensation and benefits 5,465 5,288 Accrued real estate taxes 6,202 1,485 Due to affiliates, net 747 2,232 Other current liabilities 880 1,664 ------------------------------- Total current liabilities 36,464 17,810 Long term liabilities 14,948 -- Commitments and contingencies Shareholders' equity: Preferred stock, par value $0.01; none issued -- -- Common stock, par value $0.01; 8,452,633 and 4,374,334 shares issued and outstanding as of September 30, 2002, and December 31, 2001, respectively 85 44 Additional paid in capital 78,926 50,978 Accumulated deficit (13,995) (789) ------------------------------- Total shareholders' equity 65,016 50,233 ------------------------------- $ 116,428 $ 68,043 ===============================
See accompanying notes 1
FIVE STAR QUALITY CARE, INC. CONSOLIDATED STATEMENT OF OPERATIONS (dollars in thousands, except per share amounts) (unaudited) Three Months Ended September 30, Nine Months Ended September 30, -------------------------------- ------------------------------- 2002 2001 2002 2001 ---- ---- ---- ---- Revenues: Net revenues from residents $ 132,847 $ 55,971 $ 382,085 $ 164,081 Interest income 48 36 230 82 ---------------------------------------------------------------------- Total revenues 132,895 56,007 382,315 164,163 Expenses: Wages and benefits 59,535 38,445 173,985 114,001 Other operating expenses 46,263 12,753 133,506 36,983 Management fee to Marriott Senior Living Services 4,943 -- 12,354 -- Rent expense 19,687 11 56,596 55 General and administrative 3,620 2,897 11,248 12,487 Depreciation 517 349 1,240 981 Impairment of assets -- -- 150 -- Restructuring costs 10 -- 122 -- Spin off and merger expense, non recurring -- -- 2,829 -- ---------------------------------------------------------------------- Total expenses 134,575 54,455 392,030 164,507 ---------------------------------------------------------------------- (Loss) income from continuing operations before income taxes (1,680) 1,552 (9,715) (344) Provision for income taxes -- -- -- -- ---------------------------------------------------------------------- (Loss) income from continuing operations (1,680) 1,552 (9,715) (344) Loss from discontinued operations (826) (314) (3,491) (416) ---------------------------------------------------------------------- Net (loss) income $ (2,506) $ 1,238 $ (13,206) $ (760) ====================================================================== Weighted average shares outstanding 8,453 4,374 7,254 4,374 ====================================================================== Basic and diluted (loss) income per share from: Continuing operations $ (0.20) $ 0.35 $ (1.34) $ (0.08) Discontinued operations (0.10) (0.07) (0.48) (0.09) ---------------------------------------------------------------------- Net (loss) income per share $ (0.30) $ 0.28 $ (1.82) $ (0.17) ======================================================================
See accompanying notes 2
FIVE STAR QUALITY CARE, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (dollars in thousands) (unaudited) Nine Months Ended September 30, ---------------------------------- 2002 2001 ---------------------------------- Cash flows from operating activities: Net loss $(13,206) $ (760) Adjustments to reconcile net loss to cash provided by (used in) operating activities: Spin off and merger expense 2,829 -- Depreciation 1,187 937 Impairment of assets 150 -- Net loss from discontinued operations 3,491 432 Changes in assets and liabilities: Accounts receivable, net 9,038 8,476 Due from Marriott Senior Living Services (4,620) -- Prepaid expenses and other current assets (1,793) (2,922) Accounts payable and accrued expenses 12,092 (3,313) Accrued compensation and benefits 177 116 Due to affiliates, net (2,671) -- Other current and long term liabilities (784) (5,708) ---------------------------------- Cash provided by (used in) operating activities 5,890 (2,742) ---------------------------------- Cash flows from investing activities: Proceeds from affiliates 10,722 -- Change in restricted cash (3,900) -- Real estate purchases (46,157) -- Furniture, fixtures and equipment purchases (4,372) (1,861) ---------------------------------- Cash used in investing activities (43,707) (1,861) ---------------------------------- Cash flows from financing activities: Proceeds from issuance of common stock, net 26,114 -- Proceeds from issuance of mortgages -- 9,100 Distributions to Senior Housing -- (3,635) ---------------------------------- Cash provided by financing activities 26,114 5,465 Net cash used in discontinued operations (1,235) (432) ---------------------------------- Change in cash and cash equivalents (12,938) 430 Cash and cash equivalents at beginning of period 24,943 7,178 ---------------------------------- Cash and cash equivalents at end of period $ 12,005 $ 7,608 ================================== Non-cash investing and financing activities: Acquisition of assets by merger $ (1,052) $-- Assumption of liabilities by merger 2,006 -- Issuance of common stock for merger 1,875 --
See accompanying notes 3 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share amounts) (Unaudited) Note 1. Basis of Presentation and Organization The accompanying condensed consolidated financial statements of Five Star Quality Care, Inc. and its subsidiaries have been prepared without audit. Certain information and footnote disclosures required by generally accepted accounting principles for complete financial statements have been condensed or omitted. We believe the disclosures made are adequate to make the information presented not misleading. However, the accompanying financial statements should be read in conjunction with the financial statements and notes contained in our Annual Report on Form 10-K for the year ended December 31, 2001. In the opinion of our management, all adjustments, which include only normal recurring adjustments considered necessary for a fair presentation, have been included. All intercompany transactions and balances between us and our subsidiaries have been eliminated. Our operating results for interim periods are not necessarily indicative of the results that may be expected for the full year. Until December 31, 2001, we were a wholly owned subsidiary of Senior Housing Properties Trust ("Senior Housing"). On December 31, 2001, Senior Housing distributed substantially all of our common shares to Senior Housing's shareholders (the "Spin-Off"). We entered into a transaction agreement to govern our initial capitalization and other events related to the Spin-Off. Pursuant to the transaction agreement, our initial capitalization was provided by Senior Housing and we entered into a lease agreement with Senior Housing for certain facilities. On January 2, 2002, we acquired FSQ, Inc. in a stock for stock transaction. On January 11, 2002, we entered into a lease with Senior Housing for 31 independent and assisted living communities managed by a subsidiary of Marriott International, Inc., Marriott Senior Living Services, Inc. ("Marriott"). In March and April 2002, we completed a public offering of 3,823,300 common shares raising net proceeds of $26,114. On April 1, 2002, we purchased and began to operate five additional independent and assisted living communities. Note 2. Summary of Significant Accounting Policies REVENUE RECOGNITION. Our revenues are derived primarily from services to residents at properties we own or lease. We accrue revenues when services are provided and revenues are earned. Some of our services are provided with the expectation of payment from governments or other third party payors; related revenues are reported at their estimated net realizable amounts at the time the services are provided. RESERVES FOR ACCOUNTS RECEIVABLE. Accounts receivable are recorded at their estimated net realizable value. In the case of receivables generated from residents, reserves for uncollectible amounts are estimated based upon factors, which include but are not limited to the age of the receivable and the terms of our agreements with residents or their third party payors. In the case of other receivables, such as those due to us from various governments or other entities with which we have transacted business, reserves are estimated based upon factors which include but are not limited to our agreements with such payors, their stated intent to pay, their financial capacity and other developments which may include litigation or other proceedings. Accounts receivable reserves are only estimates and we periodically review and revise these estimates. Our review and revision process subjects these reserves to future adjustments based on new information and these adjustments may be material. ESTIMATES AND ASSUMPTIONS. The preparation of financial statements in conformity with generally accepted accounting principles ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. INCOME TAXES. Prior to the Spin-Off, substantially all of our taxable income was included in the taxable income of Senior Housing. After the Spin-Off, we are a separate entity and are responsible for our own tax liabilities and filings. For the nine-month periods ended September 30, 2001 and 2002, we generated losses for income tax purposes which created a net operating loss carry forward. Because we have a short separate operating history during which we have generated no taxable income, we have fully reserved the value of this net operating loss carry forward. As a result, we have recorded no income tax benefit for the three and nine month periods ended September 30, 2002. 4 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share amounts) (Unaudited) Note 2. Summary of Significant Accounting Policies (continued) PER COMMON SHARE AMOUNTS. Loss per share for the periods ended September 30, 2002, are computed using the weighted average number of shares outstanding during the periods. Earnings (loss) per share for the periods ended September 30, 2001, have been computed as if the shares outstanding at December 31, 2001, were outstanding as of January 1, 2001. We have no common share equivalents, instruments convertible into common shares or other dilutive instruments. NEW ACCOUNTING PRONOUNCEMENTS. In 2001 the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations", SFAS No. 142, "Goodwill and Other Intangible Assets" and SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". We adopted these pronouncements on January 1, 2002. The adoption of these standards did not have a material effect on our financial position or results of operations. See footnote 6 regarding discontinued operations. RESTRICTED CASH. Restricted cash includes $3,860 we have deposited as security for letters of credit which secure obligations arising from our professional liability insurance program. Restricted cash also includes $518 we escrowed as required by certain healthcare regulatory agencies. PROPERTY AND EQUIPMENT. Property and equipment is stated at cost. We depreciate furniture, fixtures and equipment on a straight line basis over five to 12 years and buildings on a straight line basis over 40 years. IMPAIRMENT. When conditions or events occur that we believe might indicate that property or other long lived assets are impaired, an analysis of estimated future undiscounted cash flows is undertaken to determine if any write down of the carrying value of the asset is required. In the quarter ended June 30, 2002, we wrote off the carrying value of certain assets that we believed to be impaired. SELF INSURANCE. We are self insured up to certain retained limits for our workers compensation, professional liability, and, as of August 2002, employee health insurance. Claims in excess of these retained limits are insured by third party insurance providers up to contractual limits, over which we are self insured. We accrue the estimated cost of self insured amounts based on projected settlements for pending claims, known incidents which we expect may result in claims, estimates of incurred but not yet reported claims and incidents and expected changes in premiums for insurance provided by third party insurers where our policies provide for retroactive adjustments. Periodically these accrued estimates are adjusted based upon our claims experience, recommendations from our professional consultants, changes in market conditions and other factors and these adjustments may be material. RESTRUCTURING COSTS. During 2002, we reduced the number of our regional offices and had staff reductions in our home office. As a result, we incurred restructuring costs for severance payments to terminated employees. WORKING CAPITAL ADVANCES. Under the terms of the management agreements for the communities managed by Marriott we provide Marriott with the working capital needed to meet the operating needs of the communities. The working capital, which consists primarily of cash and cash equivalents, inventories, trade accounts receivable and accounts payable, is controlled and maintained by Marriott on our behalf. Accordingly, we include the individual components of working capital for the Marriott managed communities (including cash and cash equivalents of $5,126 at September 30, 2002) in our consolidated balance sheet. RECLASSIFICATIONS. Reclassifications have been made to the prior year's financial statements to conform to the current year's presentation. Note 3. Long Term Liabilities The long term liabilities on our September 30, 2002, balance sheet include $12,544 of advance payments received from residents at some of our communities managed by Marriott. These prepayments are amortized into revenues over the periods in which the service obligations are expected to be satisfied. Also included in long term liabilities as of September 30, 2002 is $2,404 of reserves related to our self insurance programs. 5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share amounts) (Unaudited) Note 4. Acquisitions and Pro Forma Results On January 11, 2002, we entered into a lease with Senior Housing for 31 retirement communities which contain 7,491 living units. These communities are managed by Marriott under agreements for terms generally expiring in 2027 plus renewal options for one five year period. Marriott has responsibility for day to day operations of these communities. These 31 retirement communities are leased from Senior Housing through 2017, with renewal options totaling an additional 15 years. The minimum rent payable by us for these facilities is $63,000 per year. As part of our lease obligations and in accordance with the Marriott management agreements, we make deposits into an escrow account for future capital expenditures at these 31 communities. These deposits, totaling $1,865 and $5,374 for the three and nine months ended September 30, 2002, respectively, are included as part of rent expense in the accompanying statement of operations. In addition, percentage rent will be payable, starting in 2003, in amounts equal to five percent (5%) of revenues at each of these 31 facilities in excess of revenues at such facility in 2002. On April 1, 2002, we purchased and began to operate five independent and assisted living communities containing 704 units for approximately $46,000. Had we entered into the lease with Senior Housing for the Marriott managed communities and acquired the five retirement communities as of January 1, 2001, on a pro forma basis, our revenues and (loss) income from continuing operations would have been $393,927 and $(5,255) for the nine months ended September 30, 2002, and $328,077 and $6,642 for the nine months ended September 30, 2001, respectively. Note 5. Shareholders' Equity On March 26, 2002, we issued 3,700,000 common shares, in an underwritten public offering, for gross proceeds of approximately $27,600. Proceeds received, net of underwriting commissions and other costs, were $25,251. On April 5, 2002, the underwriters for our March 2002 offering of common shares exercised an over allotment option and we issued 123,300 common shares for gross proceeds of $919. Proceeds received, net of underwriting commissions and other costs, were $863. On May 7, 2002, we issued 1,000 common shares to each of our five directors, as part of their annual compensation. The shares were valued at $7.10 per share, which was the closing price of our common shares on the American Stock Exchange on May 7, 2002. Note 6. Discontinued Operations During the second quarter of 2002, we ceased operations at two leased nursing homes: one facility in Phoenix, Arizona, which was leased from Senior Housing; and one facility in Campbell, Nebraska, which was leased from that municipality. The Arizona facility was closed. The operations of the Nebraska facility were assumed by its owner. As of September 30, 2002, substantially all of our assets and liabilities related to these nursing homes have been disposed of and paid. During the three months ended September 30, 2002, we decided to sell one additional nursing home located in Connecticut. Until this decision, we were exploring alternative uses for this property, including the possibility of developing age restricted housing at this facility. Our decision to abandon these efforts and sell this property resulted in our classification of this facility as a discontinued operation. The shut down of this facility was accomplished pursuant to an agreement with, and authorization from, the Connecticut Department of Social Services. That agreement provides for certain Medicaid rate adjustments to compensate for shut down losses attributable to Medicaid patients who were resident at the facility. We recorded a receivable of approximately $1,450 of expected Medicaid rate adjustments for these shut down costs. In November 2002, we received a revised notice from the Connecticut Medicaid authorities that rate adjustments totaling about only $693 would be authorized. We are continuing to pursue collection of the full shut down costs attributable to Medicaid residents of $1,450. However, we have provided a reserve for this receivable equal to the difference between the accrued amounts and the adjustment established by the 6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share amounts) (Unaudited) Note 6. Discontinued Operations (continued) Connecticut Medicaid authorities in November 2002, or $757; and this amount is included in the loss from discontinued operations for the three months ended September 30, 2002. In addition, during the quarter ended June 30, 2002, we recorded an asset impairment charge of $1,499 related to this facility, primarily because a prior agreement to sell some of our available skilled nursing bed licenses did not close. The financial statements for all periods presented have been reclassified to present these facilities as discontinued operations. Below is a summary of the operating results of these facilities:
Three Months Ended September 30, Nine Months Ended September 30, -------------------------------- ------------------------------- 2002 2001 2002 2001 ---- ---- ---- ---- Revenues $ 3 $ 1,495 $ 1,933 $ 6,599 Expenses 829 1,809 5,424 7,015 ------- ------- ------- ------- Net loss $ (826) $ (314) $(3,491) $ (416) ======= ======= ======= =======
Note 7. Commitments and Contingencies Connecticut Strike Costs. During 2001, nursing homes that we operated in Connecticut were involved in a statewide labor dispute. During a strike, we incurred costs to hire temporary staff and provide security services for our residents and temporary employees. At about the time of this strike, the Governor of Connecticut and the Connecticut Department of Social Services stated and agreed to adjust Medicaid rates temporarily to compensate for a portion of these increased costs. Litigation was brought by the striking union against the Governor and Commissioner of the Department of Social Services, and, on September 13, 2002, the United States District Court for Connecticut issued a declaratory ruling that Medicaid subsidies other than those to reimburse costs incurred to protect the health and safety of residents are violations of federal labor law. The Connecticut Department of Social Services continues to review and process our claims for these adjustments, which total approximately $1,500 as of September 30, 2002. Also, we received and recognized as revenue approximately $350 of such payments in 2001. In the event that the Connecticut Department of Social Services determines not to make payments or seeks reimbursement of payments previously made, and our defenses and claims are not fully successful, we may incur related losses in the future. We intend to vigorously pursue our claims. Receivables from Integrated Health Services. During 2000, we assumed the operations of 40 nursing homes from Integrated Health Services, Inc. and certain related entities (together "IHS"), a company in bankruptcy. Because of complex legal and governmental processes necessary to transfer nursing home licenses and Medicare and Medicaid payment arrangements, IHS agreed that any payments which it received for services which we provided would be paid to us by IHS. These agreements were approved by the bankruptcy court and generally honored by IHS with respect to approximately $42,000 received by IHS for our account. We believe IHS has received an additional $2,400 which is due to us and this amount is included in our accounts receivable at September 30, 2002. When IHS refused to pay this amount we commenced suit in the bankruptcy court in August 2002. Recently settlement discussions have begun. We intend to vigorously pursue this claim, but we can not predict the outcome of this litigation, the settlement discussion or our ability to collect amounts which are due from IHS. If we do not collect this claim our uncollected amounts, less applicable reserves, may be recorded as a loss in future periods. Marriott Management Agreements. As described above, we lease 31 communities with 7,491 living units from Senior Housing which are managed by Marriott pursuant to various management agreements . The financial results realized by us at these 31 communities have declined during 2002. Recently, however, Marriott International, Inc. has stated that its profits from its senior living business in 2002 have been improving and that it is considering divesting its senior living business. Also, we are aware that some owners of hotels managed by Marriott International have brought 7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share amounts) (Unaudited) Note 7. Commitments and Contingencies (continued) litigation to challenge the cost allocations to their hotels and to capture certain profits realized by Marriott International from their hotels. As a result, in July 2002, we and Senior Housing asked Marriott to explain allocation formulas for costs shared by our communities and other businesses operated by affiliates of Marriott International, to justify certain charges to these communities, to detail profits made by affiliates of Marriott International from purchases directed by Marriott for the account of these communities and for additional information and actions. In September 2002, in response to this inquiry Marriott paid $409 to us and provided us with some of the requested information. We sent follow up inquires to Marriott in early October 2002. We have not had a comprehensive response from Marriott, and on November 13, 2002, our counsel sent a notice of default to Marriott. These management agreements provide that Marriott may seek to cure certain defaults within stated times. We are continuing to pursue these inquires. We intend to carefully monitor Marriott International's divestment efforts, the responses we receive to our inquires and any Marriott cure efforts, and to enforce all rights and remedies relative to these 31 communities. Note 8. Subsequent Events On October 1, 2002, certain Medicare rate adjustments expired. This expiration is sometimes referred to as the "Medicare Cliff". Legislation is currently being considered which, if enacted, would extend these Medicare rate adjustments. As a result of the expiration of these Medicare rate adjustments, unless legislation is enacted to extend the expired adjustments or otherwise increase Medicare rates, and assuming our current census of Medicare residents remains about what it was during the three months ended September 30, 2002, we expect that the revenues we receive from Medicare may decline by approximately $5,300 per annum. On October 24, 2002, we entered into an agreement for a three year $12,500, interest only, revolving credit facility. The interest rate under this revolving credit facility is calculated as a spread above LIBOR. The revolving bank credit facility is available for acquisitions, working capital and general business purposes. The credit facility is secured by some of our accounts receivable and contains certain covenants such as maintenance of collateral, minimum net worth and certain other financial ratios. As of November 13, 2002, there were no amounts outstanding under the revolving credit facility. On October 25, 2002, we acquired seven independent and assisted living communities for approximately $27,000. These communities contain 407 units. One hundred percent (100%) of the revenue at these seven properties is paid by residents or their families from their private resources. One of the communities is subject to HUD insured mortgage debt of approximately $15,800. We paid the $11,200 balance of the purchase price in cash. Also on October 25, 2002, we sold one senior living property to Senior Housing for approximately $12,700, which was our approximate purchase price of that facility on April 1, 2002, and leased this property along with eight other senior living properties, from Senior Housing. These eight communities contain 609 units, the annual rent due from us to Senior Housing is $6,285 and the lease term extends to 2019. Also, on October 25, 2002, we agreed to modify the existing lease for the 31 Marriott managed properties leased from Senior Housing (see Note 4). Prior to this lease modification, we were required to make periodic deposits of funds into an escrow account for future capital expenditures at these 31 leased properties. These deposits were paid to Senior Housing and were recorded as additional rent expense on our consolidated statement of operations. As a result of this modification, effective October 1, 2002, we will own deposits in these escrow accounts and Senior Housing will have a security and remainder interest in these accounts and in all property purchased with funding from these accounts. The amounts and use of these escrow accounts are unchanged by this amendment; however subsequent to September 30, 2002, we will not report rent expense arising from these deposits. 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations RESULTS OF OPERATIONS We were a subsidiary of Senior Housing until December 31, 2001. The 2001 results discussed in this Quarterly Report on Form 10-Q are for a period during which we were a subsidiary of Senior Housing and they are not indicative of what our results would have been as a separate public company. Similarly these results are not indicative of our future financial performance. Our 2002 results of operations presented in this Quarterly Report on Form 10-Q differ materially from the 2001 historical results presented. There are material differences because our current operations include, among other items, rent expense on leases to Senior Housing, general and administrative costs incurred by us as a separate public company, revenues and expenses related to the 31 communities managed by Marriott Senior Living Services, Inc. ("Marriott") and revenues and expenses related to five communities we purchased on April 1, 2002. Key Statistical Data:
As Reported (includes facilities from the date operations by Five Star commenced): Three Months ended 9/30 Nine months ended 9/30 ------------------------------------- --------------------------------------- 2002 2001 % Change 2002 2001 % Change ---- ---- -------- ---- ---- -------- Revenues from residents $132,847 $ 55,971 138% $382,085 $164,081 133% Facility expenses $110,741 $ 51,198 116% $319,845 $150,984 112% Total expenses $134,575 $ 54,455 147% $392,030 $164,507 138% No. of facilities (end of period) 90 56 61% 90 56 61% No. of living units (end of period) 13,186 5,211 153% 13,186 5,211 153% Occupancy 89% 88% 1% 88% 89% -1% Average daily rate $ 124 $ 132 -6% $ 120 $ 130 -8% Revenue per day per available unit $ 110 $ 117 -6% $ 106 $ 115 -8% Percent of revenues from Medicare / Medicaid 40% 79% -39% 39% 78% -39% Percent of revenues from private / other 60% 21% 39% 61% 22% 39% "Same Store" Facilities (facilities Five Star operated continuously since 1/1/01): Three Months ended 9/30 Nine months ended 9/30 ------------------------------------- --------------------------------------- 2002 2001 % Change 2002 2001 % Change ---- ---- -------- ---- ---- -------- Revenues from residents $ 58,882 $ 55,971 5% $170,136 $164,081 4% Facility expenses $ 53,592 $ 51,173 5% $158,368 $150,542 5% No. of facilities (end of period) 54 54 -- 54 54 -- No. of living units (end of period) 4,991 4,991 -- 4,991 4,991 -- Occupancy 89% 90% -1% 88% 89% -1% Average daily rate $ 144 $ 136 6% $ 141 $ 135 4% Revenue per day per available unit $ 128 $ 122 5% $ 125 $ 121 3% Percent of revenues from Medicare / Medicaid 79% 79% -- 79% 78% 1% Percent of revenues from private / other 21% 21% -- 21% 22% -1%
9
Total Portfolio at 9/30/02 (includes data for periods prior to Five Star operation of certain facilities*): Three Months ended 9/30 Nine months ended 9/30 ------------------------------------- --------------------------------------- 2002 2001 % Change 2002 2001 % Change ---- ---- -------- ---- ---- -------- Revenues from residents $132,847 $130,260 2% $393,942 $382,352 3% Facility expenses $110,741 $105,336 5% $328,000 $307,653 7% No. of facilities (end of period) 90 90 -- 90 90 -- No. of living units (end of period) 13,186 13,186 -- 13,186 13,186 -- Occupancy 89% 90% -1% 88% 90% -2% Average daily rate $ 124 $ 119 4% $ 124 $ 118 5% Revenue per day per available unit $ 110 $ 107 3% $ 109 $ 106 3% Percent of revenues from Medicare / Medicaid 40% 37% 3% 39% 38% 1% Percent of revenues from private / other 60% 63% -3% 61% 62% -1% * Based on data provided to us from prior owners.
Three Months Ended September 30, 2002, Compared to Three Months Ended September 30, 2001 Revenues from residents for the three months ended September 30, 2002, were $132.8 million, an increase of 138% over revenues from residents of $56.0 million for the 2001 third quarter. This increase is attributable primarily to our lease of 31 communities on January 11, 2002, and our purchase of five communities on April 1, 2002. Revenues from residents at the communities we operated throughout each of the three-month periods ended September 30, 2002 and 2001, were $58.9 and $56.0 million, respectively, an increase of 5%. This increase is due primarily to higher per diem charges to residents. Revenues from residents at the 90 communities we operated at September 30, 2002, were $132.8 million for the three months ended September 30, 2002, an increase of 2% over revenues from residents of $130.3 million for the comparable period in 2001 (including revenues which relate to periods prior to our operation of some of these communities). This increase is attributable to higher resident charges offset somewhat by slightly lower occupancy. About 40% of our revenues from residents in the three months ended September 30, 2002, were received from Medicare and Medicaid, compared to 79% in the 2001 period. This decrease is due largely to our lease of 31 and purchase of five communities during 2002, all of which focus our services to residents who pay with private resources. On October 1, 2002, temporary increases in Medicare payment rates expired. Our Medicare revenues totaled $13.9 million and $9.6 million during the three months ended September 30, 2002 and 2001, respectively. As a result of these expirations, sometimes referred to as the "Medicare Cliff", and unless or until Medicare rate increases are reinstated, or other Medicare rate increases are taken by the Federal government, our revenues from Medicare are likely to be less than previous amounts. We cannot predict the exact amount of the decline in our Medicare revenue, but we expect it will be about $5.3 million per annum. We also cannot predict whether the Federal government will provide any reinstatement or other Medicare rate increases. Interest income increased by $12,000 in the three months ended September 30, 2002 compared to the comparable period in 2001 due to earnings on higher cash balances in the 2002 period. Expenses for the three months ended September 30, 2002, were $134.6 million, an increase of 147% over expenses of $54.5 million for the 2001 third quarter. Our wages and benefits costs increased from $38.4 million to $59.5 million, or 55%, primarily due to expenses at the 31 leased and five purchased communities discussed above. Other operating expenses, which include utilities, housekeeping, dietary, maintenance, insurance and facility level administrative costs, rose from $12.7 million to $46.3 million or 265%, again primarily due to expenses at our leased 31 and our five purchased communities discussed above. During 2001, Marriott did not manage any communities for us and we were a subsidiary of Senior Housing and did not lease any facilities. As a result, we did not incur management fees to Marriott or rent expense in 2001. Facility level operating expenses related to the communities we operated throughout each of the three-month periods ended September 30, 2002 and 2001, were $53.6 million and $51.2 million, respectively, an increase of 5%. This increase is principally attributable to higher insurance premiums, an increase in reserves for the self funded portion of our insurance programs, an increase in accounts receivable reserves and higher wage and benefit costs, which were partially offset by a decrease in expenses from our reduced use of higher cost, third party staffing. Facility level operating expenses at the 90 communities that we operated at September 30, 2002, 10 were $110.7 million for the three months ended September 30, 2002, an increase of 5% over facility expenses of $105.3 million for the comparable period in 2001 (including expenses which relate to periods prior to our operation of some of these communities). This increase results principally from higher insurance premiums, an increase in reserves for the self funded portion of our insurance programs, an increase in accounts receivable reserves and higher wage and benefit costs. Our general and administrative expenses for the three months ended September 30, 2002 were $3.6 million, an increase of 24% over the 2001 period, primarily due to the increased costs associated with operating as a separate, larger company that is publicly owned and the increased size of our operations in 2002. Depreciation expense for the three months ended September 30, 2002, was $517,000, an increase of 48% over depreciation expense of $349,000 in the 2001 period. The increase is attributable to our purchase of five communities discussed above. Discontinued operations relate to three closed facilities. Loss from discontinued operations for the three months ended September 30, 2002, was $826,000, an increase of $512,000, over the comparable 2001 period. The increase in the loss was primarily a result of our cessation of revenue generating activities and our provision for additional reserves recorded for amounts due from the State of Connecticut related to closure costs. We may close additional facilities before the end of 2002. As a result of the factors described above, net loss for the three months ended September 30, 2002, was $2.5 million, compared to net income of $1.2 million in the 2001 period. Nine Months Ended September 30, 2002, Compared to Nine Months Ended September 30, 2001 Revenues from residents for the nine months ended September 30, 2002, were $382.1 million, an increase of 133% over revenues from residents of $164.1 million for the 2001 period. This increase is attributable primarily to our lease of 31 communities on January 11, 2002, and our purchase of five communities on April 1, 2002. Revenues from residents at the communities we operated throughout each of the nine-month periods ended September 30, 2002 and 2001, were $170.1 and $164.1 million, respectively, an increase of 4%. This increase is due primarily to higher per diem charges to residents, somewhat offset by slightly lower occupancy. Revenues from residents at the 90 communities we operated at September 30, 2002, were $394.0 million for the nine months ended September 30, 2002, an increase of 3% over revenues from residents of $382.4 million for the comparable period in 2001 (including revenues which relate to periods prior to our operation of some of these communities). This increase is attributable to higher resident charges offset somewhat by lower occupancy. About 39% of our revenues from residents in the nine months ended September 30, 2002, were received from Medicare and Medicaid, compared to 78% in the 2001 period. This decrease is due largely to our lease of 31 and purchase of five communities during 2002 all of which focus our services to residents who pay with private resources. On October 1, 2002, temporary increases in Medicare payment rates expired. Our Medicare revenues totaled $40.2 million and $26.6 million during the nine months ended September 30, 2002 and 2001, respectively. As a result of these expirations, sometimes referred to as the "Medicare Cliff", and unless or until rate increases are reinstated, or other Medicare rate increases are taken by the Federal government, our revenues from Medicare are likely to be less than previous amounts. We cannot predict the exact amount of the decline in our Medicare revenues, but we expect it will be about $5.3 million per annum. We also cannot predict whether the Federal government will provide any reinstatement or other Medicare rate increase. Interest income increased by $148,000 in the nine months ended September 30, 2002 compared to the comparable period in 2001 due to earnings on higher cash balances in the 2002 period. Expenses for the nine months ended September 30, 2002, were $392.0 million, an increase of 138% over expenses of $164.5 million for the 2001 period. Our wages and benefits costs increased from $114.0 million to $174.0 million, or 60%, primarily due to expenses at the 31 leased and five purchased communities discussed above. Other operating expenses, which include utilities, housekeeping, dietary, maintenance, insurance and facility level administrative costs, rose from $36.9 million to $133.5 million or 262%, again primarily due to expenses at our 31 leased and our five purchased communities discussed above. During 2001, Marriott did not manage any communities for us and we were a subsidiary of Senior Housing that did not lease any facilities. As a result, we did not incur management fees to Marriott or rent expense in 2001. Facility level operating expenses related to the communities we operated throughout each of the nine-month periods ended September 30, 2002 and 2001, were $158.4 million and $150.5 million, respectively, an increase of 5%. This increase is principally attributable to higher insurance premiums, an 11 increase in reserves for the self funded portion of our insurance programs, and higher wage and benefit costs, which were partially offset by a decrease in expenses from our reduced use of higher cost, third party staffing. Facility level operating expenses at the 90 communities that we operated at September 30, 2002, were $328.0 million for the nine months ended September 30, 2002, an increase of 7% over facility expenses for the comparable period in 2001(including expenses which relate to periods prior to our operation at some off these communities). This increase results principally from higher insurance premiums, an increase in reserves for the self funded portion of our insurance programs, and higher wage and benefit costs. Our general and administrative expenses for the nine months ended September 30, 2002 were $11.2 million, a decrease of 10% over the 2001 period, primarily due to non recurring operational start up costs incurred during the 2001 period which were only partially offset by the increased costs associated with operating as a separate, larger company that is publicly owned in 2002. Our expenses during the nine months ended September 30, 2002, period include some large amounts which we do not expect to occur on a regular basis. These expenses arose as follows: o In January we incurred $2.8 million of expenses related to our spin off from Senior Housing and merger with FSQ, Inc. o During June 2002, when we implemented new programs for liability, workers compensation and employee health insurance, we re-evaluated our insurance reserves and increased estimates for pending claims by $3.2 million. Reserve estimates arise from the retention or self funded portion of our insurance programs. Reserve account adjustments are made on the basis of periodic review of pending claims and reported incidents which may result in claims. Our new insurance programs have increased costs by about $450,000 per month starting in July 2002, but the $3.2 million change in reserve estimates may be non recurring. o Also, during the nine months ended September 30, 2002, a review by Marriott of its accounting for the 31 communities which it manages for us resulted in a change in bad debt reserves and other one time charges totaling approximately $850,000. o We incurred an asset impairment charge of $150,000 in the nine months ended September 30, 2002. o We incurred a $122,000 restructuring charge in the nine months ended September 30, 2002. Depreciation expense for the nine months ended September 30, 2002, was $1.2 million, an increase of 27% over the 2001 period. The increase is attributable to our purchase of five communities on April 1, 2002. Loss from discontinued operations for the nine months ended September 30, 2002 was $3.5 million, an increase of $3.1 million, over the loss in the comparable 2001 period. This increase was the result of additional reserves recorded for amounts due from the State of Connecticut related to closure costs and an asset impairment charge related to a closed facility. This increase was primarily a result of our cessation of revenue generating activities and our provision for reserves discussed above. We may decide to close and dispose of additional facilities. As a result of the factors described above, net loss for the nine months ended September 30, 2002, was $13.2 million, an increase of $12.4 million, over the loss in the 2001 period. LIQUIDITY AND CAPITAL RESOURCES At the time of our spin off from Senior Housing on December 31, 2001, we had cash and cash equivalents of $24.9 million. In March and April 2002, we completed a public offering of our common shares raising net proceeds of $26.1 million. A significant amount of our cash was used to acquire five senior living communities for $45.5 million on April 1, 2002. At September 30, 2002, we had cash and equivalents of $12.0 million, including $5.1 million of cash controlled by Marriott. Our primary source of cash to fund operating expenses, including rent and routine capital expenditures, is our revenues from services to residents at our facilities. Changes in laws and regulations which impact Medicare or Medicaid rates, on which some of our facilities rely, may materially affect our future results. Similarly, recent increases in the costs of insurance, especially tort liability insurance, workers compensation and employee health insurance costs, which are 12 affecting the senior living industry, will continue to have a material adverse impact upon our future results of operations. As discussed above in footnote 7 to our financial statements, a failure by IHS or the State of Connecticut to make payments that we believe are due to us would have a material adverse impact upon our future results and deny us access to those cash proceeds to which we believe we are entitled. It is also possible that termination of the Marriott management agreements, as discussed in that footnote 7 to our financial statements, may have a short term adverse impact on our financial results or increase our working capital requirements. Despite these contingencies, however, we believe that our revenues and possible borrowings under our line of credit will be sufficient to allow us to meet our ongoing operating expenses, working capital needs and rent payments to Senior Housing in the short term, or next 12 months, and long term. On October 1, 2002, temporary increases in Medicare payment rates expired. As a result of these expirations, sometimes referred to as the "Medicare Cliff", and unless or until these rate increases are reinstated, or other Medicare rate increases are taken by the Federal government, our revenues from Medicare are likely to be less than previous amounts. We cannot predict the exact amount of our expected decline of our Medicare revenue which will result from the Medicare Cliff, but we expect it to be approximately $5.3 million per annum. We also cannot predict whether the Federal government will provide any reinstatement or other Medicare rate increases. The expansion of our business in 2002 by leasing and acquiring facilities which focus on services to residents who pay with private resources may lessen the effect of Medicare rate declines on our future results of operations. On October 24, 2002, we entered into an agreement for a three year $12.5 million, interest only, revolving credit facility. The interest rate under our revolving credit facility is calculated as LIBOR plus a spread. This revolving credit facility is available for acquisitions, working capital and for general business purposes. The credit facility is secured by some of our accounts receivable and contains covenants, such as maintenance of collateral, minimum net worth and various financial ratios. In certain circumstances, amounts available may be increased to $25 million. As of November 12, 2002, there were no amounts outstanding under this revolving credit facility. On October 25, 2002, we acquired seven independent and assisted living communities with 407 living units for $27 million. All of the revenues at these communities are paid by residents from private resources. This purchase price was paid by our assuming $15.8 million of HUD insured mortgage debt which encumbers one of these communities, and our paying the balance of approximately $11.2 million in cash. On October 25, 2002, we sold one senior living community, which we previously owned unencumbered by mortgage debt, to Senior Housing for $12.7 million. The proceeds of this sale were used to fund the cash portion of our purchase price for the seven facilities we purchased on October 25, 2002, and the balance was added to our working capital for general business purposes. Also on October 25, 2002, we entered a lease with Senior Housing for nine independent and assisted living communities, including the one facility we sold to Senior Housing and eight additional facilities. These nine communities include 750 living units and all of the revenues which we expect from these communities are paid by residents from private resources. The lease has an initial term expiring on December 31, 2019, with an option to renew for one renewal term of 15 years. We agreed to pay Senior Housing minimum rent equal to $6.3 million per year, plus percentage rent starting in 2005. The terms of this new lease are otherwise substantially the same as our other leases with Senior Housing. Debt Instruments and Covenants At September 30, 2002, we had no outstanding obligations for funded debt. The long term liabilities which appear on our September 30, 2002, balance sheet include $12.5 million of advance payments and deposits received from residents at some of our senior living communities plus approximately $2.4 million of reserves arising from the self funded portion of our insurance programs. As discussed above, on October 25, 2002, we assumed HUD insured mortgage debt for approximately $15.8 million. The weighted average interest costs on this debt is 8.98% per year. Principal and interest is due periodically through 2033. Although this mortgage is not recourse to us, it is secured by one of our owned communities with 229 living units. We believe we are in compliance with all material terms and covenants related to this debt. A portion of this debt is refinanceable at any time and all of this debt may be refinanced beginning in 2004. We have begun to consider refinance alternatives. 13 Also, as discussed above, on October 24, 2002, we entered a revolving credit facility for $12.5 million. This credit facility is secured by some of our accounts receivable and it contains various covenants including our maintenance of collateral, minimum net worth and various financial ratios. On November 13, 2002, no amounts were drawn under this revolving credit facility, and we believe we are in compliance with all material terms and covenants applicable to this credit facility. Our most significant long term obligations are our lease obligations to Senior Housing. Including the lease entered on October 25, 2002, as described above, our lease obligations require minimum rent of $76.3 million per year. At November 13, we believe we are in compliance with all material lease obligations. SEASONALITY Our business is subject to modest effects of seasonality. During the calendar fourth quarter holiday periods nursing home and assisted living residents are sometimes discharged to join family celebrations and admission decisions are often deferred. The first quarter of each calendar year usually coincides with increased illness among nursing home and assisted living residents which can result in increased costs or discharges to hospitals. As a result of these factors, nursing home and assisted living operations sometimes produce greater earnings in the second and third quarters of a calendar year and lesser earnings in the first and fourth quarters. We do not believe that this seasonality will cause fluctuations in our revenues or operating cash flow to such an extent that we will have difficulty paying our expenses, including rent, which do not fluctuate seasonally. 14 Item 3. Quantitative and Qualitative Disclosures About Market Risk As of September 30, 2002, we had no obligations for funded debt and, accordingly, are not directly affected by changes in market interest rates. However, as discussed above, we have entered into a $12.5 million revolving credit facility secured by certain of our accounts receivable. This facility will require interest on drawn amounts at floating rates generally equal to LIBOR plus a spread. Whenever borrowings are outstanding under such a credit facility we may be exposed to market changes in interest rates, especially market changes in short term rates. For example, if the full amount of a $12.5 million line of credit were drawn and interest rates decrease or increase by 1% per annum, our interest expense would decrease or increase by $125,000 per year, or $0.015 per share, respectively. Depending upon our exposure to interest rate risks for floating rate obligations outstanding from time to time in the future, we may decide to purchase interest rate caps or other hedging instruments. As noted above, on October 25, 2002, we assumed $15.8 million of fixed rate mortgage debt. Changes in prevailing interest rate may affect the market value of fixed rate debt. Generally, increases in interest rates reduce the market value of fixed rate debt, and decreases in interest rates increase the market value of fixed rate debt. For example: based upon discounted cash flow analysis, if prevailing interest rates were to decline by 10% and other credit market considerations remained unchanged, the market value of our $15.8 million mortgage debt would increase by about $1.3 million; and, similarly, if prevailing interest rates were to increase by 10%, the market value of our $15.8 million mortgage debt would decline by about $1.1 million. The market values of long term, fixed rate debt which can be prepaid or refinanced prior to maturity, such as our $15.8 million mortgage debt, are generally less affected by changes in interest rates. Changes in the market value of our long term, fixed rate debt obligations which are paid according to their terms will not affect our operating results. However, if we have unhedged amounts of floating rate debt outstanding, changes in short term rates will impact our operating results. During the past year short term rates have decreased. We are unable to predict the direction or amount of interest rate changes during the next year. However, we may incur debt at floating or fixed rates in the future, which would increase our exposure to market changes in interest rates. Item 4. Controls and Procedures (a) Within the 90 days prior to the filing date of this report, management of the Company carried out an evaluation, under the supervision and with the participation of our President and Chief Executive Officer and Treasurer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934. Based upon that evaluation, the President and Chief Executive Officer and Treasurer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in recording, summarizing and reporting material information required to be included in our periodic SEC filings in a timely manner. (b) There have been no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. 15 FORWARD LOOKING STATEMENTS THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS FORWARD LOOKING STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 AND THE FEDERAL SECURITIES LAWS. FOR EXAMPLE, THIS REPORT ON FORM 10-Q STATES OR IMPLIES THAT WE WILL BE ABLE TO OPERATE OUR PROPERTIES IN A FINANCIALLY SUCCESSFUL MANNER, THAT CERTAIN LARGE CHARGES AND CHANGES IN INSURANCE RESERVE ESTIMATES WILL NOT RECUR, THAT WE MAY CLOSE ADDITIONAL FACILITIES, THAT OUR REVENUES FROM MEDICARE AND MEDICAID WILL DECREASE BY APPROXIMATELY $5.3 MILLION PER ANNUM, THAT WE BELIEVE WE WILL BE ABLE EXPAND OUR BUSINESS FOCUSED UPON SERVICES TO RESIDENTS WHO PAY WITH PRIVATE RESOURCES, THAT WE WILL COLLECT AMOUNTS WE BELIEVE ARE DUE TO US FROM INTERGRATED HEALTH SERVICES AND THE STATE OF CONNECTICUT AND THAT CANCELLATION OF THE MARRIOTT MANAGEMENT AGREEMENTS WILL NOT RESULT IN A MATERIAL DECLINE IN THE INCOME WE RECEIVE FROM OUR MARRIOTT MANAGED LEASED COMMUNITIES. HOWEVER, OUR OPERATING FINANCIAL RESULTS MAY DETERIORATE BECAUSE OF CHANGES IN MARKET CONDITIONS, GREATER DECLINES IN MEDICARE REVENUES THAN EXPECTED, LOWER MEDICARE AND MEDICAID RATES, HIGHER INSURANCE COSTS, RECURRING LARGE CHANGES IN INSURANCE RESERVES OR OTHERWISE; WE MAY BE UNABLE TO IDENTIFY OR CLOSE EXPANSION OPPORTUNITIES ON ACCEPTABLE TERMS; WE MAY BE UNABLE TO COLLECT AMOUNTS FROM INTEGRATED HEALTH SERVICES OR THE STATE OF CONNECTICUT BECAUSE WE CANNOT REACH AGREEMENTS OR SETTLEMENTS, BECAUSE OUR LITIGATION OR OTHER EFFORTS FAIL OR BECAUSE INTEGRATED HEALTH SERVICES OR THE STATE OF CONNECTICUT ARE UNABLE TO MAKE PAYMENTS OR FOR OTHER REASONS; AND CANCELLATION OF THE MARRIOTT MANAGEMENT AGREEMENTS COULD RESULT IN MATERIAL DECLINES IN REVENUE, INCREASES IN EXPENSES OR INCREASES IN OUR WORKING CAPITAL NEEDS. FORWARD LOOKING STATEMENTS ARE NOT GUARANTEED TO OCCUR, OUR EXPECTED RESULTS MAY NOT BE ACHIEVED, AND ACTUAL RESULTS MAY DIFFER MATERIALLY FROM OUR EXPECTATIONS. INVESTORS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON FORWARD-LOOKING STATEMENTS. YOU SHOULD NOT RELY UPON FORWARD LOOKING STATEMENTS EXCEPT AS STATEMENTS OF OUR PRESENT INTENTIONS AND OF OUR PRESENT EXPECTATIONS WHICH MAY OR MAY NOT OCCUR. 16 Part II. Other Information Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: 2.1 Purchase and Sale Agreement, dated as of August 26, 2002, by and among Constellation Health Services, Inc. and certain of its subsidiaries, as Seller, and Constellation Real Estate Group, Inc., as Guarantor, and Senior Housing Properties Trust, as Buyer. (Incorporated by reference to the Registrant's Current Report on Form 8-K filed on November 12, 2002.) 2.2 First Amendment to Purchase and Sale Agreement, dated as of October 25, 2002, by and among Constellation Health Services, Inc. and certain of its subsidiaries, as Seller, and Senior Housing Properties Trust and Five Star Quality Care, Inc., collectively as Buyer. (Incorporated by reference to Five Star Quality Care, Inc.'s Current Report on Form 8-K filed on November 12, 2002.) 10.1 Lease Agreement, dated as of October 25, 2002, by and between SNH CHS Properties Trust, as Landlord, and FVE-CHS LLC, as Tenant. (Incorporated by reference to Five Star Quality Care, Inc.'s Current Report on Form 8-K filed on November 12, 2002.) 10.2 Receivables Purchase and Transfer Agreement, dated as of October 24, 2002, among Five Star Quality Care, Inc., as Primary Servicer, the Providers named therein, and FSQC Funding Co., LLC, as Purchaser. 10.3 Loan and Security Agreement, dated as of October 24, 2002, among FSQC Funding Co., LLC, as Borrower, the Lenders party thereto, Dresdner Kleinwort Wasserstein LLC, as Co-Program Manager, Syndication Agent and Lead Arranger, Healthcare Finance Group, Inc., as Co-Program Manager, and HFG Healthco-4 LLC, as Collateral Agent. 10.4 Guaranty Agreement, dated as of October 24, 2002, made by Five Star Quality, Inc., Five Star Quality Care Trust and Five Star Quality Care Holding Co., Inc. in favor of FSQC Funding Co., LLC. 10.5 Pledge Agreement, dated as of October 24, 2002, among Five Star Quality Care Trust and Five Star Quality Care Holding Co., Inc., as Grantors, and HFG Healthco-4 LLC, as Collateral Agent for the benefit of the Lenders and as assignee of the Purchaser. 10.6 Assignment of Contracts as Collateral Security, dated as of October 24, 2002, between FSCQ Funding Co., LLC and HFG Healthco-4, LLC, as Collateral Agent. 99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K: None. 17 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FIVE STAR QUALITY CARE, INC. By: /s/ Evrett W. Benton Evrett W. Benton President and Chief Executive Officer Dated: November 14, 2002 By: /s/ Bruce J. Mackey Jr. Bruce J. Mackey Jr. Treasurer and Chief Financial Officer Dated: November 14, 2002 18 CERTIFICATIONS I, Evrett W. Benton, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Five Star Quality Care, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2002 /s/ Evrett W. Benton Evrett W. Benton President and Chief Executive Officer 19 I, Bruce J. Mackey Jr., certify that: 1. I have reviewed this quarterly report on Form 10-Q of Five Star Quality Care, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2002 /s/ Bruce J. Mackey Jr. Bruce J. Mackey Jr. Treasurer and Chief Financial Officer 20 EX-10.2 3 ex10-2.txt EXHIBIT 10.2 RECEIVABLES PURCHASE AND TRANSFER AGREEMENT Dated as of October 24, 2002 Among FIVE STAR QUALITY CARE, INC., as Primary Servicer, THE PROVIDERS NAMED HEREIN and FSQC FUNDING CO., LLC, as Purchaser ALL THE RIGHT, TITLE AND INTEREST OF THE PURCHASER IN AND TO, ALL BENEFITS OF THE PURCHASER UNDER AND ALL MONIES DUE OR TO BECOME DUE TO THE PURCHASER UNDER OR IN CONNECTION WITH, THIS AGREEMENT HAVE BEEN ASSIGNED TO HFG HEALTHCO-4 LLC, AS COLLATERAL SECURITY FOR ANY AND ALL THE OBLIGATIONS OF THE PURCHASER PURSUANT TO A LOAN AND SECURITY AGREEMENT DATED AS OF OCTOBER 24, 2002 AMONG THE PURCHASER, THE LENDERS FROM TIME TO TIME PARTY THERETO AND THE PROGRAM MANAGER.
TABLE OF CONTENTS Page ARTICLE I. TERMS OF THE PURCHASES AND CONTRIBUTIONS SECTION 1.01 Sale, Contribution and Purchase of Receivables................................1 SECTION 1.02 Monthly Report................................................................1 SECTION 1.03 The Transfers.................................................................2 SECTION 1.04 Collection and Payment Procedures.............................................2 SECTION 1.05 Allocation of Servicer Responsibilities.......................................3 ARTICLE II. PAYMENT MECHANICS;MISDIRECTED PAYMENTS; EOB'S SECTION 2.01 Non-Governmental Entities Payment Mechanics...................................4 SECTION 2.02 Governmental Entities Payment Mechanics.......................................4 SECTION 2.03 Misdirected Payments; EOB's...................................................5 SECTION 2.04 Unidentified Payments; Purchaser's Right of Presumption ..........................................................6 SECTION 2.05 No Rights of Withdrawal.......................................................6 ARTICLE III. REPRESENTATIONS AND WARRANTIES; COVENANTS; EVENTS OF TERMINATION; GROUP-WIDE EVENTS OF TERMINATION SECTION 3.01 Representations and Warranties; Covenants.....................................6 SECTION 3.02 Group-Wide Event of Termination; Event of Termination ..........................................................6 ARTICLE IV. INDEMNIFICATION; GRANT OF SECURITY INTEREST SECTION 4.01 Denied Receivables............................................................7 SECTION 4.02 Indemnities by the Provider...................................................8 SECTION 4.03 Right of Set-Off..............................................................9 SECTION 4.04 Grant of Security Interest....................................................9 ARTICLE V. MISCELLANEOUS SECTION 5.01 Amendments, etc..............................................................10 SECTION 5.02 Notices, etc.................................................................10 SECTION 5.03 Assignability................................................................10 SECTION 5.04 Further Assurances...........................................................11 SECTION 5.05 Costs, Expenses and Termination Fee..........................................11 SECTION 5.06 Confidentiality..............................................................12 SECTION 5.07 Term and Termination.........................................................12 SECTION 5.08 Sale and Contribution Treatment..............................................12 SECTION 5.09 Grant of Security Interest...................................................12 SECTION 5.10 No Liability of the Purchaser................................................13 SECTION 5.11 Addition and Removal of Providers............................................13 SECTION 5.12 Attorney-in-Fact.............................................................15 SECTION 5.13 Entire Agreement; Severability...............................................15
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SECTION 5.14 Governing Law................................................................15 SECTION 5.15 Waiver of Jury Trial, Jurisdiction And Venue.........................................................15 SECTION 5.16 Execution in Counterparts....................................................16 SECTION 5.17 No Proceedings...............................................................16 SECTION 5.18 Survival of Termination......................................................16 SECTION 5.19 Joint and Several Liability; Providers.......................................16 SECTION 5.20 Accounting Information.......................................................16
EXHIBITS - -------- Exhibit I Definitions Exhibit II Conditions of Purchases Exhibit III Representations and Warranties Exhibit IV Covenants Exhibit V Events of Termination Exhibit VI Receivable Information Exhibit VII-A Form of Notice to Governmental Entities Exhibit VII-B Form of Notice to non-Governmental Entities Exhibit VIII Primary Servicer Responsibilities Exhibit IX Servicer Termination Events Exhibit X Interface Between Master Servicer and the Primary Servicer Exhibit XI-A Memorandum of Providers' Counsel with Respect to the Patient Consent Forms Exhibit XI-B Form of Opinion of Providers' and Purchaser's Counsel with Respect to Certain Corporate Matters Exhibit XI-C Form of Opinion of Providers' and Purchaser's Counsel with Respect to Certain Bankruptcy Matters Exhibit XII Form of Depositary Agreement Exhibit XIII Form of Parent Guaranty Exhibit XIV Form of Pledge Agreement Exhibit XV Form of Subscription Agreement Exhibit XVI Form of Control Agreement Exhibit XVII Form of Government Depositary Agreement SCHEDULES - --------- Schedule I Providers Schedule II Addresses for Notices Schedule III Credit and Collection Policy Schedule IV Disclosures Schedule V Lockbox Information Schedule VI Tradenames Schedule VII Net Value Factors Schedule VIII Providers with Facilities in Certain States ii RECEIVABLES PURCHASE AND TRANSFER AGREEMENT Dated as of October 24, 2002 FIVE STAR QUALITY CARE, INC., a corporation organized under the laws of the State of Maryland (together with its successors and assigns, "Five Star"), each of the entities named on Schedule I hereto, as such Schedule I may be amended from time to time pursuant to Section 5.11 hereof (each, together with each one's successors and assigns, a "Provider" and, collectively, the "Providers") and FSQC Funding Co., LLC, a limited liability company organized under the laws of the State of Delaware (together with its successors and assigns, the "Purchaser"), agree as follows: PRELIMINARY STATEMENTS. Certain terms that are capitalized and used throughout this Agreement are defined in Exhibit I to this Agreement. References herein and in the Exhibits and Schedules hereto to the "Agreement" refer to this Agreement, as amended, restated, modified or supplemented from time to time in accordance with its terms (the "Agreement"). The Providers wish to sell or contribute to the Purchaser on a continuing basis all of its healthcare receivables. The Purchaser is prepared to purchase or to accept the contribution of such healthcare receivables on the terms and subject to the conditions set forth herein. Accordingly, the parties agree as follows: ARTICLE I. TERMS OF THE PURCHASES AND CONTRIBUTIONS SECTION 1.01 Sale, Contribution and Purchase of Receivables. On each Transfer Date until the Facility Termination Date and on the terms and conditions set forth herein, each Provider agrees to sell or contribute, without recourse except to the extent expressly provided herein, all of such Provider's Receivables to the Purchaser, and the Purchaser agrees to purchase or accept such contribution of, all of each Provider's Receivables. SECTION 1.02 Monthly Report. On or prior to the 15th day of each Month, the Primary Servicer, on behalf of each Provider, shall provide the Master Servicer by Transmission a report (the "Monthly Report") containing the information listed on Exhibit VI hereto (as such Exhibit may be modified by the Purchaser from time to time, the "Receivable Information") with respect to the new Receivables sold or contributed to the Purchaser during the immediately prior Month. Based on the Monthly Report, the Providers and Purchaser shall finalize and record on their respective books and records (to the extent not previously recorded) the determination of those Receivables that were purchased and those that were contributed. All Receivable Information that has been received by the Master Servicer shall be reviewed by the Master Servicer and the Program Manager. SECTION 1.03 The Transfers. On each Transfer Date (i) subject to satisfaction of the applicable conditions set forth in Exhibit II hereto, the Providers shall sell to the Purchaser all Eligible Receivables, that the Providers have submitted, if any, to the Purchaser for purchase hereunder and to be included in the Purchased Batch, (ii) the Providers will contribute to the capital of the Purchaser all other Eligible Receivables in the Transferred Batch, and (iii) the Providers will contribute to the capital of the Purchaser all other Receivables that do not constitute Eligible Receivables. The Purchaser shall (x) pay to the Primary Servicer for the benefit of the Providers, at the Primary Servicer Account, an amount equal to the Purchase Price of the Purchased Batch, and (y) record on the books and records of the Purchaser the capital contribution with respect to those Receivables contributed to the capital of the Purchaser in such Transferred Batch, in each case, promptly and in no event later than seven Business Days after the applicable Transfer Date for such Batch. The Primary Servicer shall remit the proceeds of the Purchase Price of the Purchased Batch to each Provider in accordance with their respective interests. (a) Effective on each Transfer Date, in consideration of the payment of the Purchase Price, or the increase in the capital accounts of the applicable Provider in the Purchaser, and for other good and valuable consideration, each Provider hereby sells, contributes, assigns and conveys to the Purchaser and the Purchaser hereby purchases and accepts, as absolute owner, all right, title and interest in and to the Batch Receivables purchased or contributed on such Transfer Date. SECTION 1.04 Collection and Payment Procedures. Collections on Batches. The Purchaser shall be entitled with respect to each Batch, (i) to receive all Collections on such Batch and (ii) to have and to exercise any and all rights (x) to collect, record, track and, during the continuance of an Event of Termination or a Servicer Termination Event, take all actions to obtain Collections with respect to each Batch Receivable payable by Persons other than Governmental Entities and (y) to the extent permitted by law and in a manner consistent with all applicable laws and regulations, to record, track and, during the continuance of an Event of Termination or a Servicer Termination Event, take all actions to obtain Collections with respect to each Receivable included in a Batch payable by Governmental Entities. (a) Collections Not Part of a Batch. On each Settlement Date, and provided that (i) each Provider shall have paid all amounts then due and owing to the Purchaser under this Agreement, (ii) each Provider, or the Primary Servicer on behalf of such Provider, shall have successfully sent by Transmission to the Master Servicer all information required with respect to the Batch Receivables for the immediately preceding Settlement Period, and (iii) no Event of Termination shall have occurred and be continuing, the Purchaser shall pay or turn over, as the case may be, to the Primary Servicer for the benefit of the applicable Providers any and all cash collections or other cash or non-cash proceeds received by the Purchaser during the immediately preceding Settlement Period with respect to Accounts that are not part of any Batch. The Primary Servicer shall remit such cash and proceeds to each Provider in accordance with their respective interests. (b) Distributions. On each Business Day and with respect to each Batch, Total Collections shall be distributed to the Purchaser. 2 SECTION 1.05 Allocation of Servicer Responsibilities. Tracking of purchases, Collections and other transactions pertaining to each Batch shall be administered by the Master Servicer in a manner consistent with the terms of this Agreement. The responsibilities of the Providers, the Primary Servicer and the Master Servicer are set forth in Exhibit X attached hereto. Each Provider shall cooperate fully with the Primary Servicer and the Master Servicer in establishing and maintaining the Transmission of the Receivable Information, including, without limitation, the matters described in Exhibit X, and shall provide promptly to the Master Servicer such other information necessary or desirable for the administration of Collections on the Batch Receivables as may be requested from time to time. (a) The Purchaser hereby appoints Five Star as its agent for the administration and servicing obligations set forth in Exhibit VIII hereto with respect to the Receivables sold or transferred by the Providers to the Purchaser hereunder (the "Primary Servicer Responsibilities"), and Five Star hereby accepts such appointment and agrees to perform the Primary Servicer Responsibilities on behalf of the Providers; provided, however, that such appointment shall not release any Provider from any of its duties, responsibilities, liabilities and obligations resulting or arising hereunder. Each of Five Star, the Providers and the Purchaser hereby acknowledge that Five Star's appointment as Primary Servicer is expressly limited by and subject to the Program Manager's right as specified by the Loan Agreement to replace the Purchaser or its agent as the Primary Servicer (which replacement may be effectuated through the outplacement to a Person of all back office duties, including billing, collection and processing responsibilities, and access to all personnel, hardware and software utilized in connection with such responsibilities). The Purchaser may, with the consent of the Program Manager, at any time following the occurrence of a Servicer Termination Event (and shall, without requirement of notice to any party, upon a Servicer Termination Event resulting from the events described in clauses (g) or (j) of Exhibit V hereto) or a Group-Wide Event of Termination, appoint another Person (which may be the Master Servicer) to succeed Five Star as agent for performance of the Primary Servicer Responsibilities (which appointment may be effectuated through the outplacement to a Person of all back office duties, including billing, collection and processing responsibilities, and access to all personnel, hardware and software utilized in connection with such responsibilities). (b) As compensation for the performance of the Primary Servicer Responsibilities, the Providers shall pay Five Star (or the successor Primary Servicer who performs such Primary Servicer Responsibilities) the Primary Servicing Fee. ARTICLE II. PAYMENT MECHANICS; MISDIRECTED PAYMENTS; EOB'S SECTION 2.01 Non-Governmental Entities Payment Mechanics. On or prior to the Initial Transfer Date, each of the Primary Servicer, the Providers, the Purchaser, the Program Manager, the Collateral Agent and the Lockbox Bank shall have entered into the Depositary 3 Agreement and shall have caused the Lockbox Bank to establish the Primary Purchaser Account. In addition, on or prior to the Initial Transfer Date, the Primary Servicer, the Providers, the Purchaser, the Program Manager, the Collateral Agent, and the Local Banks shall have entered into the Control Agreements with respect to each of the Local Purchaser Accounts and shall have caused the Local Banks to establish each Local Purchaser Account. (a) Each Provider shall prepare, execute and deliver to each non-Governmental Entity who is or is expected to be an Obligor, with copies to the Purchaser, on or prior to the Initial Transfer Date, a Notice to non-Governmental Entities addressed to each such non-Governmental Entity, which Notice to non-Governmental Entities shall state that all present and future Receivables owing to such Provider have been and will be transferred to the Purchaser and that all checks and EOB's from such non-Governmental Entity on account of Receivables shall be sent to the applicable Provider for immediate deposit in the applicable Purchaser Account and all wire transfers from such non-Governmental Entity on account of Receivables shall be wired directly into the applicable Purchaser Account. (b) Each Provider covenants and agrees that, on and after the Initial Transfer Date, all invoices (and, if provided by such Provider, return envelopes) to be sent to non-Governmental Entities shall set forth only the address of the applicable Provider as a return address for payment of Receivables and delivery of EOB's, and only the applicable Purchaser Account with respect to wire transfers for payment of Receivables. Each Provider hereby further covenants and agrees to cause each check received by such Provider to be deposited in the applicable Purchaser Account no later than one Business Day following receipt. Each Provider hereby further covenants and agrees to instruct and notify each of the members of its accounting and collections staff to provide identical information in communications with non-Governmental Entities with respect to payment of Receivables, wire transfers and EOB's. SECTION 2.02 Governmental Entities Payment Mechanics. On or prior to the Initial Transfer Date, each of the Primary Servicer, the Providers, the Purchaser, the Program Manager, the Collateral Agent and the Lockbox Bank shall have entered into the Depositary Agreement, and the Providers shall have caused the Lockbox Bank to establish the Primary Provider Account and the Government Lockboxes and Government Lockbox Accounts for those Providers indicated on Schedule VIII. In addition, on or prior to the Initial Transfer Date, each of the Providers listed on Schedule VIII hereto that have or will have established a Government Lockbox and Government Lockbox Account at a bank other than the Lockbox Bank shall have entered into a Government Depositary Agreement with the bank listed next to such Provider's name on Schedule VIII, the Primary Servicer, the Purchaser, the Program Manager and the Collateral Agent, and shall have caused such bank to establish a Government Lockbox and a Government Lockbox Account. Each Provider shall prepare, execute and deliver to each Governmental Entity or its fiscal intermediary who is or is expected to be an Obligor, with copies to the Purchaser, on or prior to the Initial Transfer Date, Notices to Governmental Entities, which Notices to Governmental Entities shall provide that all checks and EOB's from Governmental Entities on account of Receivables shall be sent to the applicable Government Lockbox and all wire transfers on account of Receivables shall be wired directly into the applicable Provider Account. 4 (a) Each Provider covenants and agrees that, on and after the Initial Transfer Date, all invoices to be sent to Governmental Entities (and, if provided by such Provider, return envelopes) shall set forth only the address of the applicable Government Lockbox as a return address for payment of Receivables and delivery of EOB's, and only the applicable Provider Account with respect to wire transfers for payment of Receivables. Each Provider further covenants and agrees to instruct and notify each of the members of its accounting and collections staff to provide identical information in communications with Governmental Entities with respect to payment of Receivables, wire transfers and EOB's. (b) The Providers shall maintain the Government Lockbox, the Government Lockbox Account and the Provider Account solely and exclusively for the receipt of payments on account of Receivables from Governmental Entities. The Providers and the Primary Servicer shall take all actions necessary to ensure that no payments from any Person other than a Governmental Entity shall be deposited in any Government Lockbox or any Provider Account. SECTION 2.03 Misdirected Payments; EOB's. In the event that any Provider receives an EOB or a Misdirected Payment in the form of a check, such Provider shall immediately send or deposit such Misdirected Payment, in the form received by such Provider, by hand or overnight delivery service to the Local Purchaser Account or Government Lockbox, as the case may be, together with the EOB and the envelope in which such payment was received. In the event that any Provider receives a Misdirected Payment in the form of cash or wire transfer, such Provider shall immediately wire transfer the amount of such Misdirected Payment directly to the Primary Purchaser Account. All Misdirected Payments and EOB's shall be sent promptly upon receipt thereof, and in no event later than the close of business, on the first Business Day after receipt thereof. (a) If a Misdirected Payment in the form of a check is received by the Purchaser more than six days after the postmark date on the envelope enclosing a check from the Obligor (or, if no such envelope is sent to the Government Lockbox by a Provider, more than six days after the date of such check or wire transfer with respect thereto), then the Providers shall pay interest on such Misdirected Payment to the Purchaser from such sixth subsequent day to and including the date such check is received in the Primary Purchaser Account, at a rate equal to the interest rate then in effect under the Loan Agreement. (b) Each Provider hereby agrees and consents to the Purchaser taking such actions as are reasonably necessary to ensure that future payments from the Obligor of a Misdirected Payment shall be made in accordance with the Notice previously delivered to such Obligor, or, if no Notice was provided, in accordance with the provisions of Sections 2.01 and 2.02, including, without limitation, to the maximum extent permitted by law, (i) the Purchaser, its assigns or designees, or the Program Manager executing on such Provider's behalf and delivering to such Obligor a new Notice, and (ii) the Purchaser, its assigns or designees, or the Program Manager contacting such Obligor by telephone to confirm the instructions previously set forth in the Notice to such Obligor. Upon the Purchaser's request, such Provider shall promptly (and in any event, within two Business Days from such request) take such similar actions as the Purchaser may request. 5 SECTION 2.04 Unidentified Payments; Purchaser's Right of Presumption. Each Provider and the Purchaser agree and consent that the Program Manager or its designees or assigns, may apply any payment it receives from an Obligor or any other payor against a Transferred Batch if the Program Manager is unable in good faith to determine from the information in the EOB whether such payment relates to a Transferred Batch. SECTION 2.05 No Rights of Withdrawal. None of the Providers, the Primary Servicer or the Purchaser shall have any rights of direction or withdrawal with respect to amounts held in the Purchaser Account, except on each day that there are any funds in a Local Purchaser Account, the applicable Provider shall cause all such funds to be transferred to the Primary Purchaser Account. ARTICLE III. REPRESENTATIONS AND WARRANTIES; COVENANTS; EVENTS OF TERMINATION; GROUP-WIDE EVENTS OF TERMINATION SECTION 3.01 Representations and Warranties; Covenants. Each Provider makes, on the Initial Transfer Date and on each subsequent Transfer Date, the representations and warranties on and as of such dates, and hereby agrees to perform and observe the covenants, set forth in Exhibits III and IV, respectively, hereto. SECTION 3.02 Group-Wide Event of Termination; Event of Termination. If a Group-Wide Event of Termination shall occur and be continuing, the Purchaser may, by notice to the Providers or by notice to the Primary Servicer (which notice shall be deemed to have been given to the Providers), take either or both of the following actions: (x) declare the Facility Termination Date to have occurred (except with respect to a Group-Wide Event of Termination arising as a result of clause (g) of Exhibit V, in which case the Facility Termination Date shall be deemed to have occurred automatically and without notice), and (y) without limiting any rights hereunder, terminate the appointment of Five Star as Primary Servicer and replace Five Star as Primary Servicer in the manner set forth in Section 1.05(b). Upon any such declaration or designation, the Purchaser shall have, in addition to the rights and remedies which it may have under this Agreement, all other rights and remedies provided after default under the UCC and under other applicable law, which rights and remedies shall be cumulative. (a) If an Event of Termination shall occur and be continuing with respect to a Provider, following the receipt by the Purchaser of (x) all Collections with respect to Eligible Receivables (that have not become Denied Receivables) and (y) all Return Prices and Indemnified Amounts with respect to Denied Receivables, in each case, attributable to such Provider, the Primary Servicer may request that such Provider be removed as a Provider for the purposes of the Provider Documents, provided that the conditions set forth in Section 5.11(b) shall have been satisfied. 6 ARTICLE IV. INDEMNIFICATION; GRANT OF SECURITY INTEREST SECTION 4.01 Denied Receivables. If a breach of any of the representations or warranties contained herein relating to a Batch Receivable shall be discovered at any time (each, a "Denied Receivable"), the Primary Servicer or the applicable Provider shall on the next Settlement Date, purchase such Denied Receivable from the Purchaser at the Return Price. (a) For ease of administration, the Purchaser shall be entitled to presume that the failure of any Batch Receivable (or portion thereof) to be paid in full on or after the 180th day following the Last Service Date thereof is the result of a breach of a representation or warranty contained herein with respect to such Batch Receivable, unless the Purchaser shall have actual knowledge to the contrary (such as, by way of example, actual knowledge of the financial inability of an Obligor to pay its obligations represented by a Receivable). Each Provider hereby represents and warrants to the Purchaser that it would generally become aware, in the ordinary course of its business, if an Obligor did not have the financial ability to pay its obligations represented by a Receivable. Each Provider agrees that it shall provide notice to the Purchaser and the Program Manager, as soon as such Provider becomes aware of any Obligor's financial inability to pay obligations represented by a Receivable. In the event the Purchaser receives the Return Price for any such Batch Receivable and it is thereafter determined that the failure of such Batch Receivable to be paid in full was not the result of a breach of representation or warranty contained herein, the parties hereto shall make an appropriate adjustment to the appropriate Provider's capital account or increase the Purchase Price of any Purchased Batch to be purchased on or after such date. (b) Upon receipt by (or on behalf of) the Purchaser of the Return Price with respect to any Denied Receivable, the Purchaser shall be deemed to have reassigned and resold to the applicable Provider such Denied Receivable without any representation, warranty or recourse whatsoever, and, thereafter, neither the Purchaser nor any member of the Lender Group shall have any further servicing or other obligation to such Provider with respect to such Denied Receivable. At the request of a Provider (and at such Provider's sole cost and expense), the Purchaser shall promptly deliver to such Provider such documents, assignments, releases, notices and instruments of termination as such Provider may reasonably request to evidence the reconveyance by the Purchaser of a Denied Receivable pursuant to the terms of this Section 4.01(c). SECTION 4.02 Indemnities by the Provider. Without limiting any other rights that the Purchaser, the Program Manager, the Master Servicer or any of their respective Affiliates (together with their respective officers, directors, agents, representatives, shareholders, counsel, employees and lenders, each, an "Indemnified Party") may have hereunder or under applicable law, the Providers hereby agree to indemnify each Indemnified Party from and against any and all claims, losses and liabilities (including, without limitation, reasonable attorneys' fees) (all of the foregoing being collectively referred to as "Indemnified Amounts") arising out of or resulting from any of the following: 7 (a) the sale or contribution of any Receivable which purports to be part of a Transferred Batch but which is not, at the date of such sale or contribution, an Eligible Receivable; (b) any representation or warranty made or deemed made by any Provider (or any of its officers) under or in connection with this Agreement (and not relating to the Eligibility Criteria) which shall have been incorrect in any material respect when made; (c) the failure by any Provider or any Batch Receivable to comply with any applicable law, rule or regulation; (d) the failure to vest in the Purchaser a perfected ownership interest in each Receivable included in a Transferred Batch and the proceeds and Collections in respect thereof, free and clear of any Liens (other than Liens expressly permitted hereunder); (e) any dispute, claim, set-off or defense to the payment, in whole or in part, of any Receivable (including, without limitation, a defense based on such Receivable not being a legal, valid and binding obligation) or any other claim resulting from the services or merchandise related to such Receivable or the furnishing or failure to furnish such services or merchandise or relating to collection activities with respect to such Receivable (if such collection activities were performed by a Provider or any of its Affiliates acting as Primary Servicer); provided, however, this clause (e) shall not be deemed to include any dispute, claim, set-off or defense to the payment of any Receivable arising out of the financial inability of an Obligor to pay its obligations represented by such Receivable including, without limitation, a discharge in bankruptcy; (f) a failure of any Provider, including, without limitation, the Primary Servicer's actions on behalf of the Providers under Section 1.05(b) of this Agreement with respect to Primary Servicer Responsibilities, to perform its duties or obligations in accordance with the provisions hereof or to perform its duties or obligations hereunder; or (g) the commingling by any Provider of Collections at any time with other funds of such or any other Provider; provided, however, that in all events there shall be excluded from the foregoing indemnification any claims, losses or liabilities resulting solely from the gross negligence or willful misconduct of an Indemnified Party or which constitute credit recourse for an uncollectible Batch Receivable. Such Indemnified Party shall notify the Primary Servicer, on behalf of the Providers, of such claim, provided that the failure to so notify shall not affect or invalidate the indemnity granted pursuant to this Section 4.02. SECTION 4.03 Right of Set-Off. Unless a Provider notifies the Purchaser in writing that it desires to pay on the date when due the Return Price under Section 4.01 or any Indemnified Amounts under Section 4.02 and such Provider makes such payment to the Purchaser 8 in immediately available funds on such date, such Provider hereby irrevocably instructs the Purchaser to set-off the full amount of the Return Price or the Indemnified Amounts, as the case may be, against the Purchase Price of any Purchased Batch to be purchased on or after such date. No further notification, act or consent of any nature whatsoever is required prior to the right of the Purchaser to exercise such right of set-off; provided, however, the Purchaser or the Program Manager shall notify the Primary Servicer on behalf of such Provider that a set-off pursuant to this Section 4.03 occurred, the amount of such set-off and a description of the Denied Receivable or Indemnified Amounts, as the case may be; provided, further that the failure to so notify shall not affect or invalidate the indemnity granted pursuant to Section 4.02. The Purchaser shall exercise its right to set-off hereunder to the extent funds are available prior to making a demand for indemnification under Section 4.02. SECTION 4.04 Grant of Security Interest. As collateral security for the Providers' existing and future (i) obligations to purchase Denied Receivables under Section 4.01 hereof, (ii) indemnification obligations to the Purchaser under Section 4.02 hereof, and (iii) obligations to pay costs, expenses and fees under Section 5.05 hereof, each Provider hereby grants to the Purchaser a first priority lien on and security interest in, and right of set-off against, (1) all of the Accounts now or hereafter owned or held by such Provider, (2) all of the Additional Collateral, (3) any and all amounts held in any accounts maintained at any bank, and (5) all proceeds of the foregoing (all of the foregoing, the "Collateral"). (a) In connection with the grant under (a) above, this Agreement shall be deemed to be a security agreement as understood under the UCC. Each Provider agrees to execute, and hereby authorizes the Purchaser to file, one or more financing statements or continuation statements or amendments thereto or assignments thereof in respect of the lien created pursuant to this Section 4.04 which may at any time be required or, in the opinion of the Purchaser, be desirable, and to do so without the signature of such Provider where permitted by law. ARTICLE V. MISCELLANEOUS SECTION 5.01 Amendments, etc. No amendment or waiver of any provision of this Agreement or consent to any departure therefrom by a party hereto shall be effective unless in writing signed by the Primary Servicer, each Provider, the Purchaser, and consented to in writing by the Collateral Agent as assignee of all of the Purchaser's rights and remedies hereunder, and then such amendment, waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. No failure on the part of the Purchaser, the Primary Servicer or a Provider to exercise, and no delay in exercising, any right hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right hereunder preclude any other or further exercise thereof or the exercise of any other right. SECTION 5.02 Notices, etc. All notices and other communications hereunder shall, unless otherwise stated herein, be in writing (which may include facsimile communication) 9 and shall be faxed or delivered to, (i) each party hereto, at its address set forth under its name on the signature pages hereof or at such other address as shall be designated by such party in a Written Notice to the other parties hereto (each Provider hereby acknowledges and agrees that notices and communications to or for its benefit may be delivered to Five Star and such delivery to Five Star shall be deemed to be received by such Provider),(ii) the Program Manager and the Master Servicer at the addresses set forth on Schedule II attached hereto (as such Schedule may be amended from time to time) and (iii) if the Primary Servicer is a person other than Five Star, at the address provided by such Primary Servicer. Notices and communications by facsimile shall be effective when sent (and shall be followed by hard copy sent by regular mail) and notices and communications sent by other means shall be effective when received. SECTION 5.03 Assignability. This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective permitted successors and assigns. (a) Subject to Section 5.03(b) of the Loan Agreement, this Agreement and the Purchaser's rights and obligations herein (including, without limitation, ownership of the Batch Receivables in each Transferred Batch, the Purchaser Account and rights in relation to the Government Lockbox and the Provider Account) shall be assignable by the Purchaser and its successors and assigns. Each Provider hereby acknowledges that the Purchaser is granting to the Collateral Agent, for the benefit of the Collateral Agent, the Program Manager and the Lenders, which may further grant to their respective lenders or to any Federal Reserve Bank, a security interest in, and collateral assignment of, this Agreement and all of the Purchaser's rights, title and interests hereunder (including, without limitation, the Batch Receivables, the Providers' obligations hereunder, the Purchaser Account, and rights in relation to the Government Lockbox and the Provider Account). (b) No Provider may assign its rights or obligations hereunder or any interest herein without the prior written consent of the Purchaser, the Program Manager and the Collateral Agent. SECTION 5.04 Further Assurances. Each Provider shall, at its cost and expense, upon the request of the Purchaser, duly execute and deliver, or cause to be duly executed and delivered, to the Purchaser such further instruments and do and cause to be done such further acts as may be necessary or proper in the reasonable opinion of the Purchaser to carry out more effectively the provisions and purposes of this Agreement. SECTION 5.05 Costs, Expenses and Termination Fee. In addition to the rights of indemnification granted under Section 4.02 hereof, the Providers agree to pay on demand all reasonable costs and expenses in connection with the preparation, execution and delivery of this Agreement and any waiver, modification, supplement or amendment hereto, including, without limitation, the reasonable fees and out-of-pocket expenses of counsel for the Purchaser and the members of the Lender Group, and all costs and expenses, if any (including reasonable counsel fees and expenses), of the Purchaser, its Affiliates and the members of the Lender Group in connection with the enforcement, collection, protection, maintenance, preservation and foreclosure on its interests with respect to this Agreement, any related documents, any Collateral, the Receivables, any Lien, or under any instrument or document delivered pursuant to this Agreement, and the Purchaser 10 may take judgment for all such amounts. The attorneys' fees arising from such services, including those of any appellate proceedings, and all reasonable out-of-pocket expenses, charges, costs and other fees incurred by such counsel in any way or in any respect to or arising out of or in connection with or relating to any of the events or actions described in this Section 5.05 shall be payable by the Providers to the Purchaser on demand (with interest accruing from the tenth Business Day following the date of such demand). (a) The Providers further agree to pay on the Initial Transfer Date (and with respect to costs and expenses incurred following the Initial Transfer Date, within seven days of demand therefor) (i) all reasonable costs and expenses incurred by the Purchaser or its agent in connection with periodic audits of the Receivables, (ii) all reasonable costs and expenses incurred by the Master Servicer or the Program Manager to accommodate any significant coding or data system changes made by a Provider that would affect the transmission or interpretation of data received through the interface, and (iii) all reasonable costs and expenses incurred by the Purchaser for additional time and material expenses of the Master Servicer resulting from a lack of cooperation or responsiveness of any Provider or the Primary Servicer to agreed-upon protocol and schedules with the Master Servicer; provided, that such Provider or the Primary Servicer has been informed of the alleged lack of cooperation or responsiveness and has been provided an opportunity to correct such problems. (b) In the event that a Facility Termination Date is declared (or is deemed to have occurred) pursuant to a Group-Wide Event of Termination, the Providers shall pay to the Purchaser an early termination fee in an amount equal to the termination fee payable by the Purchaser pursuant to Section 5.07(d) of the Loan Agreement. SECTION 5.06 Confidentiality. All parties hereto agree to comply with all applicable state or federal statutes or regulations relating to patient medical record confidentiality. (a) Each of the Providers, the Primary Servicer and the Purchaser hereby grants the Program Manager the right to place one or more advertisements in newspapers and journals, on its website and in other its materials (all, at its own expense) that recites the transaction, the amount of the transaction and utilizes the corporate logo of Five Star. SECTION 5.07 Term and Termination. This Agreement shall continue in full force and effect from the date hereof until the Final Payment Date; provided, however, that, with respect to any Transferred Batches transferred prior to the Final Payment Date and not purchased pursuant to Section 4.01, the occurrence of the Final Payment Date shall not terminate any security interest of the Purchaser hereunder, nor shall it relieve or discharge any Provider, the Primary Servicer or the Purchaser of or from their respective duties, obligations or covenants hereunder and all the terms, provisions and conditions of this Agreement shall remain in effect for such purpose until such obligations have been satisfied and performed in full. Upon the satisfaction in full of all the obligations, the Purchaser shall deliver all assignments, certificates, releases, notices and other documents at the Providers' expense, as the Providers may reasonably request to effect such termination. 11 SECTION 5.08 Sale and Contribution Treatment. The Providers and the Purchaser have structured the transactions contemplated by this Agreement with respect to each Transferred Batch as a sale or contribution and intend that such transactions constitute a sale or contribution. Five Star will prepare year-end financial statements on an annual basis for it and its consolidated subsidiaries (including the Purchaser) in accordance with GAAP. Such consolidated financial statements will contain footnotes or other information to the effect that: (i) the Purchaser's business consists of both purchased and contributed Receivables from the Providers; and (ii) the Purchaser is a separate Delaware limited liability company with its own separate creditors which, upon liquidation of the Purchaser will be entitled to be satisfied solely out of the Purchaser's assets. The Purchaser will prepare separate financial statements, which statements will treat all transfers of purchased and contributed Receivables pursuant to this Agreement respectively as sales and contributions to the Purchaser's capital, and not as secured loans, and Five Star will classify all purchased and contributed Receivables transferred under this Agreement as assets owned exclusively by the Purchaser for all purposes. Each Provider will advise all persons inquiring about the ownership of the Receivables that all Receivables have been sold or contributed to the Purchaser. Each Provider will pay all taxes (excluding income or franchise taxes of the Purchaser), if any, relating to the transactions contemplated under this Agreement, including, without limitation, the sale, transfer and contribution of each Batch to the Purchaser. SECTION 5.09 Grant of Security Interest. In the event that, contrary to the mutual intent of the Providers and the Purchaser, any purchase or contribution of a Batch is not characterized as a sale or contribution, each Provider shall, effective as of the date hereof, be deemed to have granted (and such Provider hereby does grant) (in addition to and not in substitution of the grant under Section 4.04 hereof) to the Purchaser a first priority security interest in and to any and all present and future Receivables and the proceeds thereof to secure the repayment of all amounts paid to such Provider hereunder with accrued interest thereon, and this Agreement shall be deemed to be a security agreement. With respect to such grant of a security interest, the Purchaser may at its option exercise from time to time any and all rights and remedies available to it under the UCC or otherwise. Each Provider agrees that five Business Days shall be reasonable prior notice to such Provider or to the Primary Servicer on behalf of such Provider of the date of any public or private sale or other disposition of all or any of the Batch Receivables. SECTION 5.10 No Liability of the Purchaser. Neither this Agreement nor any document executed in connection herewith shall constitute an assumption by the Purchaser of any obligation to an Obligor or a patient/customer of a Provider. SECTION 5.11 Addition and Removal of Providers. Subject to satisfaction of the conditions set forth below and any other conditions required by the Purchaser or the Program Manager, upon 30-days' prior written request from time to time of the Primary Servicer, the Purchaser hereby agrees to the adding of other Persons designated by the Primary Servicer as additional Providers hereunder (each such event, an "Addition"): (i) the Required Lenders shall have agreed in writing to such Addition; 12 (ii) no Group-Wide Event of Termination is existing and the proposed Addition shall not cause, or shall not reasonably be expected to cause, a Group-Wide Event of Termination; (iii) as of the effective date of such Addition, the conditions precedent applicable to such Person as set forth in Exhibit II hereto shall have been fulfilled; (iv) as of the effective date of such Addition, the representations and warranties set forth in Exhibit III hereto applicable to such Person shall be true and correct; (v) the Purchaser shall have received a certificate from the Master Servicer stating that all computer linkups and interfaces necessary or desirable, in the judgment of the Master Servicer, to effectuate the transactions and information transfers under this Agreement with respect to the Addition, are fully operational to the reasonable satisfaction of the Master Servicer and the Master Servicer shall have received an interface fee for each additional computer interface; (vi) such Person shall execute such agreements, instruments and documents as the Purchaser (or its assignees) may reasonably request, in form and substance satisfactory to the Purchaser to effectuate the Addition, including without limitation (x) the appropriate subscription agreement in the form of Exhibit XV attached (the "Subscription Agreement") to this Agreement whereby such Person agrees to be bound by the terms of this Agreement, (y) financing statements covering the Receivables that such Person may sell or contribute to the Purchaser and (z) financing statements covering the Collateral in which such Person will grant a security interest pursuant to Section 4.04(a); (vii) the Purchaser and its assigns shall have been provided with such information (whether financial or otherwise), documents or opinions as they may reasonably request; and (viii) such Person shall become a member of the Purchaser. Upon the effectiveness of any Addition, Schedule I hereto shall be deemed amended to add the name of the applicable Person. (a) Subject to satisfaction of the conditions set forth below and any other conditions required by the Purchaser or the Program Manager, upon 30-days' prior written request of the Primary Servicer made pursuant to Section 3.02(b) or otherwise, the Purchaser hereby agrees to the removal of any Provider designated by the Primary Servicer (each such event, a "Removal"). (i) if such Provider individually or in the aggregate with all other Providers removed pursuant to this Section 5.11(b) constitutes a Group Wide Provider, the Required Lenders shall have agreed in writing to such Removal; 13 (ii) no Group-Wide Event of Termination is existing and the proposed Removal shall not cause, or shall not reasonably be expected to cause, a Group-Wide Event of Termination; (iii) such Person shall execute such agreements, instruments and documents as the Purchaser may reasonably request, in form and substance satisfactory to the Purchaser to effectuate the Removal, including without limitation an amendment to this Agreement effectuating such Removal; (iv) the Purchaser shall have received all Collections with respect to Eligible Receivables (that have not become Denied Receivables) and (y) all Return Prices and Indemnified Amounts with respect to Denied Receivables, in each case, attributable to such Person; and (v) such Person shall have withdrawn as a member of the Purchaser; provided, however, that such Person's capital account as a member shall not be paid out until the earlier of (x) the date of termination of this Agreement as set forth in Section 5.07 and (y) the Final Payment Date with respect to the Receivables of such Provider. Upon the effectiveness of any Removal, Schedule I hereto shall be deemed amended to delete the name of the applicable Person. (b) Notwithstanding any Removal of a Person as a Provider made in accordance with the provisions of Section 5.11(b), the provisions of Article IV (and the representations and warranties with respect thereto) and Sections 5.06, 5.08, 5.10 and 5.17 shall, with respect to such Person, survive such Removal. SECTION 5.12 Attorney-in-Fact. Each Provider hereby irrevocably designates and appoints the Purchaser, the Primary Servicer, the Master Servicer, the Collateral Agent and the Program Manager, to the extent permitted by applicable law and regulation, as such Provider's attorneys-in-fact, which irrevocable power of attorney is coupled with an interest, with authority to (i) endorse or sign such Provider's name to financing statements, remittances, invoices, assignments, checks (other than payments from Governmental Entities), drafts or other instruments or documents in respect of the Batch Receivables, (ii) notify non-Governmental Entities to make payments on the Batch Receivables directly to the Purchaser, and (iii) bring suit in such Provider's name and settle or compromise such Batch Receivables as the Purchaser, the Primary Servicer, the Collateral Agent or the Master Servicer may, in its discretion, deem appropriate. SECTION 5.13 Entire Agreement; Severability. This Agreement, including all exhibits and schedules hereto, and the documents referred to herein, embody the entire agreement and understanding of the parties concerning the subject matter contained herein. This Agreement supersedes any and all prior agreements and understandings between the parties, whether written or oral. 14 (a) If any provision of this Agreement shall be declared invalid or unenforceable, the parties hereto agree that the remaining provisions of this Agreement shall continue in full force and effect. SECTION 5.14 GOVERNING LAW. THIS AGREEMENT SHALL, IN ACCORDANCE WITH SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK, BE GOVERNED BY THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO ANY CONFLICTS OF LAWS PRINCIPLES THEREOF THAT WOULD CALL FOR THE APPLICATION OF THE LAWS OF ANY OTHER JURISDICTION. SECTION 5.15 WAIVER OF JURY TRIAL, JURISDICTION AND VENUE. EACH OF THE PARTIES HERETO HEREBY WAIVES ALL RIGHTS TO A TRIAL BY JURY IN THE EVENT OF ANY LITIGATION WITH RESPECT TO ANY MATTER RELATED TO THIS AGREEMENT, AND HEREBY IRREVOCABLY CONSENTS TO THE JURISDICTION OF THE STATE AND FEDERAL COURTS LOCATED IN NEW YORK COUNTY, NEW YORK CITY, NEW YORK IN CONNECTION WITH ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT. IN ANY SUCH LITIGATION, EACH OF THE PARTIES HERETO WAIVES PERSONAL SERVICE OF ANY SUMMONS, COMPLAINT OR OTHER PROCESS AND AGREES THAT SERVICE THEREOF MAY BE MADE BY CERTIFIED OR REGISTERED MAIL DIRECTED TO SUCH PARTY AT ITS ADDRESS SET FORTH ON THE SIGNATURE PAGE HEREOF. EACH OF THE PARTIES HERETO SHALL APPEAR IN ANSWER TO SUCH SUMMONS, COMPLAINT OR OTHER PROCESS WITHIN THE TIME PRESCRIBED BY LAW, FAILING WHICH SUCH PARTY FAILING TO SO APPEAR SHALL BE DEEMED IN DEFAULT AND JUDGMENT MAY BE ENTERED BY THE OTHER PARTY FOR THE AMOUNT OF THE CLAIM AND OTHER RELIEF REQUESTED THEREIN. SECTION 5.16 Execution in Counterparts. This Agreement may be executed in counterparts, each of which when so executed shall be deemed to be an original and all of which when taken together shall constitute one and the same agreement. SECTION 5.17 No Proceedings. Each Provider hereby agrees that it will not institute against the Purchaser or any Lender any proceeding of the type referred to in paragraph (g) of Exhibit V so long as any senior indebtedness issued by the Purchaser or such Lender shall be outstanding or there shall not have elapsed one year plus one day since the last day on which any such senior indebtedness shall have been outstanding. SECTION 5.18 Survival of Termination. The provisions of Article IV (and the representations and warranties with respect thereto) (other than Section 4.04) and Sections 5.05, 5.06, 5.10 and 5.17 shall survive any termination of this Agreement. SECTION 5.19 Joint and Several Liability; Providers. Each Provider agrees that each reference to "the Providers" in this Agreement shall be deemed to refer to each such 15 Provider jointly and severally with the other Providers. Each Provider (i) shall be jointly and severally liable for the obligations, duties and covenants of each other such Provider under this Agreement and the acts and omissions of each other such Provider including, without limitation, under Article IV hereof, and (ii) jointly and severally makes each representation and warranty for itself and each other such Provider under this Agreement; provided, however, that the breach of an obligation, duty, covenant, representation or warranty by one Provider shall not result in an Event of Termination with respect to any other Provider unless such breach constitutes a Group-Wide Event of Termination. SECTION 5.20 Accounting Information. Each Provider authorizes the Purchaser and the Lender Group to discuss the financial position of such Provider with its independent public accountant with respect to their audit of the financial statements of such Provider and agrees that none of the Purchaser, the Lender Group or the independent public accountants, shall have any liability to any Provider with respect to any such discussion or communication except for violations by a member of the Lender Group of federal and state securities laws solely with respect to such discussions or communications. The Purchaser and the Lender Group expressly agree to maintain the disclosed information in confidence. Each Provider shall deliver a letter addressed to such accountants authorizing them to comply with the provisions of this subsection, which letter shall be acknowledged to in writing by such accountants. The Purchaser and the Lender Group may rely on the financial statements provided to such Purchaser and Lender Group by each Provider. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 16 IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their respective officers thereunto duly authorized, as of the date first above written. PROVIDERS: FIVE STAR QUALITY CARE-AZ, LLC FIVE STAR QUALITY CARE-CA, LLC FIVE STAR QUALITY CARE-COLORADO, LLC FIVE STAR QUALITY CARE-CT, LLC FIVE STAR QUALITY CARE-GA, LLC FIVE STAR QUALITY CARE-IA, LLC FIVE STAR QUALITY CARE-KS, LLC FIVE STAR QUALITY CARE-MI, LLC FIVE STAR QUALITY CARE-MO, LLC FIVE STAR QUALITY CARE-NE, LLC FIVE STAR QUALITY CARE-WI, LLC FIVE STAR QUALITY CARE-WY, LLC FIVE STAR QUALITY CARE-CA, INC. FIVE STAR QUALITY CARE-IA, INC. FIVE STAR QUALITY CARE-MI, INC. FIVE STAR QUALITY CARE-NE, INC. By: /s/ Bruce J. Mackey, Jr. Bruce J. Mackey, Jr. Chief Financial Officer, Treasurer and Assistant Secretary Address: 400 Center Street Newton, MA 02458 Facsimile Number: 617-796-8385 PURCHASER: FSQC FUNDING CO., LLC By: /s/ Bruce J. Mackey, Jr. Bruce J. Mackey, Jr. Chief Financial Officer, Treasurer and Assistant Secretary Address: 400 Center Street Newton, MA 02458 Facsimile Number: 617-796-8385 PRIMARY SERVICER: FIVE STAR QUALITY CARE, INC. By: /s/ Bruce J. Mackey, Jr. Bruce J. Mackey, Jr. Chief Financial Officer, Treasurer and Assistant Secretary Address: 400 Center Street Newton, MA 02458 Facsimile Number: 617-796-8385 EXHIBIT I DEFINITIONS As used in the Agreement (including its Exhibits and Schedules), the following terms shall have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined): "Accounts" means all health-care-insurance receivables, accounts, chattel paper, instruments, general intangibles and goodwill, whether now existing or hereafter arising, including, all Receivables and all payments due from any Governmental Entity based on a cost report settlement or expected settlement, and all proceeds of any of the foregoing. "Addition" has the meaning set forth in Section 5.11(a) hereto. "Additional Collateral" means all assets of each Provider. "Affiliate" means, as to any Person, any other Person that, directly or indirectly, is in control of, is controlled by or is under common control with such Person or is a director or officer of such Person. For the purposes of this definition, "control", when used with respect to any specified Person, means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise. "Agreement" has the meaning set forth in the preliminary statements hereto. "Availability" means, the difference between (a) the Borrowing Limit (as defined in the LSA) and (b) Lender Debt (as defined in the LSA). "Batch" means, with respect to any Transfer Date, all Receivables, including the Transferred Batch with respect to such Transfer Date, which are purchased, or purported to be purchased, by the Purchaser or contributed, or purported to be contributed, to the capital of the Purchaser. "Batch Receivable" means a Receivable that is included in a Transferred Batch, but excludes a Denied Receivable for which the Return Price has been received by the Purchaser. "Business Day" means any day on which banks are not authorized or required to close in New York City, New York. "Capital Lease" means, as applied to any Person, any lease of any Property (whether real, personal or mixed) by that Person as lessee, the obligations of which are required, in accordance with GAAP, to be capitalized on the balance sheet of that Person. "CHAMPUS" means the Civilian Health and Medical Program of the Uniformed Service, a program of medical benefits covering former and active members of the uniformed services and certain of their dependents, financed and administered by the United States Departments of Defense, Health and Human Services and Transportation and established pursuant to 10 USC ss.ss. 1071-1106, and all regulations promulgated thereunder including without limitation (a) all federal statutes (whether set forth in 10 USC ss.ss. 1071-1106 or elsewhere) affecting CHAMPUS; and (b) all rules, regulations (including 32 CFR 199), manuals, orders and administrative, reimbursement and other guidelines of all Governmental Entities (including, without limitation, the Department of Health and Human Services, the Department of Defense, the Department of Transportation, the Assistant Secretary of Defense (Health Affairs), and the Office of CHAMPUS, or any Person or entity succeeding to the functions of any of the foregoing) promulgated pursuant to or in connection with any of the foregoing (whether or not having the force of law) in each case as may be amended, supplemented or otherwise modified from time to time. "Change of Control" means (a) any "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) is or becomes the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that a Person will be deemed to have "beneficial ownership" of all securities that such Person has the right to acquire, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of 50% or more of the total voting power of the then outstanding common equity of Five Star except as a result of a transaction approved by Five Star's Board of Directors involving the issuance of new Five Star common shares, or 15% or more of the total voting power of the then outstanding equity of any Provider; or (b) individuals (or a substitute elected by the holders of the equity of Five Star or any Provider, as the case may be, and which are reasonably satisfactory to the Purchaser and the Program Manager) who on the Initial Transfer Date constituted the Board of Directors (or the equivalent) of Five Star or any Provider cease for any reason to constitute a majority of the Board of Directors of such Person then in office; or (c) any two of Barry M. Portnoy, Gerard M. Martin, Evrett W. Benton or Bruce J. Mackey (or a substitute elected by the directors or trustees of REIT Management & Research LLC or Five Star, as the case may be, and which is reasonably satisfactory to the Purchaser and the Program Manager) shall cease to serve as an officer, director or trustee of REIT Management & Research LLC or Five Star in a position, in the case of an officer, of equal or greater seniority to the respective offices each holds with REIT Management & Research LLC or Five Star, as the case may be, as of the Closing Date (any event that would be a Change of Control under this clause (c) shall be deemed to relate to Five Star, individually); or (d) the sale, lease, conveyance, transfer, assignment or other disposition in one or more transactions of all or substantially all of the assets of Five Star or any Provider (whether now or hereafter acquired) to any Person or group (as such term is defined in Section 13(d)(3) of the Exchange Act); or (e) the liquidation or dissolution of (or the adoption of a plan of liquidation by) Five Star or any Group-Wide Providers. "Closing Date" means October 24, 2002. "CMS" means the Centers for Medicare and Medicaid Services of the United States Department of Health and Human Services. "Collateral" has the meaning set forth in Section 4.04(a) hereto. "Collateral Agent" means HFG Healthco-4 LLC and its successors and assigns. "Collections" means, with respect to any Receivable included in a Batch, all cash collections, wire transfers, electronic funds transfers and other cash proceeds of such Receivable, deposited in or transferred to the Primary Purchaser Account, including, without limitation, all cash proceeds thereof. "Consolidated Net Worth" means with respect to any Person and its Subsidiaries determined on a consolidated basis, at any date of determination, total stockholders', owners' or members' equity in accordance with GAAP. "Control Agreement" means each Control Agreement, dated as of the date hereof, among the Primary Servicer, the Provider named therein, the Purchaser, the Program Manager, the Collateral Agent and the Local Bank named therein, in substantially the form attached hereto as Exhibit XVI, as such agreement may be amended, modified or supplemented from time to time. "Credit and Collection Policy" means those receivables credit and collection policies and practices of the Providers in effect on the date of the Agreement and set forth in Schedule III hereto, as modified from time to time in accordance with the consent of the Purchaser and the Program Manager. "Current Assets" means, at any date of determination, the aggregate amount of all assets of Five Star and its Subsidiaries on a consolidated basis that are classified as current assets at such date computed and calculated in accordance with GAAP and excluding the Marriott Assets. "Current Liabilities" means, at any date of determination, the aggregate amount of all liabilities of Five Star and its Subsidiaries on a consolidated basis that would be classified as current liabilities at such date computed and calculated in accordance with GAAP and excluding the Marriott Current Liabilities and current portions of long term debt due. "Current Ratio" means, at any date of determination, the ratio of (i) the remainder of (x) Current Assets plus Availability to (ii) Current Liabilities. "Debt" means as to any Person (without duplication): (i) all obligations of such party for borrowed money, (ii) all obligations of such party evidenced by bonds, notes, debentures, or other similar instruments, (iii) all obligations of such party to pay the deferred purchase price of property or services (other than trade payables in the ordinary course of business), (iv) all Capital Leases of such party, (v) all Debt of others directly or indirectly Guaranteed (which term shall not include endorsements in the ordinary course of business) by such party, (vi) all obligations secured by a Lien existing on property owned by such party, whether or not the obligations secured thereby have been assumed by such party or are non-recourse to the credit of such party (but only to the extent of the value of such property), and (vii) all reimbursement obligations of such party (whether contingent or otherwise) in respect of letters of credit, bankers' acceptance and similar instruments. "Defaulted Receivable" means a Batch Receivable (i) as to which the Obligor therefor or any other Person obligated thereon has taken any action, or suffered any event to occur, of the type described in paragraph (g) of Exhibit V or (ii) which, consistent with the Credit and I-3 Collection Policy, would be written off the applicable Provider's books as uncollectible; provided, however, that a Batch Receivable as to which the Obligor therefor has suffered a temporary governmental shutdown or delay shall not be a "Defaulted Receivable". "Delinquent Receivable" means a Batch Receivable (a) that has not been paid in full on or following the 180th day following the date of original invoicing thereof, or (b) that is a Denied Receivable. "Denied Receivable" has the meaning set forth in Section 4.01(a) hereto. "Depositary Agreement" means that certain Depositary Account Agreement, dated as of the date hereof, among the Primary Servicer, the Providers, the Purchaser, the Program Manager, the Collateral Agent and the Lockbox Bank, in substantially the form attached hereto as Exhibit XII, as such agreement may be amended, modified or supplemented from time to time in accordance with its terms. "Eligibility Criteria" has the meaning specified in the Loan Agreement. "Eligible Receivables" means Receivables that satisfy the Eligibility Criteria, as determined by the Program Manager. "Employee Benefit Plan" means any employee benefit plan within the meaning of ss. 3(3) of ERISA maintained by the Provider or any ERISA Affiliate, or with respect to which any of them have any liability. "EOB" means the explanation of benefit from an Obligor that identifies the services rendered on account of the Batch Receivable specified therein. "Equity Net Proceeds" means, with respect to the issuance, sale or other disposition of any stock or other equity interests or any security which under GAAP is recorded as equity, the excess of (i) the aggregate amount received in cash (excluding any cash received by way of deferred payment pursuant to a note receivable, other non-cash consideration or otherwise, prior to the time when such cash is so received) in connection with such issuance, sale or other disposition, over (ii) the sum of (A) the reasonable fees, commissions, discounts and other out-of-pocket expenses including, without limitation, related legal, investment banking and accounting fees and disbursements incurred in connection with such issuance, sale or other disposition, and (B) all income and transfer taxes payable in connection with such issuance, sale or other disposition, whether payable at such time or thereafter. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. "ERISA Affiliate" means any entity which is under common control with any Provider within the meaning of ERISA or which is treated as a single employer with any Provider under the Internal Revenue Code of 1986, as amended. I-4 "Event of Termination" means any of the events specified in Exhibit V hereto. "Expected Net Value" means, with respect to any Batch Receivable, the gross unpaid amount of such Receivable on the Transfer Date therefor, times the applicable Net Value Factor. "Facility Termination Date" means the earlier of (a) October 24, 2005 (subject to automatic extensions of such date to coincide with extensions under Section 5.07 of the Loan Agreement) and (b) the date of occurrence of a Group-Wide Event of Termination. "Final Payment Date" means the first Settlement Date following the Settlement Period in which final collection has been received for all Batch Receivables or such Batch Receivables have become Denied Receivables or Defaulted Receivables. "Five Star" has the meaning set forth in the preamble hereto. "GAAP" means generally accepted accounting principles in the United States of America, applied on a consistent basis, as set forth in Opinions of the Accounting Principles Board of the American Institute of Certified Public Accountants or in statements of the Financial Accounting Standards Board or the rules and regulations of the Securities and Exchange Commission or their respective successors and which are applicable in the circumstances as of the date in question. "Governmental Entity" means the United States of America, any state, any political subdivision of a state and any agency or instrumentality of the United States of America or any state or political subdivision thereof and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. Payments from Governmental Entities shall be deemed to include payments governed under the Social Security Act (42 U.S.C. ss.ss. 1395 et seq.), including payments under Medicare, Medicaid, and CHAMPUS/Champva, and payments administered or regulated by CMS. "Government Depositary Agreement" means each Depositary Account Agreement, dated as of the date hereof, among the Primary Servicer, the Provider named therein, the Purchaser, the Program Manager, the Collateral Agent and the bank named therein, in substantially the form attached hereto as Exhibit XVII, as such agreement may be amended, modified or supplemented from time to time in accordance with its terms. "Government Lockbox(es)" means each of the lockboxes identified on Schedule V hereto as a Government Lockbox, established to receive checks and EOB's with respect to Receivables payable by Governmental Entities to the Providers listed on Schedule VIII hereto. "Government Lockbox Account(s)" means each of the accounts identified on Schedule V hereto as a Government Lockbox Account in the name of a Provider listed on Schedule VIII hereto and associated with the Government Lockbox established and controlled by such Provider to deposit all cash collections, wire transfers, electronic funds transfers and other cash proceeds of Receivables from the applicable Governmental Entity listed on Schedule VIII, including I-5 collections received in the associated Government Lockbox and collections received by wire transfer directly from applicable the Governmental Entity, all as more fully set forth in the Government Depositary Agreement. "Group-Wide Event of Termination" means (i) an Event of Termination which relates to the Group-Wide Providers or Five Star, individually, (ii) a Servicer Termination Event or (iii) an Event of Termination arising under any of clause (i), clause (t) or clauses (w) through (aa) of Exhibit V hereto. "Group-Wide Providers" means, as of any date of determination, the Providers responsible for the sale or contribution to the Purchaser of more than 25% of the Batch Receivables (whether or not purchased) in the 90 days prior to such date (or, if less than 90 days, the number of days as shall have elapsed from the Closing Date to such date of determination). "Guaranty" by any Person means any obligation, contingent or otherwise, of such Person directly or indirectly guaranteeing any Debt or other obligation of any other Person and, without limiting the generality of the foregoing, any obligation, direct or indirect, contingent or otherwise, of such Person (i) to purchase or pay (or advance or supply funds for the purchase or payment of) such Debt or other obligation (whether arising by virtue of partnership arrangements, by agreement to keep-well, to purchase assets, goods, securities or services, to take-or-pay), or (ii) entered into for the purpose of assuring in any other manner the obligee of such Debt or other obligation of the payment thereof or to protect the obligee of such Debt or other obligation of the payment thereof or to protect the obligee against loss in respect thereof (in whole or in part), provided that the term Guaranty shall not include endorsements for collection or deposit in the ordinary course of business. The term "Guaranty" used as a verb has a corresponding meaning. "Indemnified Amounts" has the meaning set forth in Section 4.02 hereto. "Indemnified Party" has the meaning set forth in Section 4.02 hereto. "Initial Transfer Date" means the date of the initial purchase and contribution of Receivables hereunder. "Insurer" means any Person (other than a Governmental Entity) which in the ordinary course of its business or activities agrees to pay for healthcare goods and services received by individuals, including commercial insurance companies, nonprofit insurance companies (such as Blue Cross, Blue Shield entities), employers or unions which self-insure for employee or member health insurance, prepaid health care organizations, preferred provider organizations and health maintenance organizations. "Insurer" includes insurance companies issuing health, personal injury, workers' compensation or other types of insurance but does not include any individual guarantors. "Interest Expense" means, with respect to any Person for any period, the interest expense of such Person during such period as determined in accordance with GAAP. I-6 "Last Service Date" means, with respect to any Receivable, the date set forth on the related invoice or statement as the most recent date on which services or merchandise were provided by the related Provider to the related patient. "Lender" means the Persons party to the Loan Agreement from time to time as lenders. "Lender Group" means each Lender, the Program Manager, the Master Servicer, the Collateral Agent and their agents, delegates, designees and assigns identified from time to time. "Lien" means any lien, mortgage, security interest, tax lien, pledge, hypothecation, assignment, preference, priority, other charge or encumbrance, or any other type of preferential arrangement of any kind or nature whatsoever by or with any Person (including, without limitation, any conditional sale or title retention agreement), whether arising by contract, operation of law, or otherwise. "Loan Agreement" means the Loan and Security Agreement dated as of the date hereof among the Purchaser as borrower, the Lenders, the Program Manager and the Collateral Agent, as such agreement may be modified, supplemented or amended from time to time in accordance with its terms. "Local Bank" means each bank at which a Local Purchaser Account is located. "Local Purchaser Account" means each of the accounts identified on Schedule V hereto as a Local Purchaser Account established by the Purchaser to deposit all cash collections, wire transfers, electronic funds transfers and other cash proceeds of Receivables from non-Governmental Entities, including collections received in the form of a check and collections received by wire transfer directly from non-Governmental Entities. "Lockbox Bank" means Citizens Bank as lockbox bank under the Depositary Agreement. "Marriott Current Assets" means, at any date of determination, all current assets computed and calculated in accordance with GAAP that relate to the facilities managed by Marriott on behalf of Five Star (and excluding amounts due from Marriott that relate to payment of prior Months' owner's profit). "Marriott Current Liabilities" means, at any date of determination, all current liabilities computed and calculated in accordance with GAAP that relate to the facilities managed by Marriott on behalf of Five Star. "Master Servicer" means Healthcare Finance Group, Inc., and any other Person then identified by the Program Manager to the Providers, or the Primary Servicer on behalf of the Providers, as being authorized to administer and service Receivables. I-7 "Material Adverse Effect" means any event, condition, change or effect that (a) has a materially adverse effect on the business, Properties, capitalization, liabilities, operations, prospects or financial condition of (i) the Providers, taken as a whole, or (ii) Five Star, (b) materially impairs the ability of the Primary Servicer or any Provider to perform its obligations under the Agreement, (c) materially impairs the validity or enforceability of, or materially impairs the rights, remedies or benefits available to the Purchaser under the Agreement, or (d) changes, or could reasonably be expected to change, the characterization and treatment of the sales and contributions of Receivables under the Agreement as something other than a true sale or complete transfer of ownership. "Misdirected Payment" means any form of payment in respect of a Batch Receivable made by an Obligor in a manner other than as provided in the Notice sent to such Obligor or other than as provided in Sections 2.01 and 2.02, including, in the case of a check received by a Provider with respect to a payment made by an Obligor that is not a Governmental Entity, the failure to deposit such check in the applicable Local Purchaser Account within one Business Day of receipt of such check. "Month" means a calendar month. "Monthly Report" has the meaning set forth in Section 1.02 hereto. "Multiemployer Plan" means a plan, within the meaning of ss. 3(37) of ERISA, as to which the Primary Servicer, any Provider or any ERISA Affiliate contributed or was required to contribute within the preceding five years. "Net Value Factor" means, initially, the percentages set forth on Schedule VII hereto, as such percentages may be adjusted upwards or downwards in accordance with the Loan Agreement, based on the historical actual final collections received on the Receivables within 180 days of the Last Service Date of such Receivables (without regard to the factors set forth in the definition of "Defaulted Receivable"). "New Patient Consent Form" has the meaning set forth in clause (i) of Exhibit II hereto. "Notice" means a Notice to Governmental Entities or Notice to non-Governmental Entities, as applicable. "Notice to Governmental Entities" means a notice letter on a Provider's corporate letterhead in substantially the form attached hereto as Exhibit VII-A. "Notice to non-Governmental Entities" means a notice letter on a Provider's corporate letterhead in substantially the form attached hereto as Exhibit VII-B. "Obligor" means each Person who is responsible for the payment of all or any portion of a Receivable. I-8 "Parent Guaranty" means that certain Guaranty, dated as of the date hereof, made by Five Star in favor of the Purchaser, in substantially the form attached hereto as Exhibit XIII. "PBGC" means the Pension Benefit Guaranty Corporation or any entity succeeding to all or any of its functions under ERISA. "Permitted Debt" means, with respect to the Providers, any Debt that is (i) in connection with this Agreement and the transactions contemplated hereby, (ii) purchase money Debt incurred to finance the acquisition of equipment, or (iii) obligations secured by a Lien existing on property owned by such party, that are non-recourse to the credit of such party (but only to the extent of the value of such property). "Person" means an individual, partnership, corporation (including a business trust), limited liability company, joint stock company, trust, unincorporated association, joint venture or other entity, an Insurer or a Governmental Entity. "Pledge Agreements" means the Pledge Agreement, dated as of the date hereof, between Five Star and the Purchaser, in substantially the form attached hereto as Exhibit XIV. "Primary Provider Account" means the account set forth on Schedule V hereto in the name of the Providers established and controlled by the Providers to deposit all cash collections, wire transfers, electronic funds transfers and other cash proceeds of Receivables from Governmental Entities, collections received in the Government Lockbox Accounts and collections received by wire transfer directly from Governmental Entities, all as more fully set forth in the Depositary Agreement and the Government Depositary Agreement. "Primary Purchaser Account" means the account identified on Schedule V hereto as the Primary Purchaser Account, established by the Purchaser to deposit all cash collections, wire transfers, electronic funds transfers and other cash proceeds of Receivables from non-Governmental Entities, including collections received in the Local Purchaser Accounts and collections received by wire transfer directly from non-Governmental Entities, all as more fully set forth in the Depositary Agreement. "Primary Servicer" means any person then appointed as Primary Servicer to perform the Primary Servicer Responsibilities pursuant to Section 1.05(b) hereto, initially being Five Star. "Primary Servicer Account" means account #1135638907 of the Primary Servicer at Citizens Bank, ABA #211070175, Exchange Place, 53 State Street Building, Boston, MA 02109, or such other bank account designated by the Primary Servicer by Written Notice to the Master Servicer, the Purchaser and the Program Manager from time to time, as the account for receipt of proceeds on behalf of the Provider. "Primary Servicer Responsibilities" has the meaning set forth in Section 1.05(b) hereto. I-9 "Primary Servicing Fee" means, with respect to any Transferred Batch, an amount equal to 0.1% of Collections with respect to the Receivables in all Transferred Batches; provided, however, that if the Primary Servicer is at any time a Person other than Five Star or an Affiliate of Five Star, then "Primary Servicing Fee" means, with respect to any Transferred Batch, an amount equal to the greater of (i) 0.1% of Collections with respect to the Receivables in all Transferred Batches and (ii) the then-current market rate. "Program Manager" means (i) collectively, Dresdner Kleinwort Wasserstein LLC and Healthcare Finance Group, Inc., or (ii) any other Person identified by the then Program Manager in writing to the Primary Servicer as being authorized to provide administrative services with respect to the Purchaser and the Purchaser's purchase, funding and collection of healthcare receivables. "Property" means property of all kinds, movable, immovable, corporeal, incorporeal, real, personal or mixed, tangible or intangible (including, without limitation, all rights relating thereto), whether owned or acquired on or after the date of this Agreement. "Provider" or "Providers" has the meaning set forth in the preamble hereto. "Provider Documents" means this Agreement, the Depositary Agreement, the Government Depositary Agreements, the Control Agreements, the Parent Guaranty, the Pledge Agreement, each agreement now existing or hereafter created providing collateral security for the payment or performance of any Provider's obligations described in Section 4.04(a) or any Person's obligations under a Guaranty of such obligations of the Providers, and each other document or instrument now or hereafter executed and delivered to the Purchaser by or on behalf of the Providers pursuant to or in connection herewith or therewith. "Provider Account(s)" means, collectively, the Primary Provider Account and the Government Lockbox Accounts set forth on Schedule V hereto in the name of the Providers and associated, in the case of the Government Lockbox Accounts, with the Government Lockboxes established and controlled by the Providers to deposit all cash collections, wire transfers, electronic funds transfers and other cash proceeds of Receivables from Governmental Entities, including collections received in the Government Lockboxes and collections received by wire transfer directly from Governmental Entities, all as more fully set forth in the Depositary Agreement and the Government Depositary Agreements. "Purchase Price" means, with respect to Eligible Receivables in each Purchased Batch, an amount equal to 95% of the aggregate Expected Net Value of such Receivables. "Purchased Batch" means all Eligible Receivables purchased on any Transfer Date. "Purchaser" has the meaning set forth in the preamble hereto. "Purchaser Account(s)" means, collectively, the Primary Purchaser Account and the Local Purchaser Accounts set forth on Schedule V hereto established by the Purchaser to deposit all I-10 cash collections, wire transfers, electronic funds transfers and other cash proceeds of Receivables from non-Governmental Entities, including collections received in the form of a check and collections received by wire transfer directly from non-Governmental Entities. "Receivable Information" has the meaning set forth in Section 1.02 hereto. "Receivables" means all third-party reimbursable portions or third-party directly payable portions of health-care-insurance receivables, all accounts and general intangibles, and all other obligations for the payment of money, in each case, owing (or in the case of Unbilled Receivables, to be owing) to any Provider and arising out of the rendition of medical, surgical, diagnostic or other professional medical services or the sale of medical products by such Provider in the ordinary course of its business, including all rights to reimbursement under any agreements with and payments from Obligors, customers, residents, patients or other Persons, together with, to the maximum extent permitted by law, all accounts and general intangibles related thereto, all rights, remedies, guaranties, security interests and Liens in respect of the foregoing, all books, records and other Property evidencing or related to the foregoing, and all proceeds of any of the foregoing. "Removal" has the meaning set forth in Section 5.11 hereto. "Required Lenders" has the meaning specified in the Loan Agreement. "Return Price" means, with respect to a Denied Receivable, an amount equal to (x) either the Purchase Price or the increase in the capital account of the applicable Provider with respect to the prior contribution thereof, in each case, of such Denied Receivable, minus (y) any cash received from the Obligor in the Primary Purchaser Account with respect to such Denied Receivable, plus (z) accrued and unpaid interest on such amount calculated at the interest rate then in effect under the Loan Agreement on the average outstanding difference between clauses (x) and (y) from and including the Business Day following the Transfer Date of such Denied Receivable to the date the Return Price is received by the Purchaser. "Servicer Termination Event" means any of the events specified in Exhibit IX hereto. "Settlement Date" means two Business Days following the date of delivery of the Monthly Report; provided, that, if, following the occurrence of a Group-Wide Event of Termination, the Purchaser shall have selected a period shorter than one month as the Settlement Period, the Settlement Date shall mean the fifth Business Day following the end of each such Settlement Period. "Settlement Period" means each Month; provided, that notwithstanding the foregoing, the first Settlement Period shall be the period from and including the Initial Transfer Date through October 24, 2002; and provided, further, that following the occurrence of a Group-Wide Event of Termination, the Purchaser may from time to time, by notice to the Primary Servicer on behalf of the Providers, select a shorter period as the Settlement Period. "Subscription Agreement" has the meaning set forth in Section 5.11 hereof. I-11 "Subsidiary" means, with respect to any Person, any corporation or entity of which at least a majority of the outstanding shares of stock or other ownership interests having by the terms thereof ordinary voting power to elect a majority of the board of directors (or Persons performing similar functions) of such corporation or entity (irrespective of whether or not at the time, in the case of a corporation, stock of any other class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency) is at the time directly or indirectly owned or controlled by such Person. "Total Collections" means, as to each Batch, the sum of all Collections, Return Prices and Indemnified Amounts (but only to the extent that such Indemnified Amounts are received in lieu of Collections) distributed to and received by the Purchaser with respect thereto. "Transfer Date" means the Initial Transfer Date and each Business Day thereafter. "Transferred Batch" means, with respect to any Transfer Date, all Receivables purported by the Primary Servicer and applicable Provider to constitute Eligible Receivables and which are purchased by the Purchaser or contributed to capital of the Purchaser as of such Transfer Date. "Transmission" means, upon establishment of computer interface between the Providers and the Master Servicer in accordance with the specifications established by the Master Servicer, the transmission of Receivable Information through computer interface or e-mail communication to the Master Servicer in a manner satisfactory to the Master Servicer. "UCC" means the Uniform Commercial Code as in effect from time to time in the specified jurisdiction. "Unbilled Receivable" means a Receivable in respect of which the goods have been shipped, or the services rendered, to the relevant customer or patient, and rights to payment therefor have accrued, but the invoice has not been rendered to the applicable Obligor. "Written Notice" and "in writing" mean any form of written communication or a communication by means of telex, facsimile device, telegraph or cable. Other Terms. All accounting terms not specifically defined herein shall be construed in accordance with GAAP. All terms used in Article 9 of the UCC in the State of New York, and not specifically defined herein, are used herein as defined in such Article 9. I-12 EXHIBIT II CONDITIONS OF PURCHASES AND CONTRIBUTIONS 1. Conditions Precedent on the Initial Transfer Date. The purchase or contribution of the Transferred Batch under the Agreement on the Initial Transfer Date is subject to the conditions precedent that the Purchaser shall have received on or before the Initial Transfer Date the following, each (unless otherwise indicated) dated such date, in form and substance reasonably satisfactory to the Purchaser: (a) For each Provider and the Primary Servicer, a certificate issued by the Secretary of State of the state of such entity's (i) organization as to the legal existence and good standing of such entity and (ii) locale of operation, if different from its state of organization, as to the foreign qualification, authorization and good standing of such entity in such locale (all of which certificates shall be dated not more than 20 days prior to the Initial Transfer Date). (b) For each Provider and the Primary Servicer, certified copies of the charter and by-laws of such entity, certified copies of resolutions of the Board of Directors of such entity approving the Agreement, certified copies of all documents filed to register any and all assumed/trade names of such entity, and certified copies of all documents evidencing other necessary corporate action and governmental approvals, if any, with respect to the Agreement. (c) For each Provider and the Primary Servicer, a certificate of the Secretary or Assistant Secretary of such entity certifying the names and true signatures of the incumbent officers of such entity authorized to sign the Agreement and the other documents to be delivered by it hereunder. (d) (i) Certified copies of the consolidated balance sheets of Five Star and its Subsidiaries as at December 31, 2001, and for the prior fiscal year and the related consolidated statements of income and expense, cash flow and retained earnings of Five Star and its Subsidiaries for the fiscal years then ended, each certified in a manner acceptable to the Purchaser by independent public accountants acceptable to the Purchaser and demonstrating that no Material Adverse Effect has occurred; (ii) certified copies of the consolidating balance sheets of Five Star and its Subsidiaries as at December 31, 2001, and for the prior fiscal year and the related consolidating statements of income and expense of Five Star and its Subsidiaries for the fiscal years then ended; and (iii) unaudited consolidated and consolidating balance sheets of Five Star and its Subsidiaries for the fiscal quarters ended March 31, 2002 and June 30, 2002 and the related consolidated and consolidating statements of income and expense and the related consolidated statements of cash flow of Five Star and its Subsidiaries for the periods then ended. (e) Acknowledgment or time stamped receipt copies of proper financing statements (showing each Provider as debtor/seller, the Purchaser as secured party/purchaser and the Collateral Agent as assignee, and stating that the financing statements are being filed because UCC Section 9-109 does not distinguish between a sale and a secured loan for filing purposes) duly filed II-1 on or before the Initial Transfer Date under the UCC of all jurisdictions that the Purchaser may deem necessary or desirable in order to perfect the ownership interests contemplated by the Agreement. (f) Acknowledgment or time-stamped receipt copies of proper financing statements (showing each Provider as debtor and the Purchaser as secured party and the Collateral Agent as assignee with respect to the grant by such Provider of a first priority security interest to the Purchaser in the Collateral, as contemplated by Section 4.04 of the Agreement) duly filed on or before the Initial Transfer Date under the UCC of all jurisdictions that the Purchaser may deem necessary or desirable in order to perfect such security interest. (g) Completed requests for information (UCC search results) dated within 20 days of the Initial Transfer Date, and a schedule thereof listing all effective financing statements filed in the jurisdictions referred to in subsections (e) and (f) above that name each Provider as debtor, together with copies of all other financing statements filed against each Provider (none of which shall cover any Collateral or the Receivables). (h) Releases of, and acknowledgment copies of proper termination statements (Form UCC-3), if any, necessary to evidence the release of all security interests, ownership and other rights of any Person previously granted by the Provider in the Receivables or any of the other Collateral and proceeds thereof. (i) A memorandum of Schnader Harrison Segal & Lewis LLP, counsel for the Providers, substantially in the form attached hereto as Exhibit XI-A, regarding compliance with patient confidentiality laws, and including a new form of patient consent form to be used by the Providers in each locale (the "New Patient Consent Form"), and as to such other matters as the Lender Group requests. (j) A favorable opinion of Schnader Harrison Segal & Lewis LLP, counsel for the Primary Servicer and the Providers, substantially in the form attached hereto as Exhibit XI-B, and as to such other matters as the Lender Group requests. (k) A favorable opinion of Schnader Harrison Segal & Lewis LLP, counsel for the Primary Servicer and the Providers, substantially in the form attached hereto as Exhibit XI-C, and as to such other matters as the Lender Group requests. (l) Proof of payment of all fees and other amounts due and payable, on or prior to the Initial Transfer Date under this Agreement, the Loan Agreement or otherwise, including the reimbursement or payment of all out-of-pocket expenses required to be reimbursed or paid and all reasonable attorneys' fees and disbursements incurred by the Purchaser and the Lender Group. (m) A duly executed Depositary Agreement, together with evidence satisfactory to the Purchaser that the Primary Purchaser Account and the Primary Provider Account and the Government Lockbox and the Government Lockbox Account with respect to the applicable Providers listed on Schedule VIII hereto have been established. II-2 (n) Duly executed Government Depositary Agreements, together with evidence satisfactory to the Purchaser that the Government Lockboxes and the Government Lockbox Accounts with respect to the applicable Providers listed on Schedule VIII hereto have been established. (o) Duly executed Control Agreements, together with evidence satisfactory to the Purchaser that the Local Purchaser Accounts have been established. (p) Copies of all Notices required pursuant to Article II of the Agreement, together with evidence satisfactory to the Purchaser that such Notices have been or will be delivered to the addressees thereof. (q) A copy of each new form of invoice from each Provider showing the applicable Government Lockbox as the remittance address. (r) A copy of all of each Provider's existing forms of patient consents which were signed by each patient for which the currently existing Receivables were created, as well as a copy of each New Patient Consent Form to be signed by each patient for which a Receivable will be created on or after the Initial Transfer Date, which consents authorize certain demographic and medical information with respect to such patient to be disclosed by such Provider to its servicing agents and by such servicing agents to any third party obligors thereon, certified by an officer of such Provider, as being true, complete, correct and the only consent forms presently in effect. (s) A certificate from the Master Servicer stating that all computer linkups and interfaces necessary or desirable, in the judgment of the Master Servicer, to effectuate the transactions and information transfers contemplated hereunder, are fully operational to the reasonable satisfaction of the Master Servicer. (t) A duly executed Parent Guaranty. (u) A duly executed Pledge Agreement, the certificates evidencing the equity interests pledged thereunder, together with undated equity interest powers executed in blank. 2. Conditions Precedent on All Transfer Dates. Each purchase and contribution of a Transferred Batch on a Transfer Date (including the Initial Transfer Date) shall be subject to the further conditions precedent that the Primary Servicer, the Providers and the Purchaser shall have agreed upon the terms of such purchase and also that: (a) The Providers shall have delivered to the Purchaser or the Master Servicer, as the case may be, at least one Business Day prior to such Transfer Date, in form and substance satisfactory to the Purchaser or the Master Servicer (as the case may be), to the extent not previously provided, executed Notices to each Obligor responsible for the payment of any of the Batch Receivables to be transferred on such Transfer Date, directing such Obligors to make payment to the addresses and accounts designated in such Notices, as set forth in Article II hereof, together with evidence that such Notices have been delivered to such Obligors. II-3 (b) On each such Transfer Date the following statements shall be true (and acceptance of the proceeds of such purchase by the Primary Servicer on behalf of the Providers shall be deemed a representation and warranty by each Provider that such statements are then true): (i) the representations and warranties contained in Exhibit III are true and correct in all material respects on and as of the date of such purchase as though made on and as of such date except any representation or warranty that expressly indicates that it is being made as of a specific date, in which case such representation or warranty shall be true and correct on and as of such date, and (ii) no event has occurred and is continuing, or would result from such purchase, that constitutes an Event of Termination or a Group-Wide Event of Termination or that would constitute an Event of Termination or a Group-Wide Event of Termination but for the requirement that notice be given or time elapse or both. (c) The Purchaser shall have received a duly executed Subscription Agreement for each Provider that became a Provider after the Initial Transfer Date. (d) The Purchaser shall have received such other approvals, opinions or documents as it may reasonably request. II-4 EXHIBIT III REPRESENTATIONS AND WARRANTIES Each Provider and the Primary Servicer represents and warrants as follows: (a) It is duly incorporated or organized, validly existing and in good standing under the laws of the state of its formation as set forth in the preamble hereto or on Schedule I hereto, and is duly qualified to do business, and is in good standing, in every jurisdiction where the nature of its business requires it to be so qualified, except in any jurisdiction where the failure to be so qualified would not result in a Material Adverse Effect. (b) The execution, delivery and performance by it of the Agreement and the other documents to be delivered by it thereunder, (i) are within its powers, (ii) have been duly authorized by all necessary action, (iii) do not contravene (1) its charter, by-laws or operating agreement, (2) any law, rule or regulation applicable to it, (3) any contractual restriction binding on or affecting it or its Property, or (4) any order, writ, judgment, award, injunction or decree binding on or affecting it or its Property, and (iv) do not result in or require the creation of any Lien upon or with respect to any of its Properties, other than the interests created by the Agreement. The Agreement has been duly executed and delivered by it. It has furnished to the Purchaser a true, correct and complete copy of its certificate of incorporation, organization or formation and by-laws or operating agreement, as applicable, including all amendments thereto. (c) No authorization or approval or other action by, and no notice to or filing with, any Governmental Entity other than as required by this Agreement is required for the due execution, delivery and performance by it of the Agreement or any other document to be delivered thereunder. (d) The Agreement constitutes the legal, valid and binding obligation of it, enforceable against it in accordance with its terms, except as limited by bankruptcy, insolvency, moratorium, fraudulent conveyance or other laws relating to the enforcement of creditors' rights generally and general principles of equity (regardless of whether enforcement is sought at equity or law). (e) It has all power and authority, and has all permits, licenses, accreditations, certifications, authorizations, approvals, consents and agreements of all Insurers, Governmental Entities, accreditation agencies and any other Person (including without limitation, accreditation by the appropriate Governmental Entities and industry accreditation agencies and accreditation and certifications as a provider of healthcare services eligible to receive payment and compensation and to participate under Medicare, Medicaid, CHAMPUS/Champva, Blue Cross/Blue Shield and other equivalent programs), necessary or required for it (i) to own the assets (including Receivables) that it now owns, and (ii) to carry on its business as now conducted, except, in each case, where the failure to do so could not reasonably be expected to result in a Material Adverse Effect. III-1 (f) It has not been notified by any Insurer, Governmental Entity or instrumentality, accreditation agency or any other Person, during the immediately preceding 24 Month period, that such party has rescinded or not renewed, or is reasonably likely to rescind or not renew, any permit, license, accreditation, certification, authorization, approval, consent or agreement granted to it or to which it is a party except as disclosed in Schedule IV hereto. (g) As of the Initial Transfer Date, all conditions precedent set forth in Exhibit II have been fulfilled or waived in writing by the Purchaser, and as of each Transfer Date, the conditions precedent set forth in paragraph 2 of such Exhibit II have been fulfilled or waived in writing by the Purchaser. (h) The consolidated balance sheet of Five Star and its Subsidiaries as at June 30, 2002, and the related consolidated statements of income and expense, and cash flows of Five Star and its Subsidiaries for the fiscal periods then ended, copies of which have been furnished to the Purchaser, fairly present the consolidated financial position of Five Star and its Subsidiaries as at such date and the results of the operations of Five Star and its Subsidiaries for the period ended on such date, all in accordance with GAAP, and since June 30, 2002 there has been no Material Adverse Effect. (i) There is no pending or, to its knowledge, threatened action or proceeding or injunction, writ or restraining order affecting it or any of its Subsidiaries before any court, Governmental Entity or arbitrator which could reasonably be expected to result in a Material Adverse Effect, and it or any Subsidiary thereof is not currently the subject of, and has no present intention of commencing, an insolvency proceeding or petition in bankruptcy. (j) It is the legal and beneficial owner of each Batch Receivable free and clear of any Lien (other than any Lien on Accounts that is expressly subordinated in writing to the Lien created hereunder in a manner acceptable to the Purchaser, in its sole discretion); upon each purchase or contribution of a Transferred Batch, the Purchaser shall acquire valid ownership of each Batch Receivable therein and in the collections with respect thereto prior to all other Liens thereon. No effective financing statement or other instrument similar in effect covering any Collateral or any Batch Receivable is on file in any recording office, except those filed in favor of the Purchaser, the Collateral Agent or any permitted assignee of the Collateral Agent or a Lender relating to the Agreement, and no competing notice or notice inconsistent with the transactions contemplated in the Agreement remains in effect with respect to any Obligor. (k) All Receivable Information, information provided in the application for the program effectuated by the Agreement, and each other document, report and Transmission provided by the Primary Servicer or any Provider to the Lender Group is or shall be accurate in all material respects as of its date and as of the date so furnished, and no such document contains or will contain any untrue statement of a material fact or omits or will omit to state a material fact necessary in order to make the statements contained therein, in the light of the circumstances under which they were made, not misleading. III-2 (l) The principal place of business and chief executive office of each Provider and the office where such Provider keeps its records concerning the Collateral and the Batch Receivables are located at the respective address referred to on the signature pages of the Agreement and there have been no other such locations for the four immediately prior Months. (m) Each transfer of a Transferred Batch will constitute a purchase or other acquisition of notes, drafts, acceptances, open accounts receivable or other obligations representing part or all of the sales price of merchandise, insurance or services within the meaning of Section 3(c)(5) of the Investment Company Act of 1940, as amended. (n) The provisions of the Agreement create legal and valid security interests in all of the Collateral owned or held by the Providers in the Purchaser's favor, and when all proper filings and other actions necessary to perfect such Liens have been completed, will constitute a perfected and continuing Lien on all of the Collateral owned or held by the Providers (excluding the Batch Receivables sold or contributed to the Purchaser pursuant to the provisions of the Agreement), having priority over all other liens on such Collateral of the Providers, enforceable against the Providers and all third parties. (o) All required Notices have been prepared and delivered to each applicable Governmental Entity and Insurer, and all invoices now bear only the appropriate remittance instructions for payment direction to the applicable Provider (solely in the case of invoices to Obligors that are not Governmental Entities) the applicable Purchaser Account, the applicable Government Lockbox or the applicable Provider Account, as the case may be. (p) Except as disclosed on Schedule IV hereto, no Provider has changed its principal place of business or chief executive office in the last five years. (q) The exact name of each Provider is as set forth on the signature pages of the Agreement and, except as set forth on such signature page or in a Written Notice pursuant to clause (j)(vii) of Exhibit IV, no Provider has changed its name in the last five years and, except as set forth on Schedule IV or in a Written Notice pursuant to clause (j)(vii) of Exhibit IV, during such period no Provider has used, nor does any Provider now use, any other fictitious, assumed or trade name. (r) With respect to itself or any Subsidiary thereof there exists no event which has or is reasonably likely to result in a Material Adverse Effect. (s) It is not in violation under any applicable statute, rule, order, decree or regulation of any court, arbitrator or governmental body or agency having jurisdiction over it which could result in a Material Adverse Effect. (t) It has filed on a timely basis all tax returns (federal, state and local) required to be filed and has paid, or made adequate provision for payment of, all taxes, assessments and other governmental charges due from it, unless contested in good faith by appropriate proceedings. No tax Lien has been filed and is now effective against it or any of its Properties, except any Lien in respect of taxes and other charges not yet due or contested in good faith by appropriate proceedings. III-3 To its knowledge, there are no pending investigations of it by any taxing authority or any pending but unassessed tax liability of it. It does not have any obligation under any tax sharing agreement for periods prior to December 31, 2001. (u) It is solvent and will not become insolvent after giving effect to the transactions contemplated by the Agreement; it has not incurred debts or liabilities beyond its ability to pay; it will, after giving effect to the transaction contemplated by the Agreement, have an adequate amount of capital to conduct its business in the foreseeable future; the sales and contributions of Receivables hereunder are made in good faith and without intent to hinder, delay or defraud its present or future creditors. (v) The Government Lockboxes are the only post office boxes and the Provider Accounts are the only accounts or lockbox accounts maintained by any Provider for Receivables, the Obligors of which are Governmental Entities; the Providers do not maintain any lockboxes and the Purchaser Accounts are the only lockbox accounts maintained for Receivables, the Obligors of which are non-Governmental Entities; and no direction of any Provider is in effect directing Obligors to remit payments on Receivables other than to the applicable Provider, Purchaser Account, Government Lockbox or Provider Account in accordance with Sections 2.01 and 2.02. (w) Each pension plan or profit sharing plan to which it is a party has been fully funded in accordance with its obligations as set forth in such plan. (x) To its knowledge, there are no pending civil or criminal investigations by any Governmental Entity involving it or its officers or directors and neither it nor any of its officers or directors has been involved in, or the subject of, any civil or criminal investigation by any Governmental Entity, other than facility reviews or license reviews in the ordinary course that have not resulted in any action being taken by the Governmental Entity against it or its officers or directors. (y) The primary business of each Provider is the provision of healthcare services, products, merchandise or equipment and the primary business of Five Star is the ownership and operation of senior residences directly or through Subsidiaries. (z) The assets of each Provider are free and clear of any liens in favor of the Internal Revenue Service, any Employee Benefit Plan or the PBGC other than inchoate tax liens resulting from an assessment of such Provider. (aa) With respect to each Employee Benefit Plan of it, including to its knowledge as to any Multiemployer Plan, such Employee Benefit Plan has complied and been administered in accordance with its terms and in substantial compliance with all applicable provisions of ERISA and the Internal Revenue Code of 1986, as amended; neither it nor any ERISA Affiliate has been notified by the sponsor of a Multiemployer Plan that such Multiemployer Plan is in reorganization or has been terminated, within the meaning of Title IV of ERISA; and it has no material unpaid and unaccrued liability for any Employee Benefit Plan. III-4 (bb) No Batch Receivable constitutes or has constituted an obligation of any Subsidiary thereof, parent or other Person which is its Affiliate. (cc) No transaction contemplated under this Agreement requires compliance with any bulk sales act or similar law. (dd) It has, or has the right to use, valid provider identification numbers and licenses to generate the Receivables. (ee) Five Star will prepare year-end financial statements on an annual basis for it and its consolidated Subsidiaries (including the Purchaser) in accordance with GAAP, which will contain footnotes or other information to the effect that: (i) the Purchaser's business consists of both purchased and contributed Receivables from the Providers; and (ii) the Purchaser is a separate Delaware limited liability company with its own separate creditors which, upon liquidation of the Purchaser will be entitled to be satisfied solely out of the Purchaser's assets and the Purchaser will prepare separate financial statements, which statements will treat all transfers of purchased and contributed Receivables pursuant to this Agreement respectively as sales and contributions to the Purchaser's capital, and not as secured loans, and Five Star will classify all purchased and contributed Receivables transferred under this Agreement as assets owned exclusively by the Purchaser for all purposes. (ff) It is not engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulation T, U, or X of the Board of Governors of the Federal Reserve System), and no part of the proceeds of any extension of credit under this Agreement will be used to purchase or carry any such margin stock or to extend credit to others for the purpose of purchasing or carrying margin stock. (gg) On and after the Initial Transfer Date, only the New Patient Consent Forms are being obtained by it from each patient and customer who commences to receive services or products from any Provider thereafter. (hh) With respect to each Receivable contributed to the capital of the Purchaser in each Batch, the Purchaser shall record in each applicable Provider's own capital account the aggregate Expected Net Value of such Receivables as a capital contribution. (ii) Except as set forth on Schedule IV, no Provider has any Debt other than Permitted Debt. III-5 EXHIBIT IV COVENANTS Until the later of the Facility Termination Date and the Final Payment Date, each Provider and the Primary Servicer agrees as follows: (a) Compliance With Laws, etc. It will comply in all material respects with all applicable laws, rules, regulations and orders and preserve and maintain its corporate existence, rights, franchises, qualifications, and privileges. (b) Offices, Records and Books of Account. It will keep its principal place of business and chief executive office and the office where it keeps its records concerning the Collateral and the Batch Receivables at the address set forth under its name on the signature pages to the Agreement or, upon 30 days' prior Written Notice to the Purchaser, at any other locations in jurisdictions where all actions reasonably requested by the Purchaser or otherwise necessary to protect, perfect and maintain the Purchaser's security interest in the Collateral have been taken and completed. It shall keep its books and accounts in accordance with GAAP and shall make a notation on its books and records, including any computer files, to indicate which Receivables have been sold or contributed to the Purchaser and the security interest of the Purchaser in the Collateral and its Receivables not sold or contributed to the Purchaser. It shall maintain and implement administrative and operating procedures (including, without limitation, an ability to recreate records evidencing Receivables and related contracts in the event of the destruction of the originals thereof), and keep and maintain all documents, books, records and other information reasonably necessary or advisable for collecting all Batch Receivables (including, without limitation, records adequate to permit the daily identification of each Batch Receivable and all Collections of and adjustments to each existing Batch Receivable) and for providing the Receivable Information. (c) Performance and Compliance With Contracts and Credit and Collection Policy. It will, at its expense, timely and fully perform and comply with all material provisions, covenants and other promises required to be observed by it under the contracts and other documents related to the Batch Receivables and its responsibilities under the Agreement, and timely and fully comply in all material respects with the Credit and Collection Policy in regard to each Batch Receivable and the related contract, and it shall maintain, at its expense, in full operation each of the bank accounts and lockboxes required to be maintained under the Agreement. It shall not do anything to impede or interfere, or suffer or permit any other Person to impede or interfere in any material respect, with the collection by the Purchaser, or the Master Servicer or any other Person designated by the Purchaser on behalf of the Purchaser, of the Batch Receivables. (d) Notice of Breach of Representations and Warranties. It shall promptly (and in no event later than one Business Day following actual knowledge thereof) inform the Purchaser and the Master Servicer of any breach of covenants or representations and warranties hereunder, including, without limitation, upon discovery of a breach of the Eligibility Criteria set forth in the Loan Agreement. IV-1 (e) Sales, Liens and Debt. It will not sell, assign (by operation of law or otherwise) or otherwise dispose of, or create or suffer to exist any Liens upon or with respect to, the Collateral, the Batch Receivables or upon or with respect to any account to which any Collections of any Batch Receivable are sent, or assign any right to receive income in respect thereof except those Liens in favor of the Purchaser, the Collateral Agent or any assignee of the Collateral Agent or any Lender relating to the Agreement. It will not, directly or indirectly (x) at any time pay any amount of principal or prepay, defease, purchase, redeem any Debt, during the continuance of an Event of Termination or (y) pay any management fees or other similar fees to any Affiliate; provided that nothing in this clause (e) shall prohibit payment of non-cash interest "in-kind" thereunder. (f) Extension or Amendment of Batch Receivables. It shall not amend, waive or otherwise permit or agree to any deviation from the terms or conditions of any Batch Receivable except in accordance with the Credit and Collection Policy. (g) Change in Credit and Collection Policy. It will not make any material change in the Credit and Collection Policy without the prior written consent of the Program Manager; provided, however, that during the continuance of an Event of Termination, it will not make any change in the Credit and Collection Policy. The Providers will not make any change in the character of their businesses that is reasonably likely to result in a Material Adverse Effect. (h) Audits and Visits. It will, at any time and from time to time during regular business hours as requested by the Purchaser, permit the Purchaser, or its agents or representatives (including the Master Servicer), upon reasonable notice, (i) on a confidential basis, to examine and make copies of and abstracts from all books, records and documents (including, without limitation, computer tapes and disks) in its possession or under its control relating to Batch Receivables including, without limitation, the related contracts, and (ii) to visit its offices and properties for the purpose of examining and auditing such materials described in clause (i) above, and to discuss matters relating to Batch Receivables or its performance hereunder or under the contracts with any of its officers or employees having knowledge of such matters. It shall, at any time and from time to time during regular business hours as requested by the Master Servicer, permit the Master Servicer to have at least one agent or representative physically present in its administrative office, upon reasonable notice, to assist it in performing its obligations under the Agreement, including its obligations with respect to the collection of Batch Receivables pursuant to Article I of the Agreement; provided, however, that no notice shall be required upon the occurrence of and during the continuance of an Event of Termination. (i) Change in Payment Instructions. It will not terminate the Primary Provider Account, any Government Lockbox, or any Government Lockbox Account, or make any change or replacement in the instructions contained in any invoice, Notice or otherwise, or regarding payments with respect to Receivables to be made to the any Government Lockbox, any Government Lockbox Account, the Primary Provider Account, the Primary Purchaser Account, or any Local Purchaser Account, except upon the prior and express written consent of the Program Manager or the Purchaser. IV-2 (j) Reporting Requirements. It will provide to the Purchaser (in multiple copies, if requested by the Purchaser) the following: (i) as soon as available and in any event within 45 days after the end of each of the first three quarters of each fiscal year of Five Star, consolidated and consolidating balance sheets of Five Star and its Subsidiaries as of the end of such quarter and consolidated and consolidating statements of income and consolidated cash flows and retained earnings of Five Star and its Subsidiaries for the period commencing at the beginning of the current fiscal year and ending with the end of such quarter, certified by the chief financial officer of Five Star and accompanied by a certificate of an authorized officer of the Primary Servicer detailing the Primary Servicer's and each Provider's compliance for such fiscal period with all terms, including calculations demonstrating compliance with the financial covenants, contained in the Agreement, and to the extent any non-compliance exists, a description of the steps being taken by the Primary Servicer or the applicable Provider to address such non- compliance; (ii) as soon as available and in any event within 90 days after the end of each fiscal year of Five Star a copy of consolidating financial statements and the audited consolidated financial statements (together with explanatory notes thereon) and the auditor's report letter for such year for Five Star and its Subsidiaries, containing financial statements for such year audited by Ernst & Young LLP or other independent public accountants of recognized standing acceptable to the Purchaser, certified by the chief financial officer of the Primary Servicer and accompanied by a certificate of an authorized officer of the Primary Servicer detailing the Primary Servicer's and each Provider's compliance for such fiscal period with all terms, including the financial covenants, contained in the Agreement, and to the extent any non-compliance exists, a description of the steps being taken by the Primary Servicer or the applicable Provider to address such non-compliance; (iii) on or before the 25th of each Month, monthly and year-to-date statistical and financial reports and unaudited consolidated profit and loss reports, from the chief financial officer of the Providers; (iv) promptly and in any event within two Business Days after the occurrence of (x) each Event of Termination or event which, with the giving of notice or lapse of time, or both, would constitute an Event of Termination, a statement of the chief financial officer of applicable Provider setting forth details of such Event of Termination or event, and the action that it has taken and proposes to take with respect thereto and (y) each Group-Wide Event of Termination or event which, with the giving of notice or lapse of time, or both, would constitute a Group-Wide Event of Termination, a certificate of the Primary Servicer setting forth the details of such Group-Wide Event of Termination or event, and the action that has been taken and proposes to take with respect thereto; (v) promptly after the sending or filing thereof, if any, copies of all reports and registration statements that any Provider or any Subsidiary thereof files with the Securities and Exchange Commission or any national securities exchange and official IV-3 statements that any Provider or any Subsidiary thereof files with respect to the issuance of tax-exempt indebtedness and after an Event of Termination or Servicer Termination Event, copies of all reports (if any) that the Provider or any Subsidiary thereof sends to any of its security holders; (vi) promptly after the filing or receiving thereof, copies of all reports and notices that any Provider or any of its Affiliates (it being understood that for purposes of this Section (j)(vi), the term "Affiliates" does not include REIT Management & Research LLC or Senior Housing Properties Trust) files under ERISA with the Internal Revenue Service or the PBGC or the U.S. Department of Labor or that any Provider or any of its Affiliates receives from any of the foregoing or from any Multiemployer Plan to which such Provider or any of its Affiliates is or was, within the preceding five years, a contributing employer, in each case in respect of the assessment of withdrawal liability or an event or condition which could, in the aggregate, result in the imposition of liability on such Provider or any such Affiliate in excess of $100,000; (vii) at least ten Business Days prior to any change in any Provider's name or any implementation of a new trade/assumed name, a Written Notice setting forth the new name or trade name and the proposed effective date thereof and copies of all documents required to be filed in connection therewith; (viii) promptly (and in no event later than one Business Day following actual knowledge or receipt thereof), Written Notice in reasonable detail, of (w) any Lien asserted or claim made against a Batch Receivable, (x) the occurrence of a Service Termination Event or a Group-Wide Event of Termination, or any other event which could result in a material adverse effect on the value of a Batch Receivable or on the interest of the Purchaser in a Batch Receivable, (y) any notice of any investigations or similar audits of any Provider being conducted by any federal, state or county Governmental Entity or its agents or designees or (z) the results of any cost report filed and reviewed by any Governmental Entity or its fiscal intermediary or settled, and any investigation or similar audit being conducted by any federal, state or county Governmental Entity or its agents or designees; (ix) not later than 30 days after the commencement of each fiscal year, a consolidated and consolidating operating plan (together with a statement in reasonable detail of the assumptions on which such plan is based) of Five Star and its Subsidiaries, and which shall, in each case, include budgets for the prospective year in reasonable detail acceptable to the Purchaser and will integrate operating profit and cash flow projections, capital expenditures, and facilities plans; (x) promptly upon receipt thereof, a copy of any management letter or written report submitted to any Provider by independent certified public accountants with respect to the Subsidiaries thereof, business, condition (financial or otherwise), operations, prospects, or Properties of such Provider; IV-4 (xi) no later than two Business Days after the commencement thereof, Written Notice of all actions, suits, and proceedings before any Governmental Entity or arbitrator affecting any Provider which, if determined adversely to such Provider, could result in a Material Adverse Effect; (xii) promptly after the furnishing thereof, copies of any statement or report furnished by any Provider to any other party pursuant to the terms of any indenture, loan, or credit or similar agreement and not otherwise required to be furnished to the Purchaser pursuant to this Agreement; (xiii) as soon as possible and in any event within five days after becoming aware of the occurrence thereof, Written Notice of any matter that could reasonably be expected to result in a Material Adverse Effect; (xiv) as soon as available, (A) one copy of each financial statement, report, notice or proxy statement sent by Five Star to its stockholders generally, (B) and one copy of each regular, periodic or special report, registration statement, or prospectus filed by Five Star with any securities exchange or the Securities and Exchange Commission or any successor agency or the Bankruptcy Court, and (C) all press releases and other statements made available by Five Star to the public concerning developments in the business of such Provider; (xv) within the sixty (60) day period prior to the end of each fiscal year of each Provider, a report satisfactory in form to the Purchaser, listing all material insurance coverage maintained as of the date of such report by such Provider and all material insurance planned to be maintained by such Provider in the subsequent fiscal year; and (xvi) promptly, and in no event later than three Business Days following the earlier of actual knowledge or receipt of notification from a Governmental Entity, estimates of amounts of Receivables generated which are subject to offset by Governmental Entities; (xvii) at the time of each Monthly Report, internally prepared cost-report settlement estimates with respect to Governmental Entities; and (xviii) such other information respecting the Receivables or the condition or operations, financial or otherwise, of any Provider or any Subsidiary or Affiliate thereof as the Purchaser may from time to time reasonably request. (k) Notice of Proceedings; Overpayments. The Primary Servicer shall promptly notify the Master Servicer in the event of any action, suit, proceeding, dispute, set-off, deduction, defense or counterclaim that is or may be asserted by an Obligor with respect to any Batch Receivable. Each Provider shall make any and all payments to the Obligors necessary to prevent the Obligors from offsetting any earlier overpayment to such Provider against any amounts the Obligors owe on any Batch Receivables. IV-5 (l) Officer's Certificate. On the date the financial statements referred to in clause (j) above are to be delivered in each fiscal year after the Initial Transfer Date, the chief financial officer of each Provider shall deliver a certificate to the Purchaser, stating that, as of such date, (i) all representations and warranties set forth in the Agreement are true and correct, (ii) the conditions precedent set forth in paragraph 2 of Exhibit II have been fulfilled or waived in writing by the Purchaser, and (iii) no Event of Termination or Group-Wide Event of Termination exists and is continuing. (m) Further Instruments, Continuation Statements. Each Provider shall, at its expense, promptly execute and deliver all further instruments and documents, and take all further action that the Program Manager or the Purchaser may reasonably request, from time to time, in order to perfect, protect or more fully evidence the full and complete transfer of ownership of the Batch Receivables and the security interest in the Collateral, or to enable the Purchaser or the Program Manager to exercise or enforce the rights of the Purchaser hereunder or under the Batch Receivables. Without limiting the generality of the foregoing, each Provider will upon the request of the Program Manager execute and file such UCC financing or continuation statements, or amendments thereto or assignments thereof, and such other instruments or notices, as may be, in the opinion of the Program Manager, necessary or appropriate. Each Provider hereby authorizes the Program Manager or its designees, upon two Business Days' notice, to file one or more financing or continuation statements and amendments thereto and assignments thereof, relative to all or any of the Batch Receivables or the Collateral now existing or hereafter arising without the signature of such Provider where permitted by law. If any Provider fails to perform any of its agreements or obligations under the Agreement, the Program Manager may (but shall not be required to) itself perform, or cause performance of, such agreement or obligation, and the expenses of the Program Manager incurred in connection therewith shall be payable by such Provider. (n) Taxes. Each Provider shall pay any and all taxes (excluding the Purchaser's income, gross receipts, franchise, doing business or similar taxes) relating to the transactions contemplated under the Agreement, including but not limited to the sale, transfer and assignment of each Batch Receivable. (o) Deviation from Terms of Batch Receivable, etc. No Provider shall, without the prior written consent of the Purchaser: (i) other than in connection with the purchase of a Denied Receivable, compromise, adjust, extend, satisfy, subordinate, rescind, set off, waive, amend, or otherwise modify, or permit or agree to any deviation from, the terms and conditions of any Batch Receivable, or materially or adversely amend, modify or waive any term or condition of any contract related thereto; (ii) (x) amend, modify, supplement or delete in any way or to any extent any provision for uncollectible accounts and free care applicable to any Batch Receivable or (y) amend, modify or supplement in any way or to any extent any financial category or change in any way or to any extent the manner in which any financial category is treated or reflected in the Provider's records; IV-6 (iii) alter or modify (x) its claims processing system, or (y) its third party billing system, as applicable (except for technical changes of an immaterial nature); or (iv) change, modify or rescind any direction contained in any invoice or previously delivered Notice. (p) Purchaser's Ownership of Batch Receivables. It shall not prepare or permit to be prepared any financial statements which shall account for the transactions contemplated hereby in a manner which is, or in any other respect account for the transactions contemplated hereby in a manner which is, inconsistent with the Purchaser's ownership of the Batch Receivables. (q) No "Instruments". It shall not take any action which would allow, result in or cause any Transferred Batch or Batch Receivable to be evidenced by an "instrument" within the meaning of the UCC of the applicable jurisdiction. (r) Deviation from New Patient Consent Form. No Provider shall, without the prior written consent of the Purchaser, substitute, alter, modify or change in any way the New Patient Consent Form. (s) Implementation of New Invoices. Each Provider shall take all reasonable steps to ensure that all invoices rendered or dispatched on or after the Initial Transfer Date contain only the remittance instructions required under Article II of this Agreement. (t) Assumed/Trade Name Certificates. On or before December 31, 2002, the Purchaser shall receive copies of all certificates filed by each Provider in each applicable jurisdiction regarding the use of each of the trade or assumed names set forth opposite such Provider's name on Schedule VI attached hereto. (u) Notice of Termination or Suspension of Contracts. It shall promptly (and in no event later than one Business Day following actual knowledge thereof) inform the Purchaser and the Master Servicer of any termination or suspension of any of its contracts. (v) Incurrence of Debt. It will not incur any Debt other than Permitted Debt. IV-7 EXHIBIT V EVENTS OF TERMINATION Each of the following shall be an "Event of Termination": (a) The Primary Servicer, in its capacity as agent for the Providers and the Purchaser pursuant to Section 1.05(b), shall fail to perform or observe any term, covenant or agreement included in the Primary Servicer Responsibilities (other than a Servicer Termination Event resulting from the events described in paragraph (g) of this Exhibit) and such failure shall remain unremedied for 15 days or the Primary Servicer or any Provider shall fail to make when due any payment or deposit to be made by it under the Agreement. (b) A Provider or the Primary Servicer (i) fails to transfer in a timely manner any servicing rights and obligations with respect to the Batch Receivables to any successor designated pursuant to Section 1.05(b) of the Agreement, (ii) fails to make any payment required under the Agreement (unless such payment obligation has been fulfilled in full pursuant to the Purchaser's set- off rights under Section 4.03 of the Agreement) or (iii) sends a "Revocation Order" (as defined in the Depositary Agreement or the Government Depositary Agreement) or makes any change or replacement in the "Standing Revocable Instruction" (as defined in the Depositary Agreement or the Government Depositary Agreement). (c) Any representation or warranty (other than those representations and warranties (i) with respect to the purchase of Receivables that are covered by paragraph (f) of this Exhibit and (ii) with respect to Batch Receivables, the Return Price with respect thereto is paid to the Purchaser in the manner set forth in Article IV of this Agreement within two Business Days following demand therefor) made or deemed made by any Provider or the Primary Servicer under or in connection with the Agreement, any Provider's Document or any information or report delivered by any Provider or the Primary Servicer pursuant to the Agreement or any Provider Document shall prove to have been incorrect or untrue in any material respect when made or deemed made or delivered. (d) A Provider or the Primary Servicer fails to perform or observe any other term, covenant or agreement contained in the Agreement or in any other Provider Document on its part to be performed or observed and any such failure shall remain unremedied for five Business Days after the earlier of (i) the discovery thereof by such Provider or the Primary Servicer and (ii) written notice thereof shall have been given to such Provider or the Primary Servicer by the Purchaser. (e) A Provider shall fail to pay any principal of or premium or interest on any of its Debt when the same becomes due and payable (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise), and such failure shall continue after the applicable grace period, if any, specified in the agreement or instrument relating to such Debt; or any other event shall occur or condition shall exist under any agreement or instrument relating to any such Debt and shall continue after the applicable grace period, if any, specified in such agreement or V-1 instrument, if the effect of such event or condition is to accelerate, or to permit the acceleration of, the maturity of such Debt; or any such Debt shall be declared to be due and payable, or required to be prepaid (other than by a regularly scheduled required prepayment), redeemed, purchased or defeased, or an offer to repay, redeem, purchase or defease such Debt shall be required to be made, in each case prior to the stated maturity thereof. (f) Any purchase or contribution of a Transferred Batch pursuant to the Agreement shall for any reason (other than pursuant to the terms hereof) fail or cease to create or fail or cease to be a valid and perfected ownership interest in each Batch Receivable in such Transferred Batch and the Collections with respect thereto free and clear of all Liens (other than Liens referred to in paragraph (e) of Exhibit IV) unless, as to any such Batch Receivable, the Return Price with respect thereto is paid to the Purchaser in the manner set forth in Article IV of the Agreement within five Business Days following demand therefor. (g) A Provider or the Primary Servicer shall generally not pay its debts as such debts become due, or shall admit in writing its inability to pay its debts generally, or shall make a general assignment for the benefit of creditors; or any proceeding shall be instituted by or against a Provider or the Primary Servicer seeking to adjudicate it a bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief, or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking the entry of an order for relief or the appointment of a receiver, trustee, custodian or other similar official for it or for any substantial part of its Property and, in the case of any such proceeding instituted against it (but not instituted by it), either such proceeding shall remain undismissed or unstayed for a period of 30 days, or any of the actions sought in such proceeding (including, without limitation, the entry of an order for relief against, or the appointment of a receiver, trustee, custodian or other similar official for, it or for any substantial part of its Property) shall occur; or a Provider or the Primary Servicer shall take any action to authorize any of the actions set forth above in this paragraph (g). (h) As of any date of determination, a Provider is found to have been overpaid by Governmental Entities by an amount equal to 10% of the Expected Net Value of all Eligible Receivables or more during any period covered by an audit conducted by CMS or any state authority and such overpayment is not repaid within 30 days of its due date or reserved for in a manner reasonably acceptable to the Program Manager. (i) There shall have occurred any Material Adverse Effect since June 30, 2002. (j) There shall have occurred a Change of Control. (k) Judgments or orders for payment of money (other than judgments or orders in respect of which adequate insurance is maintained for the payment thereof) against a Provider in excess of $100,000 in the aggregate remain unpaid, unstayed on appeal, undischarged, unbonded or undismissed for a period of 30 days or more. V-2 (l) Any governmental authority (including, without limitation, the Internal Revenue Service or the PBGC) files a notice of a Lien against the assets of a Provider other than a Lien (i) that is limited by its terms to assets other than Receivables and (ii) that does not result in a Material Adverse Effect. (m) A Provider does not maintain, keep, and preserve all of its Properties necessary or useful in the proper conduct of its business in good repair, working order, and condition (ordinary wear and tear excepted) and make all reasonably necessary repairs, renewals, replacements, betterments, and improvements thereof. (n) A Provider does not pay or discharge at or before maturity or before becoming delinquent (i) all taxes, levies, assessments, and governmental charges imposed on it or its income or profits or any of its Property, and (ii) all lawful claims for labor, material, and supplies, which, if unpaid, might become a Lien upon any of its Property. (o) A Provider does not keep insured by financially sound and reputable insurers all Property of a character usually insured by corporations engaged in the same or similar business similarly situated against loss or damage of the kinds and in the amounts customarily insured against by such corporations and carry such other insurance as is usually carried by such corporations. Each policy referred to in this clause (o) shall provide that it will not be canceled, amended, or reduced except after not less than thirty (30) days' prior written notice to the Purchaser and the Collateral Agent and shall also provide that the interests of the Purchaser shall not be invalidated by any act or negligence of the applicable Provider. A Provider does not advise the Purchaser promptly of any policy cancellation, reduction, or amendment. Any insurance policy for property, casualty, liability and business interruption coverage for a Provider does not name the Collateral Agent as assignee of the Purchaser as loss payee (as the Purchaser's interests may appear) or an additional insured, as appropriate. (p) A Provider or the Primary Servicer does not maintain proper books of record and account in which full, true and correct entries in conformity with GAAP are made of all dealings and transactions in relation to its business and activities. (q) A Provider or the Primary Servicer does not comply in all material respects with (i) any document directly relating to the responsibilities of such Provider or the Primary Servicer, respectively, under the Agreement or (ii) any agreement, contract, or instrument that results in a Material Adverse Effect. (r) A Provider does not comply with all minimum funding requirements and all other material requirements of ERISA, if applicable, so as not to give rise to any material liability thereunder. (s) A Provider engages in any line or lines of business activity other than the businesses in which it is engaged on the date hereof. V-3 (t) An "Event of Default" (as defined in the Loan Agreement) shall occur under the Loan Agreement. (u) Any provision of this Agreement shall for any reason cease to be valid and binding on the Primary Servicer or any Provider, or the Primary Servicer or any Provider shall so state in writing. (v) A Change of Control shall occur. (w) The Current Ratio, calculated at the end of any fiscal quarter of the Providers, is less than 1.05:1.00. (x) The Consolidated Net Worth of Five Star and its Subsidiaries calculated at the end of any fiscal quarter of the Providers, is less than an amount equal to the sum of (i) $37,500,000 plus (ii) 100% of Equity Net Proceeds. V-4 EXHIBIT VI RECEIVABLE INFORMATION The following information shall, as appropriate, be provided by each Provider to the Master Servicer with respect to each Batch Receivable, together with such other information and in such form as may reasonably be requested from time to time by the Master Servicer and as, in accordance with applicable law, may be disclosed or released to the Master Servicer (the "Receivable Information"): (i) customer/patient demographic information; (ii) insured party demographic and other policy-related information; (iii) such Provider's services and products classification information (i.e., D.R.G. and other like information established by such Provider from time to time to classify services rendered or goods sold at or by such Provider's institutions); (iv) Obligor required information (i.e., information provided in the ordinary course of business to any specified Obligor or any other information required to be provided to an Obligor pursuant to any agreement, contract or other arrangement with such Obligor); and (v) billing information (i.e., all information provided by such Provider on invoices to Obligors and any other information required to be provided pursuant to the Credit and Collection Policy and, to the extent the Transmission will not be via computer interface, including a copy of the admitting face sheet, CMS Form and a detailed copy of the bill). VI-1 EXHIBIT VII-A FORM OF NOTICE TO GOVERNMENTAL ENTITIES [Letterhead of the Provider] [Date] [Name and Address of Governmental Entity] Re: Change of Account and Address To Whom it May Concern: Please be advised that we have opened a new bank account at [Lockbox Bank]1 and a post-office box with respect to such bank account. Accordingly, until further notice, we hereby request that: (1) All wire transfers be made directly into our account at: [Lockbox Bank] ___________________ ___________________ Account #_______________ ABA #__________________ Confirm Phone Number: _______________ Attention: ___________________ (2) All Explanations of Benefits, remittance advices and other forms of payment, including checks, be made to our post office box located at: ___________________ ___________________ ___________________ Reference: Account #____________ Thank you for your cooperation in this matter. [NAME OF PROVIDER] By:____________________ [Authorized Officer] - -------- 1 In the case of WI it will not be the Lockbox Bank. VII-A-1 EXHIBIT VII-B FORM OF NOTICE TO NON-GOVERNMENTAL ENTITIES [Letterhead of the Provider] [Date] [Name and Address of Obligor] Re: Change of Account and Address To Whom it May Concern: Please be advised that we are selling and contributing to FSQC Funding Co., LLC (the "Purchaser"), an affiliated company, all of our existing and future receivables payable by you to us; and the Purchaser is assigning the aforementioned existing and future arising receivables as collateral to ____________, for the benefit of the Purchaser's lenders . Accordingly, you are hereby directed to make: (1) All wire transfers directly to the following account: __________________ __________________ ___________________ Account #_______________ ABA #__________________ Confirm Phone Number: _______________ Attention: ___________________ (2) All Explanation of Benefits, remittance advices and other forms of payment, including checks, to the following address: __________________ __________________ Reference: _________________ The foregoing directions shall apply to all existing receivables payable to us and (until further written notice) to all receivables arising in the future and may not be revoked except by a writing executed by the Purchaser. VII-B-1 Please acknowledge your receipt of this notice by signing the enclosed copy of this letter and returning it in the enclosed envelope. Thank you for your cooperation in this matter. [NAME OF PROVIDER] By:_______________________________ [Authorized Officer] FSQC FUNDING CO., LLC By:____________________ [Authorized Officer] Receipt Acknowledged: [Name of Obligor] By: ____________________ Title: VII-B-2 EXHIBIT VIII PRIMARY SERVICER RESPONSIBILITIES Each Provider shall be responsible for the following administration and servicing obligations (the "Primary Servicer Responsibilities") which shall be performed by the Primary Servicer on behalf of the Providers until such time as a successor servicer shall be designated and shall accept appointment pursuant to Section 1.05(b) of the Agreement: (a) Servicing Standards and Activities. The Primary Servicer agrees to administer and service the Batch Receivables sold or contributed by the Providers in each Transferred Batch (i) to the extent consistent with the standards set forth in clauses (b)(i) through (iv) below, with the same care that it exercises in administering and servicing similar receivables for its own account, (ii) within the parameters of services set forth in paragraph (b) of this Exhibit VIII, as such parameters may be modified by mutual written agreement of the Purchaser and the Primary Servicer, (iii) in compliance at all times with applicable law and with the agreements, covenants, objectives, policies and procedures set forth in the Agreement, and (iv) in accordance with industry standards for servicing healthcare receivables unless such standards conflict with the procedures set forth in paragraph (b) of this Exhibit VIII in which case the provisions of paragraph (b) shall control. The Primary Servicer shall establish and maintain electronic data processing services for monitoring, administering and collecting the Batch Receivables in accordance with the foregoing standards and shall, within three Business Days of the deposit of any checks, other forms of cash deposits, EOB's or other written matter into a Government Lockbox, post such information to its electronic data processing services. (b) Parameters of Primary Servicing. The Primary Servicer Responsibilities shall be performed within the following parameters: (i) Subject to the review and authority of the Purchaser and except as otherwise provided herein, the Primary Servicer shall have full power and authority to take all actions that it may deem necessary or desirable, consistent in all material respects with its existing policies and procedures with respect to the administration and servicing of accounts receivable, in connection with the administration and servicing of Batch Receivables. Without limiting the generality of the foregoing, the Primary Servicer shall, in the performance of its servicing obligations hereunder, act in accordance with all legal requirements and subject to the terms and conditions of the Agreement. The Primary Servicer agrees that the Primary Servicing Fee has been calculated to cover all costs and expenses incurred in the performance of its servicing obligations hereunder and no other reimbursement of costs and expenses shall be payable to the Primary Servicer. (ii) The Primary Servicer shall not be entitled to sue to enforce or collect any Batch Receivable without the prior written consent of the Purchaser unless the Primary Servicer shall have purchased such Batch Receivable in accordance with the Agreement. VIII-1 (iii) The Primary Servicer shall not change in any material respect its existing policies and procedures with respect to the administration and servicing of accounts receivable (including, without limitation, the amount and timing of write-offs) without the prior written consent of the Purchaser. (iv) The Primary Servicer will be responsible for monitoring and collecting the Batch Receivables, including, without limitation, contacting Obligors that have not made payment on their respective Batch Receivables within the customary time period for such Obligor, and resubmitting any claim rejected by an Obligor due to incomplete information. (v) If the Primary Servicer determines that a payment with respect to a Batch Receivable has been received directly by a patient or any other Person, the Primary Servicer shall promptly advise the Purchaser, and the Purchaser shall be entitled to presume that the reason such payment was made to such patient or other Person was because of a breach of representation or warranty in the Agreement with respect to such Batch Receivable (such as, by way of example, the forms related to such Batch Receivable not being properly completed so as to provide for direct payment by the Obligor to the Primary Servicer), unless the Primary Servicer shall demonstrate that such is not the case. In the case of any such Batch Receivable which is determined not to be a Denied Receivable, the Primary Servicer shall promptly demand that such patient or other Person remit and return such funds. If such funds are not promptly received by the relevant Provider, the Primary Servicer shall take all reasonable steps to obtain such funds. (vi) Notwithstanding anything to the contrary contained herein, the Primary Servicer may not amend, waive or otherwise permit or agree to any deviation from the terms or conditions of any Batch Receivable in any material respect without the prior consent of the Purchaser. (c) The Loan Agreement. The Primary Servicer shall be responsible, with the Purchaser, for the determination and application of the Eligibility Criteria and the delivery and certification of information relating to the Receivables required to be delivered under the Loan Agreement. (d) Aged Term Servicing. The parties hereby agree that at such time as any Batch Receivable is unpaid for more than 120 days after the Last Service Date, the Primary Servicer shall, upon the request of the Purchaser, turn over all of its Primary Servicer Responsibilities under this Agreement with respect to such Batch Receivable to a successor servicer selected by the Purchaser, and such servicer shall thereafter service such Batch Receivable. (e) Termination of Primary Servicer Responsibilities; Cooperation. Upon the termination of the performance of the Primary Servicer Responsibilities by the Primary Servicer in accordance with Section 1.05(b) of the Agreement, the Primary Servicer shall immediately transfer to a successor servicer designated by the Purchaser all records, computer access and other information as shall be necessary or desirable, in the reasonable judgment of such successor servicer, VIII-2 to perform such responsibilities. The Primary Servicer shall otherwise cooperate fully with such successor servicer. (f) Primary Servicing Fee. Upon the transfer of servicing with respect to any Receivable pursuant to this Agreement, the Primary Servicer shall no longer be paid the Primary Servicing Fee relating to such Receivables, and such Primary Servicing Fee will be paid to the successor Person performing the Primary Servicer Responsibilities with respect thereto. VIII-3 EXHIBIT IX SERVICER TERMINATION EVENTS Each of the following shall be a "Servicer Termination Event": (a) An event has occurred and is continuing that constitutes an Event of Termination with respect to the Primary Servicer or that would constitute an Event of Termination with respect to the Primary Servicer but for the requirement that notice be given or time elapse or both. (b) The Primary Servicer is not performing, or becomes unable (in the commercially reasonable determination of the Purchaser) to perform, fully the Primary Servicer Responsibilities set forth in Exhibit VIII hereof or the Purchaser, in its sole judgment, which judgment shall be commercially reasonable, is not satisfied with the performance by any Provider, or the Primary Servicer on behalf of the Providers, of the Primary Servicer Responsibilities. (c) The Primary Servicer is unable to maintain the Transmission interface described in Exhibit X to the reasonable satisfaction of the Master Servicer, or the electronic information servicing capabilities of the Primary Servicer are not functioning for a period of more than three consecutive Business Days. (d) The Primary Servicer has sent multiple Transmissions to the Master Servicer in a manner that is not in compliance with the specifications set forth in Exhibit X hereof. (e) As of any date after the Initial Transfer Date, more than 8% of all outstanding Batch Receivables (excluding Denied Receivables) are aged more than 120 days but less than 180 days from the respective Last Service Dates of such Batch Receivables. IX-1 EXHIBIT X INTERFACE BETWEEN MASTER SERVICER AND THE PRIMARY SERVICER 1. The Master Servicer will convey appropriate data requirements and instructions to the Primary Servicer to establish a computer interface between the Primary Servicer's systems and the Master Servicer's receivables monitoring system. The interface will permit the Master Servicer to receive electronically the Primary Servicer's accounts receivable data, including the Receivable Information, billing data and collection and other transaction data relating to the Receivables. 2. The Primary Servicer shall give the Master Servicer and the Purchaser at least ten Business Days' notice of any coding changes or electronic data processing system modifications made by the Primary Servicer which could affect the Master Servicer's processing or interpretation of data received through the interface. 3. The Master Servicer shall have no responsibility to return to the Primary Servicer any information which the Master Servicer receives pursuant to the computer interface. 4. The Primary Servicer will prepare weekly accounts receivable data files of all transaction types for all of the Primary Servicer's sites that are included in the program. The weekly cutoff will occur at a predetermined time each week, and the weekly cutoff date for all of the sites must occur at exactly the same time. The cutoff date that will be selected will be at the end of business for a specific day of the week, or in other words, at the end of the Primary Servicer's transaction posting process for that day. The Primary Servicer will temporarily maintain a copy of the accounts data files in the event that the data is degraded or corrupted during transmission, and needs to be re-transmitted. 5. The Master Servicer will be responsible for the management of the hardware, communications and software used in the program. 6. The Master Servicer's data center will receive the Receivable files, and immediately confirm that the files have been passed without degradation or corruption of data by balancing the detailed items to the control totals that accompany the files. Any problems in this process will be immediately reported to the Primary Servicer so that the Receivable file can be re- transmitted, if necessary. 7. Once the receipt of the Receivable data has been confirmed, the Master Servicer will perform certain tests and edits to ensure that each Receivable X-1 meets the specified eligibility criteria for purchase by the Purchaser. Compliance with concentration limits will be verified and the Master Servicer will notify the Program Manager to initiate a Receivable purchase using the Receivable file received. Upon the successful completion of a purchase, the Master Servicer will generate a one-line trial balance (listing all purchased accounts) confirming the Receivables that have been purchased. A copy of the trial balance will be forwarded to the Providers, to the Primary Servicer, to the Purchaser, and to the Program Manager to confirm the purchase. 8. The Primary Servicer's sites will continue to post daily transactions to their respective Receivable files. The Primary Servicer's Receivable files for each of the eligible sites will include all transactions posted through that day. The Primary Servicer will create a transaction report and a Receivable file for each of the eligible sites. The transaction report will contain all transactions posted to the respective site Receivable file for the specified period (and will indicate the respective site and the number of items and total dollars on each transaction report for control purposes). The Receivable file will contain balances that reflect the transactions posted on the Primary Servicer's systems through the end of business of the specified period. 9. The Primary Servicer will transmit the billing, transaction, and the most current Receivable data files to the Master Servicer's data center according to the established schedule. The Providers and the Primary Servicer should, again, maintain the backup of each of these files in the event that a re- transmission is necessary. 10. The Master Servicer's data center will confirm that the files have been received intact, and will immediately communicate any problems to the Primary Servicer in order to initiate a re-transmission. The Master Servicer will then post the transaction files to the accounts receivable for the previously purchased accounts that the Master Servicer is maintaining, and consequently update the affected balances. Upon completion of the posting process, the Master Servicer will generate summary reports of the posting process that the Program Manager will use to complete various funding activities. The Master Servicer summary reports will reference the Primary Servicer's transaction codes and activity to codes that are common to the funding program. 11. The Master Servicer will then compare the updated accounts balances on the Master Servicer's system to the corresponding account balances reflected on the Receivable file. The Master Servicer expects that the balances for the funded Receivables will be congruent, and any discrepancies will be immediately examined and resolved through the cooperative effort of the Master Servicer and the Primary Servicer. The Master Servicer shall produce X-2 discrepancy reports (e.g., "Funding Only" or "Out of Balance" reports) and the Primary Servicer shall respond promptly to such reports. 12. Once the reconciliation process has been completed and any discrepancies between the Master Servicer and the Primary Servicer's Receivable files resolved through the discrepancy report process described in paragraph 11 above, the Master Servicer will then process the Receivable file and advise the Purchaser that it may purchase any new Receivable that is eligible. The Master Servicer will then proceed through exactly the same process described in paragraph 6 above. X-3 SCHEDULE I PROVIDERS Five Star Quality Care-AZ, LLC Five Star Quality Care-CA, LLC Five Star Quality Care-Colorado, LLC Five Star Quality Care-CT, LLC Five Star Quality Care-GA, LLC Five Star Quality Care-IA, LLC Five Star Quality Care-KS, LLC Five Star Quality Care-MI, LLC Five Star Quality Care-MO, LLC Five Star Quality Care-NE, LLC Five Star Quality Care-WI, LLC Five Star Quality Care-WY, LLC Five Star Quality Care-CA, Inc. Five Star Quality Care-IA, Inc. Five Star Quality Care-MI, Inc. Five Star Quality Care-NE, Inc. SCHEDULE II ADDRESSES FOR NOTICE If to the Program Manager: Dresdner Kleinwort Wasserstein LLC 75 Wall Street, 32nd Floor New York, New York 10005 Attention: Stephen Kovach Tel: (212) 895-1774 Fax: (212) 895-1766 and Healthcare Finance Group, Inc. 110 Wall Street, 2nd Floor New York, New York 10005 Attention: David Hyams, Chief Credit Officer Tel: (212) 785-9212 Fax: (212) 785-9211 If to the Master Servicer: Healthcare Finance Group, Inc. 110 Wall Street, 2nd Floor New York, New York 10005 Attention: David Hyams, Chief Credit Officer Tel: (212) 785-9212 Fax: (212) 785-9211 OMITTED EXHIBITS AND SCHEDULES The following Exhibits and Schedules to the Receivables Purchase and Transfer Agreement have been omitted: Exhibit Number Exhibit Title - -------------- ------------- XI-A Memorandum of Providers' Counsel with respect to the Patient Consent Forms XI-B Form of Opinion of Providers' and Purchaser's Counsel with Respect to Certain Corporate Matters XI-C Form of Opinion of Providers' and Purchaser's Counsel with Respect to Certain Bankruptcy Matters XII Form of Depository Agreement XIII Form of Parent Guaranty XIV Form of Pledge Agreement XV Form of Subscription Agreement Schedule Number Schedule Title - --------------- -------------- Schedule III Credit and Collection Policy Schedule IV Disclosures Schedule V Lockbox Information Schedule VI Tradenames Schedule VII Net Value Factors Schedule VIII Providers with Facilities in Certain States The Registrant agrees to furnish supplementally a copy of the foregoing omitted exhibits and schedules to the Securities and Exchange Commission upon request. EX-10.3 4 ex10-3.txt EXHIBIT 10.3 LOAN AND SECURITY AGREEMENT Dated as of October 24, 2002 Among FSQC FUNDING CO., LLC, as Borrower, the Lenders party hereto, DRESDNER KLEINWORT WASSERSTEIN LLC, as Co-Program Manager, Syndication Agent and Lead Arranger HEALTHCARE FINANCE GROUP, INC., as Co-Program Manager and HFG HEALTHCO-4 LLC, as Collateral Agent TABLE OF CONTENTS Page ARTICLE I. COMMITMENT; REVOLVING LOAN Section 1.01. Commitments........................................1 Section 1.02. Revolving Loans....................................2 Section 1.03. Notice of Borrowing................................2 Section 1.04. Termination and Reduction of the Commitments.......3 Section 1.05. Interest...........................................3 Section 1.06. Fees ...........................................4 Section 1.07. Prepayments of Revolving Loans.....................4 Section 1.08. Procedures for Payment; Evidence of Debt ..........5 Section 1.09. Taxes ...........................................6 Section 1.10. Indemnities........................................6 Section 1.11. Increased Costs....................................8 Section 1.12. Break Funding Payments.............................9 Section 1.13. Telephonic Notice..................................9 Section 1.14. Maximum Interest...................................9 Section 1.15. Computation of Interest and Fees..................10 ARTICLE II. COLLECTION AND DISTRIBUTION Section 2.01. Collections on the Receivables....................10 Section 2.02. Distributions.....................................10 Section 2.03. Distribution of Funds at the Maturity Date or Upon an Event of Default........................11 Section 2.04. Distributions to the Borrower Generally...........11 ARTICLE III. REPRESENTATIONS AND WARRANTIES; COVENANTS; EVENTS OF DEFAULT Section 3.01. Representations and Warranties; Covenants.........11 Section 3.02. Events of Default; Remedies.......................11 Section 3.03. Attorney-in-Fact..................................12 ARTICLE IV. SECURITY Section 4.01. Grant of Security Interest........................12 ARTICLE V. MISCELLANEOUS Section 5.01. Amendments, Waivers...............................13 Section 5.02. Notices, etc......................................13 Section 5.03. Assignability; Participations.....................14 Section 5.04. Further Assurances................................16 Section 5.05. Costs and Expenses; Collection Costs..............16 Section 5.06. Confidentiality...................................17 Section 5.07. Term and Termination; Early Termination Fee.......17 i Page Section 5.08. No Liability; No Fiduciary Duty...................18 Section 5.09. Entire Agreement; Severability....................19 Section 5.10. Governing Law.....................................19 Section 5.11. Waiver of Jury Trial, Jurisdiction and Venue .....19 Section 5.12. Execution in Counterparts.........................20 Section 5.13. No Proceedings....................................20 ARTICLE VI. AGENTS EXHIBITS - -------- Exhibit I Definitions Exhibit II Conditions of Revolving Loans Exhibit III Representations and Warranties Exhibit IV Covenants Exhibit V Events of Default Exhibit VI Eligibility Criteria Exhibit VII-A Form of Borrowing Base Certificate Exhibit VII-B Form of Borrower's Certificate Exhibit VIII Form of Depositary Agreement Exhibit IX-A Form of Opinion of Counsel Exhibit IX-B Form of Opinion of Counsel Exhibit X Form of Assignment of Contracts Exhibit XI Form of Government Depositary Agreement SCHEDULES - --------- Schedule I Addresses for Notices Schedule II Credit and Collection Policy Schedule III Disclosures Schedule IV Lockbox Information Schedule V Net Value Factors ii LOAN AND SECURITY AGREEMENT, dated as of October 24, 2002, among FSQC FUNDING CO., LLC, a limited liability company organized under the laws of the State of Delaware (together with its successors and assigns, the "Borrower"), the LENDERS party hereto, DRESDNER KLEINWORT WASSERSTEIN LLC, a Delaware limited liability company, as a Program Manager, Lead Arranger and Syndication Agent, HEALTHCARE FINANCE GROUP, INC., a Delaware corporation, as a Program Manager, and HFG HEALTHCO-4 LLC, a Delaware limited liability company, as Collateral Agent. Certain terms that are capitalized and used throughout this Agreement are defined in Exhibit I to this Agreement. References herein, and in the Exhibits and Schedules hereto, to the "Agreement" refer to this Agreement, as amended, restated, modified or supplemented from time to time in accordance with its terms (this "Agreement"). The Borrower (i) is a limited liability company owned by the Providers, (ii) has acquired and will acquire healthcare receivables from the Providers by purchase or contribution to the capital of the Borrower pursuant to the RPTA, as determined from time to time by the Borrower and the Providers, and (iii) wishes to borrow funds from the Lenders on a continuing and revolving basis secured by all of its assets, including the healthcare receivables acquired from the Providers. The Lenders are, severally and not jointly, prepared to make revolving loans secured by the Borrower's assets, including such healthcare receivables on the terms and subject to the conditions set forth herein. Accordingly, the parties agree as follows: ARTICLE I. COMMITMENT; REVOLVING LOANS Section 1.01. Commitments. Subject to and upon the terms and conditions herein set forth, each Lender, severally and not jointly, agrees to make Revolving Loans to the Borrower, on any Funding Date, in an aggregate principal amount at any time outstanding not to exceed the amount of such Lender's Revolving Commitment as set forth under its name on the signature pages hereto or in the Assignment and Assumption pursuant to which such Lender assumed its Revolving Commitment, as applicable, as such Revolving Commitment may be increased or reduced from time to time in accordance with the provisions of this Agreement. Notwithstanding the foregoing, the aggregate principal amount of Revolving Loans outstanding at any time to the Borrower shall not exceed the lesser of (i) the Total Revolving Commitment and (ii) the Borrowing Base minus Accrued Amounts as of such time (the lesser of (i) and (ii) being the "Borrowing Limit"). (a) Subject to the foregoing and within the foregoing limits, the Borrower may borrow, repay (without premium or penalty) and reborrow Revolving Loans, on and after the date hereof through, but not including, the Maturity Date, subject to the terms, provisions and limitations set forth herein and in Exhibit II hereof, including, without limitation, the requirement that no Revolving Loan shall be made hereunder if after giving effect thereto the sum of the aggregate principal amount of the Revolving Loans outstanding hereunder would exceed the Borrowing Limit. (b) So long as no Default or Event of Default then exists or would result therefrom, the Borrower may request by Written Notice to the Program Manager, and the Program Manager and the Lenders may approve, in their sole discretion, an increase in the Total Revolving Commitment by an amount equal to $5,000,000 or an integral multiple thereof up to a maximum of $25,000,000. If the Program Manager and the Lenders approve such request, then the Program Manager shall request that the Syndication Agent use its best efforts to arrange for a further syndication of the additional commitments to the Lenders or other Persons reasonably satisfactory to the Borrower. No Lender shall be required to participate in any of the additional commitments. The Borrower shall, upon the effective date of any such increase, pay to the Syndication Agent and to the Lenders or other Persons agreeing to such additional commitments such fees as shall be agreed upon by the Syndication Agent, such Lenders or such other Persons, as the case may be, and the Borrower. Section 1.02. Revolving Loans. The Revolving Loans made by the Lenders on any Funding Date shall be made by the Lenders ratably in accordance with their respective Revolving Commitments and shall be in a minimum amount of $500,000 and in an aggregate amount that is an integral multiple of $250,000; provided that a Revolving Loan may be in an aggregate amount that is equal to the entire unused balance of the Borrowing Limit. (a) Each Lender at its option may make any Revolving Loan by causing any domestic or foreign branch or Affiliate of such Lender to make such Revolving Loan; provided that any exercise of such option shall not affect the obligation of the Borrower to repay such Revolving Loan in accordance with the terms of this Agreement. (b) Each Lender shall make each Revolving Loan to be made by it hereunder on the proposed Funding Date thereof by wire transfer of immediately available funds by 12:00 noon, (New York City time) to the account of the Program Manager most recently designated by it for such purpose by notice to the Lenders. The Program Manager will make such Revolving Loans available to the Borrower by promptly transferring the amount so received, in like funds, to the Borrower Account. The failure of any Lender to make any Revolving Loan or portion thereof required to be made by it shall not relieve any other Lender of its obligations hereunder; provided that the Revolving Commitments of the Lenders are several and no Lender shall be responsible for any other Lender's failure to make Revolving Loans as required. Section 1.03. Notice of Borrowing. Whenever the Borrower desires a Revolving Loan be made, the Borrower shall give the Program Manager, not later than (x) 10:00 a.m. (New York City time) two Business Days prior to the proposed Funding Date of a LIBOR Loan and (y) 11:00 a.m. (New York City time) on the proposed Funding Date of a Market Rate Loan or a Prime Rate Loan, written notice, or telephonic notice from an Authorized Representative confirmed promptly by a Written Notice (which notice, in each case, shall be irrevocable) of its desire to make a borrowing of a Revolving Loan. Each notice of borrowing under this Section 1.03 shall (i) be signed by the Borrower, (ii) be substantially in the form of Exhibit VII-B hereto (each, a "Borrower's 2 Certificate"), (iii) specify the proposed Funding Date (which in each instance shall be a Business Day), (iv) specify the aggregate amount of the Revolving Loan being requested, (v) specify whether such Revolving Loan is to be a Market Rate Loan, a LIBOR Loan or a Prime Rate Loan, (vi) specify the Interest Period to be applicable thereto, which shall be a period contemplated by the definition of the term "Interest Period" and (vii) be accompanied by a Borrowing Base Certificate dated as of such date. If no Interest Period is specified, then the Borrower shall be deemed to have selected an Interest Period of one month's duration in the case of a LIBOR Loan or a Prime Rate Loan and one day in the case of a Market Rate Loan. Promptly following receipt of a Borrower's Certificate in accordance with this Section, the Program Manager shall advise each applicable Lender of the details thereof and of the amount of such Lender's portion of the requested Revolving Loan. Section 1.04. Termination and Reduction of the Commitments. On the Maturity Date, the Revolving Commitments shall terminate automatically and the outstanding balance of each Revolving Loan shall become due and payable in full. (a) The Borrower may at any time terminate in whole, pursuant to Section 5.07(c), or from time to time reduce in part, the Total Revolving Commitment, ratably among the Lenders in accordance with the amounts of their Revolving Commitments; provided, however, that the Total Revolving Commitment shall not be reduced at any time to an amount less than the Revolving Loans outstanding at such time. Each partial reduction of the Total Revolving Commitment shall be in a minimum $1,000,000 or an integral multiple of $500,000 in excess thereof. (b) The Borrower shall provide the Program Manager with Written Notice (which shall be irrevocable) of any election to terminate or reduce the Total Revolving Commitment under paragraph (b) of this Section at least five Business Days prior to the effective date of such termination or reduction, specifying such election and the effective date thereof. Promptly following receipt of any such notice, the Program Manager shall advise the Lenders of the contents thereof. (c) On the effective date of such decrease, the Borrower shall pay to each Lender, through the Program Manager, (i) the Non-Utilization Fee due and owing through and including the date of such termination or reduction on the amount of the Revolving Commitment of such Lender so terminated or reduced, and (ii) the Early Termination Fee, if any, required to be paid pursuant to Section 5.07(d). Section 1.05. Interest. Subject to the provisions of Section 1.05(e) and (f) hereof, each Market Rate Loan shall bear interest at a rate per annum equal to the Market Rate plus 3.60%. (a) Subject to the provisions of Section 1.05(e) and (f) hereof, each LIBOR Loan shall bear interest at a rate per annum equal to LIBOR plus 3.60%. (b) Subject to the provisions of Section 1.05(e) and (f) hereof, each Prime Rate Loan shall bear interest at a rate per annum equal to the Prime Rate plus 2.00%. 3 (c) The Borrower shall pay interest on the average daily Outstanding Balance during the prior Month (i) on the first Business Day of each Month, and (ii) on the Maturity Date (whether by acceleration or otherwise). (d) Notwithstanding anything to the contrary contained herein, while any Event of Default is continuing, each Outstanding Balance shall bear interest at a rate per annum equal to 4.00% in excess of the rate then otherwise applicable pursuant to paragraph (a) of this Section. Interest accrued pursuant to this paragraph (b) shall be payable on demand. (e) The Program Manager shall determine the interest rate applicable to the Revolving Loans and shall promptly advise the Borrower and the Lenders thereof. (f) The Borrower shall have the right at any time upon prior irrevocable Written Notice to the Program Manager given in the manner and at the times specified in Section 1.03 hereof to convert or continue all or any portion of any Revolving Loan as a LIBOR Loan, a Market Rate Loan or a Prime Rate Loan for any permissible Interest Period, subject to the terms and conditions of this Agreement, including without limitation Section 1.02(a). If the Borrower fails to deliver a timely notice to convert or continue any Revolving Loan, the Borrower shall be deemed to have elected to convert or continue, as the case may be, such Revolving Loan as a LIBOR Loan. Section 1.06. Fees. The Borrower shall pay to the Program Manager, for the account of each Lender, a fee (the "Non-Utilization Fee") equal to 0.40% per annum on the average amount, calculated on a daily basis, by which the Revolving Commitment of such Lender exceeded the Revolving Loans made by such Lender during the period from and including the Initial Funding Date to but excluding the date on which such Revolving Commitment terminates. Accrued Non- Utilization Fees shall be payable in arrears on (i) the first Business Day of each Month, commencing November 1, 2002, (ii) on the date of any reduction of the Revolving Commitments pursuant to this Agreement, including without limitation Sections 1.04 and 5.07(c) and (iii) on the Maturity Date. (a) The Borrower shall pay to the to the Program Manager, for the account of the Master Servicer, a fee (the "Collateral Tracking Fee") equal to $25,000 per annum, which fee shall be due and payable in advance, on the Initial Funding Date and on the first Business Day of each Month thereafter. (b) The Borrower shall pay to the Lead Arranger, for its own account, fees in the amounts and at the times separately agreed upon in writing between the Borrower and the Lead Arranger. Section 1.07. Prepayments of Revolving Loans. The Borrower may, on any Funding Date, prepay any Revolving Loan, in whole or in part, without penalty (except as otherwise provided herein); provided, however, that the Borrower shall provide the Program Manager with at least five Business Days' prior Written Notice (which notice shall be irrevocable) to the extent such reduction shall be more than the greater of (i) $3,000,000 or (ii) 20% of the then aggregate 4 outstanding principal amount of all Revolving Loans. Promptly following receipt of any such notice, the Program Manager shall advise the Lenders of the contents thereof. (a) If at any time the aggregate outstanding principal amount of all Revolving Loans exceeds the Borrowing Limit at such time, the Borrower shall promptly, in accordance with Article II hereof, eliminate such excess by paying an amount equal to such excess until such excess is eliminated in full. (b) All prepayments hereunder shall be accompanied by accrued interest to the extent required by Section 1.05. Section 1.08. Procedures for Payment; Evidence of Debt . Each payment required to be made hereunder by Borrower (whether of principal, interest, fees or otherwise) shall be made not later than 12:00 noon (New York City time) on the day when due in lawful money of the United States of America to the Lender without counterclaim, offset, claim or recoupment of any kind. All such payments shall be made to the Program Manager at the offices of Healthcare Finance Group, Inc. at 110 Wall Street, New York, New York 10005 with a notification copy to Dresdner Kleinwort Wasserstein LLC at 75 Wall Street, New York, New York 10005, and the Program Manager shall distribute any such payments received by it in accordance with Article II hereof. (a) Whenever any payment to be made hereunder or under any other Document shall be stated to be due and payable on a day which is not a Business Day, such payment shall be made on the next succeeding Business Day and such extension of time shall in such case be included in computing interest on such payment. (b) Each Lender shall maintain in accordance with its usual practice an account or accounts evidencing the indebtedness of the Borrower to such Lender resulting from each Revolving Loan made by such Lender, including the amounts of principal and interest payable and paid to such Lender from time to time hereunder. The Program Manager shall maintain accounts in which it shall record the amount of each Revolving Loan made hereunder, the amount of any principal or interest due and payable or to become due and payable from the Borrower to each Lender hereunder and the amount of any sum received or applied by the Program Manager pursuant to Article II for the account of the Lenders and each Lender's share thereof. (c) The entries made in the accounts maintained pursuant to paragraph (c) of this Section shall be prima facie evidence of the existence and amounts of the obligations recorded therein; provided that the failure of any Lender or the Program Manager to maintain such accounts or any error therein shall not in any manner affect the obligation of the Borrower to repay the Revolving Loans in accordance with the terms of this Agreement. Section 1.09. Taxes. Any and all payments required to be made by or on account of the Borrower hereunder (whether of principal, interest, fees or otherwise) shall be made free and clear of, and without deduction for, any present or future withholding or other taxes, duties or charges of any nature imposed on such payments or prepayments by or on behalf of any Governmental Entity thereof or therein, except for Excluded Taxes. If any such taxes, duties or charges are so levied or 5 imposed on any payment to any Lender, the Borrower will make additional payments in such amounts as may be necessary so that the net amount received by such Lender, after withholding or deduction for or on account of all taxes, duties or charges, including deductions applicable to additional sums payable under this Section, will be equal to the amount provided for herein. Whenever any taxes, duties or charges are payable by the Borrower with respect to any payments hereunder, the Borrower shall furnish promptly to the Program Manager information, including certified copies of official receipts (to the extent that the relevant governmental authority delivers such receipts), evidencing payment of any such taxes, duties or charges so withheld or deducted. If the Borrower fails to pay any such taxes, duties or charges when due to the appropriate taxing authority or fails to remit to the Program Manager the required information evidencing payment of any such taxes, duties or charges so withheld or deducted, the Borrower shall indemnify the Lenders for any incremental taxes, duties, charges, interest or penalties that may become payable by any Lender as a result of any such failure. (a) Notwithstanding anything to the contrary contained in this Agreement, the Borrower agrees to pay any present or future stamp or documentary taxes, any intangibles tax or any other sales, excise or property taxes, charges or similar levies now or hereafter assessed that arise from and are attributable to any payment made hereunder or from the execution, delivery of, or otherwise with respect to, this Agreement or any other Documents and any and all recording fees relating to any Documents securing any Lender Debt ("Other Taxes"). (b) The Borrower shall indemnify each Lender for the full amount of any taxes, duties or charges other than Excluded Taxes (including, without limitation, any taxes other than Excluded Taxes imposed by any jurisdiction on amounts payable under this Section) duly paid or payable by such Lender and any liability (including penalties, interest and expenses) arising therefrom or with respect thereto. Indemnification payments due under this Section shall be made within 30 days after written demand therefor. (c) Without prejudice to the survival of any other agreement of the Borrower hereunder, the agreements and obligations of the Borrower contained in this Section shall survive the payment in full of principal and interest hereunder. Section 1.10. Indemnities. The Borrower hereby agrees to indemnify the Program Manager, the Syndication Agent, the Lead Arranger and each Lender on demand against any loss or expense which such Program Manager, Syndication Agent, Lead Arranger, Lender or branch or Affiliate of such Person may sustain or incur as a consequence of: (i) any default in payment or prepayment of the principal amount of any Revolving Loan or any portion thereof made to it or any portion thereof or interest accrued thereon, as and when due and payable (at the due date thereof, by irrevocable notice of payment or prepayment, or otherwise); (ii) the effect of the occurrence of any Event of Default upon any Revolving Loan made to it or any portion thereof; (iii) the payment or prepayment of the principal amount of any Revolving Loan made to it or any portion thereof, on any day other than a Funding Date; or (iv) the failure by the Borrower to accept a Revolving Loan after it has requested such borrowing; in each case including, but not limited to, any loss or expense sustained or incurred in liquidating or employing deposits from third parties acquired to effect or maintain such Revolving Loan or any portion thereof. The Lender shall provide to the Borrower a 6 statement, supported when applicable by documentary evidence, explaining the amount of any such loss or expense it incurs, which statement shall be conclusive absent manifest error. (a) The Borrower hereby agrees to indemnify and hold harmless each Lender, the Program Manager, the Master Servicer, the Syndication Agent, the Lead Arranger, the Collateral Agent and their respective Affiliates, directors, officers, agents, representatives, counsel and employees and each other Person, if any, controlling them or any of their respective Affiliates within the meaning of either Section 15 of the Securities Act of 1933, as amended, or Section 20(a) of The Securities Exchange Act of 1934, as amended (each, an "Indemnified Party"), from and against any and all losses, claims, damages, costs, expenses (including reasonable counsel fees and disbursements) and liabilities which may be incurred by or asserted against such Indemnified Party with respect to or arising out of the commitments hereunder to make Revolving Loans, or the financings contemplated hereby, the other Documents, the Collateral (including, without limitation, the use thereof by any of such Persons or any other Person, the execution and delivery of this Agreement or any agreement or instrument contemplated hereby, the exercise by any Indemnified Party of rights and remedies or any power of attorney with respect thereto, and any action or inaction of any Indemnified Party under and in accordance with any Documents), the use of proceeds of any financial accommodations provided hereunder, any investigation, litigation or other proceeding (brought or threatened) relating thereto, or the role of any such Person or Persons in connection with the foregoing, whether or not they or any other Indemnified Party is named as a party to any legal action or proceeding ("Claims"). The Borrower will not, however, be responsible to any Indemnified Party hereunder for any Claims to the extent that a court having jurisdiction shall have determined by a final nonappealable judgment that any such Claim shall have arisen out of or resulted from (a)(i) actions taken or omitted to be taken by such Indemnified Party by reason of the bad faith, willful misconduct or gross negligence of any Indemnified Party, or (ii) in violation of any law or regulation applicable to such Indemnified Party (except to the extent that such violation is attributable to any breach of any representation, warranty or agreement by or on behalf of the Borrower, any Provider or any of their respective designees, in each case, as determined by a final nonappealable decision of a court of competent jurisdiction), or (b) a successful claim by any Provider against such Indemnified Party ("Excluded Claims"). The Indemnified Party shall give the Borrower prompt Written Notice of any Claim setting forth a description of those elements of the Claim of which such Indemnified Party has knowledge. The Program Manager, as an Indemnified Party shall be permitted hereunder to select counsel to defend such Claim at the expense of the Borrower and, if such Indemnified Party shall decide to do so, then all such Indemnified Parties shall select the same counsel to defend such Indemnified Parties with respect to such Claim; provided, however, that if any such Indemnified Party shall in its reasonable opinion consider that the retention of one joint counsel as aforesaid shall result in a conflict of interest, such Indemnified Party may, at the expense of the Borrower, select its own counsel to defend such Indemnified Party with respect to such Claim. The Indemnified Parties and the Borrower and their respective counsel shall cooperate with each other in all reasonable respects in any investigation, trial and defense of any such Claim and any appeal arising therefrom. (b) To the extent that the Borrower fails to pay any amount required to be paid by it to the Program Manager under paragraph (a) or (b) of this Section, each Lender severally agrees to pay to the Program Manager such Lender's pro rata share (determined as of the time that the 7 unreimbursed expense or indemnity payment is sought) of such unpaid amount; provided that the unreimbursed expense or indemnified loss, claim, damage, liability or related expense, as the case may be, was incurred or asserted against the Program Manager in its capacity as such. (c) To the extent permitted by applicable law, the Borrower shall not assert, and hereby waives, any claim against any Indemnified Party, on any theory of liability, for special, indirect, consequential or punitive damages (as opposed to direct or actual damages) arising out of, in connection with, or as a result of, this Agreement, the other Documents or any agreement or instrument contemplated hereby or thereby, the financings contemplated hereunder or thereunder, any Revolving Loan or the use of the proceeds thereof. Section 1.11. Increased Costs. If any Change in Law shall: (i) impose, modify or deem applicable any reserve, special deposit or similar requirement against assets of deposits with or for the account of, or credit extended by, any Lender (except any such reserve requirement reflected in LIBOR); or (ii) impose on any Lender or the London interbank market any other condition affecting this Agreement or Revolving Loans made by such Lender; and the result of any of the foregoing shall be to increase the cost to such Lender of making or main taining any Revolving Loan (or of maintaining its obligation to make any such Revolving Loan) or to reduce the amount of any sum received or receivable by such Lender hereunder (whether of principal, interest or otherwise with respect to its Revolving Loans), then the Borrower will pay to such Lender such additional amount or amounts as will compensate such Lender for such additional costs incurred or reduction suffered. If the Borrower determines in good faith that such additional amount or amounts are unreasonable, the Borrower may terminate this Agreement upon payment in full of such additional amount or amounts and all amounts payable pursuant to Section 5.07 other than the Early Termination Fee. (a) If any Lender determines that any Change in Law regarding capital requirements has or would have the effect of reducing the rate of return on such Lender's capital or on the capital of such Lender's holding company, if any, as a consequence of this Agreement or the Revolving Loans made by such Lender to a level below that which such Lender or such Lender's holding company could have achieved but for such Change in Law (taking into consideration such Lender's policies and the policies of such Lender's holding company with respect to capital adequacy), then from time to time the Borrower will pay to such Lender, as the case may be, such additional amount or amounts as will compensate such Lender or such Lender's holding company for any such reduction suffered. If the Borrower determines in good faith that such additional amount or amounts are unreasonable, the Borrower may terminate this Agreement upon payment in full of such additional amount or amounts and all amounts payable pursuant to Section 5.07 other than the Early Termination Fee. (b) A certificate of a Lender setting forth in reasonable detail the calculation of the amount or amounts necessary to compensate such Lender or its holding company, as the case 8 may be, as specified in paragraph (a) or (b) of this Section shall be delivered to the Borrower and shall be conclusive absent manifest error. The Borrower shall pay such Lender, as the case may be, the amount shown as due on any such certificate within 10 days after receipt thereof. (c) Failure or delay on the part of any Lender to demand compensation pursuant to this Section shall not constitute a waiver of such Lender's right to demand such compensation; provided that the Borrower shall not be required to compensate a Lender pursuant to this Section for any increased costs or reductions incurred more than 270 days prior to the date that such Lender, as the case may be, notifies the Borrower of the Change in Law giving rise to such increased costs or reductions and of such Lender's intention to claim compensation therefor; provided further that, if the Change in Law giving rise to such increased costs or reductions is retroactive, then the 270-day period referred to above shall be extended to include the period of retroactive effect thereof. Section 1.12. Break Funding Payments. In the event of (a) the payment of any principal of any Revolving Loan other than on the last day of an Interest Period applicable thereto (including as a result of an Event of Default) or (b) the failure to borrow, convert, continue or prepay any Revolving Loan on the date specified in any notice delivered pursuant hereto (regardless of whether such notice may be revoked), then, in any such event, the Borrower shall compensate each Lender for the loss, cost and expense attributable to such event. A certificate of any Lender setting forth in reasonable detail any amount or amounts that such Lender is entitled to receive pursuant to this Section shall be delivered to the Borrower and shall be conclusive absent manifest error. The Borrower shall pay such Lender the amount shown as due on any such certificate within 10 days after receipt thereof. Section 1.13. Telephonic Notice. Without in any way limiting the Borrower's obligation to confirm in writing any telephonic notice of a borrowing, the Program Manager may act without liability upon the basis of telephonic notice believed by the Program Manager in good faith to be from an Authorized Representative of the Borrower prior to receipt of written confirmation. Section 1.14. Maximum Interest. No provision of this Agreement shall require the payment to any Lender or permit the collection by any Lender of interest in excess of the maximum rate of interest from time to time permitted (after taking into account all consideration which constitutes interest) by laws applicable to the Lender Debt and binding on such Lender (such maximum rate being such Lender's "Maximum Permissible Rate"). (a) If the amount of interest (computed without giving effect to this Section) payable on the first Business Day of each Month in respect of the preceding interest computation period would exceed the amount of interest computed in respect of such period at a Lender's Maximum Permissible Rate, the amount of interest payable to such Lender on such date in respect of such period shall be computed at such Lender's Maximum Permissible Rate. (b) If at any time and from time to time: (i) the amount of interest payable to any Lender on the first Business Day of each Month shall be computed at the Maximum Permissible Rate pursuant to the preceding subsection (b); and (ii) in respect of any subsequent interest computation period the amount of interest otherwise payable to such Lender would be less than the 9 amount of interest payable to such Lender computed at the Maximum Permissible Rate, then the amount of interest payable to such Lender in respect of such subsequent interest computation period shall continue to be computed at the Maximum Permissible Rate until the amount of interest payable to such Lender shall equal the total amount of interest which would have been payable to such Lender if the total amount of interest had been computed without giving effect to the preceding subsection (b). Section 1.15. Computation of Interest and Fees. All interest, fees and other amounts calculated by the Program Manager hereunder or under any other Document shall be computed on the basis of actual days elapsed (including the first day but excluding the last day) over a 360-day year. ARTICLE II. COLLECTION AND DISTRIBUTION Section 2.01. Collections on the Receivables. The Collateral Agent, for the benefit of the Lenders, shall be entitled with respect to all Receivables, (i) to receive and to hold as collateral all Receivables and all Collections on Receivables in accordance with the terms of the Depositary Agreement, and (ii) to have and to exercise any and all rights (x) to collect, record, track and, during the continuance of an Event of Default, take all actions to obtain Collections with respect to all Receivables payable by non-Governmental Entities, and (y) to the extent permitted by law and in a manner consistent with all applicable laws and regulations, record, track and, during the continuance of an Event of Default, take all actions to obtain Collections with respect to all Receivables payable by Governmental Entities. Section 2.02. Distributions. On each Business Day, and provided, that no Event of Default is continuing, the Program Manager shall distribute any and all cash Collections in the Collection Account prior to 12:00 p.m. (New York City time) on such Business Day and any other payments received hereunder as follows: FIRST, to the Lenders and the Master Servicer, on a pro rata basis, an amount in cash equal to fees and interest that are due and payable as of such Business Day and have not otherwise been paid in full by the Borrower, if any, until such amounts have been paid in full; SECOND, to the Lenders, on a pro rata basis, an amount in cash equal to the Borrowing Base Deficiency, if any, until such amount is paid in full; THIRD, to the Lenders, on a pro rata basis, an amount in cash equal to the reduction of the principal amount of the Revolving Loan, if any, directed by the Borrower in writing to be repaid on such Business Day pursuant to Section 1.07(a) until such amount has been paid in full; FOURTH, to the Lenders, on a pro rata basis, an amount in cash equal to the payment of any other Lender Debt due and payable on such Business Day, if any, until such amount has been paid in full; and FIFTH, to the Borrower, all remaining amounts of Collections. Section 2.03. Distribution of Funds at the Maturity Date or Upon an Event of Default. At the Maturity Date or upon the occurrence and during the continuance of an Event of Default, subject to the rights and remedies of the Lender pursuant to Section 3.02 hereof, the Program Manager shall distribute any and all Collections and other payments received hereunder as follows: 10 FIRST, to the Lenders, the Master Servicer and the Program Manager, on a pro rata basis, an amount in cash equal to any and all accrued fees and collection costs as set forth in Sections 1.06 and 5.05, until such amount has been paid in full; SECOND, to the Lenders, on a pro rata basis, an amount in cash equal to all accrued and unpaid interest on the Revolving Loans (at the rates established under Section 1.05) until such amount has been paid in full; THIRD, to the Lenders, on a pro rata basis, an amount in cash equal to the principal amount of the Revolving Loans, until such amount is paid in full; FOURTH, to the Lenders, on a pro rata basis, an amount in cash equal to the payment of any other Lender Debt due and payable on such date, until such amount has been paid in full; and FIFTH, to the Borrower, all remaining amounts of Collections. Section 2.04. Distributions to the Borrower Generally. Distributions to the Borrower on each Business Day shall be deposited in the Borrower Account. ARTICLE III. REPRESENTATIONS AND WARRANTIES; COVENANTS; EVENTS OF DEFAULT Section 3.01. Representations and Warranties; Covenants. The Borrower makes on the Initial Funding Date and on each subsequent Funding Date, the representations and warranties set forth in Exhibit III hereto, and hereby agrees to perform and observe the covenants set forth in Exhibit IV hereto. Section 3.02. Events of Default; Remedies. If any Event of Default shall occur and be continuing, the Program Manager may, and at the request of the Required Lenders shall, by Written Notice to the Borrower, take either or both of the following actions: (x) declare the Maturity Date to have occurred, and (y) without limiting any rights hereunder and subject to applicable law, replace the Borrower or any of the Borrower's agents, as the case may be, in its performance of any or all of the "Primary Servicer Responsibilities" under the RPTA (which replacement may be effectuated through the outplacement to a qualified and experienced third-party of all back office duties, including billing, collection and processing responsibilities, and access to all personnel, hardware and software utilized in connection with such responsibilities); provided, that with respect to the Event of Default in clause (i) of Exhibit V, the Maturity Date shall be deemed to have occurred automatically and without notice. Upon any such declaration or designation, the Program Manager and the Collateral Agent shall have, in addition to the rights and remedies which they may have under this Agreement, all other rights and remedies provided after default under the UCC and under other applicable law, which rights and remedies shall be cumulative. (a) Right of Set-Off. The Borrower hereby irrevocably authorizes and instructs the Program Manager to set-off the full amount of any Lender Debt due and payable against (i) any Collections, or (ii) the principal amount of any Revolving Loans requested on or after such due date. No further notification, act or consent of any nature whatsoever is required prior to the right of the Program Manager to exercise such right of set-off; provided, however, the Program Manager shall notify the Borrower: (1) a set-off pursuant to this Section 3.02 occurred, (2) the amount of such set- off and (3) a description of the Lender Debt that was due and payable. 11 (b) The remedies described in (a) and (b) above will be available to the Program Manager, on behalf of the Lenders, only until all Lender Debt is paid in full, after which the Program Manager, on behalf of the Lenders, shall relinquish any and all of the Primary Servicer Responsibilities to the Borrower and the Borrower's agents. Section 3.03. Attorney-in-Fact. The Borrower hereby irrevocably designates and appoints the Program Manager, the Collateral Agent, the Master Servicer and each other Person in the Lender Group, to the extent permitted by applicable law and regulation, as the Borrower's attorneys-in-fact, which irrevocable power of attorney is coupled with an interest, with authority, upon the continuance of an Event of Default (and to the extent not prohibited under applicable law and regulations) to (i) endorse or sign the Borrower's name to financing statements, remittances, invoices, assignments, checks (other than, absent a court order, payments from Governmental Entities), drafts, or other instruments or documents in respect of the Receivables, (ii) notify non-Governmental Entities to make payments on the Receivables directly to the Program Manager, and (iii) bring suit in the Borrower's name and settle or compromise such Receivables as the Program Manager or the Master Servicer may, in its discretion, deem appropriate. ARTICLE IV. SECURITY Section 4.01. Grant of Security Interest. As collateral security for the Borrower's obligations to pay the Lender Debt when due and payable and its indemnification obligations hereunder, the Borrower hereby grants to the Collateral Agent, for the benefit of the Lenders, a first priority Lien on and security interest in and right of set-off against all of the rights, title and interest of the Borrower in and to (i) the Provider Documents, (ii) to the maximum extent permitted by law, the Provider Account and the Government Lockboxes, (iii) all of the Borrower's Accounts whether now owned or hereafter acquired, (iv) any and all amounts held in any accounts maintained at Citizens Bank of Massachusetts, Bank One, N.A. (formerly American National Bank), or any other bank in respect of any of the foregoing or in compliance with any terms of this Agreement, (v) all of the Additional Collateral, and (vi) all proceeds of the foregoing (all of the foregoing, the "Collateral"). This Agreement shall be deemed to be a security agreement as understood under the UCC. (a) The Borrower hereby authorizes the Collateral Agent to file, one or more financing statements or continuation statements or amendments thereto or assignments thereof in respect of the Lien created pursuant to this Section 4.01 which may at any time be required or, in the opinion of the Collateral Agent or the Program Manager, be desirable, and to do so without the signature of the Borrower where permitted by law. 12 ARTICLE V. MISCELLANEOUS Section 5.01. Amendments, Waivers. No amendment or waiver of any provision of this Agreement or consent to any departure therefrom by a party hereto shall be effective unless in a writing signed by the Borrower and the Required Lenders or the Borrower and the Program Manager with the consent of the Required Lenders; provided that no such agreement shall (i) increase the Revolving Commitment of any Lender without the written consent of such Lender, (ii) reduce the principal amount of any Revolving Loan or reduce the rate of interest thereon, or reduce any fees payable hereunder, without the written consent of each Lender directly affected thereby, (iii) postpone the Maturity Date, (iv) change Section 2.02 or 2.03, (v) increase any percentage contained in the definition of Borrowing Base, release all or a material portion of the Collateral or make overadvances other than Permitted Overadvances without the written consent of each Lender, (vi) release any Guarantee (other than in accordance with its terms) without the consent of each Lender, (vii) increase the Total Revolving Commitment pursuant to Section 1.01(c), or (viii) change any of the provisions of this Section or the definition of "Required Lenders" or any other provisions hereof specifying the number or percentage of Lenders required to waive, amend or modify any rights hereunder or make any determination or grant any consent hereunder, without the written consent of each Lender; provided further that no such agreement shall amend, modify or otherwise affect the rights or duties of the Program Manager, the Collateral Agent or the Syndication Agent hereunder without the prior written consent of the Program Manager, the Collateral Agent or the Syndication Agent, as the case may be. (a) No failure on the part of the Program Manager, the Collateral Agent or any Lender to exercise, and no delay in exercising, any right hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right hereunder preclude any other or further exercise thereof or the exercise of any other right. No waiver of any provision in this Agreement or consent to any departure by the Borrower therefrom shall in any event be effective unless the same shall be permitted by paragraph (a) or (b) of this Section, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. Section 5.02. Notices, etc. All notices and other communications hereunder shall, unless otherwise stated herein, be in writing (which may include facsimile communication) and shall be faxed or delivered, (i) to each party hereto at its address set forth under its name on the signature pages hereof or at such other address as shall be designated by such party in a Written Notice to the other parties hereto, and (ii) to the Master Servicer at the address set forth on Schedule I attached hereto and as such schedule may be amended from time to time. Notices and communications by facsimile shall be effective when sent (and shall be immediately followed by hard copy sent by regular mail), and notices and communications sent by other means shall be effective when received. Section 5.03. Assignability; Participations. This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective permitted successors and assigns, except that (i) the Borrower may not assign or otherwise transfer any of its rights or obligations hereunder or any interest herein without the prior written consent of each Lender (and any attempted assignment or transfer by the Borrower without such consent shall be null and void) and (ii) no 13 Lender may assign or otherwise transfer its rights or obligations hereunder except in accordance with this Section. Nothing in this Agreement, expressed or implied, shall be construed to confer upon any Person (other than the parties hereto, their respective successors and assigns permitted hereby and, to the extent expressly contemplated hereby, their respective Affiliates and the respective directors, officers, employees, agents and advisors of the parties and their Affiliates) any legal or equitable right, remedy or claim under or by reason of this Agreement. (a) Subject to the conditions set forth in paragraph (c) of this Section, any Lender may assign to one or more assignees all or a portion of its rights and obligations under this Agreement (including all or a portion of its Revolving Commitment and the Revolving Loans at the time owing to it) with the prior written consent (such consent not to be unreasonably withheld) of the Program Manager, provided that no consent of the Program Manager shall be required for an assignment to an assignee that is a Lender immediately prior to giving effect to such assignment or to any Affiliate or branch of any Lender, or to any trust or special purpose funding vehicle, whether or not the Lender maintains any interest in such trust or special purpose funding vehicle. The Program Manager shall notify the Borrower of any such assignment; provided, however, that failure to so notify shall not effect the validity of such assignment. (b) Assignments shall be subject to the following additional conditions: (i) the assignee is a competent Person with the financial ability to perform as a Lender under this Agreement; (ii) except in the case of an assignment to a Lender or an Affiliate of a Lender or an assignment of the entire remaining amount of the assigning Lender's Revolving Commitment or Revolving Loans, the amount of the Revolving Commitment or Revolving Loans of the assigning Lender subject to each such assignment (determined as of the date the Assignment and Assumption with respect to such assignment is delivered to the Program Manager) shall not be less than $1,000,000 of such Lender's Revolving Commitment unless the Program Manager otherwise consents; and (iii) the parties to each assignment shall execute and deliver to the Program Manager an Assignment and Assumption, together with a processing and recordation fee of $3,500; provided that such fee shall not apply to an assignment by a Lender to an Affiliate of such Lender or to an assignment by an Initial Lender, an Affiliate of an Initial Lender or an Affiliate of the Program Manager. (c) Subject to acceptance by the Program Manager pursuant to paragraph (e) of this Section, from and after the effective date specified in each Assignment and Assumption the assignee thereunder shall be a party hereto and, to the extent of the interest assigned by such Assignment and Assumption, have the rights and obligations of a Lender under this Agreement, and the assigning Lender thereunder shall, to the extent of the interest assigned by such Assignment and Assumption, be released from its obligations under this Agreement (and, in the case of an Assignment and Assumption covering all of the assigning Lender's rights and obligations under this Agreement, such Lender shall cease to be a party hereto but shall continue to be entitled to the 14 benefits of Sections 1.09, 1.10 and 5.05). Any assignment or transfer by a Lender of rights or obligations under this Agreement that does not comply with this Section 5.03 shall be treated for purposes of this Agreement as a sale by such Lender of a participation in such rights and obligations in accordance with paragraph (f) of this Section. (d) Upon its receipt of a duly completed Assignment and Assumption executed by an assigning Lender and an assignee and the processing and recordation fee referred to in paragraph (c)(ii) and any written consent to such assignment required by paragraph (b) of this Section, the Program Manager shall accept such Assignment and Assumption. (e) Any Lender may, without the consent of the Borrower or the Program Manager, sell participations to one or more banks or other entities (a "Participant") in all or a portion of such Lender's rights and obligations under this Agreement (including all of a portion of its Revolving Commitment and the Revolving Loans owing to it); provided that (A) such Lender's obligations under this Agreement shall remain unchanged, (B) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations and (C) the Borrower, the Program Manager, the Collateral Agent, the Master Servicer, the Syndication Agent and the other Lenders shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement. Any agreement or instrument pursuant to which a Lender sells such a participation shall provide that such Lender shall retain the sole right to enforce this Agreement and to approve any amendment, modification or waiver of any provision of this Agreement; provided that such agreement or instrument may provide that such Lender will not, without the consent of the Participant, agree to any amendment, modification or waiver described in the first proviso to Section 5.01(b) that affects such Participant. Subject to paragraph (c)(ii) of this Section, the Borrower agrees, to the fullest extent permitted under applicable law, that each Participant shall be entitled to the benefits of Section 1.09 to the same extent as if it were a Lender and had acquired its interest by assignment pursuant to paragraph (b) of this Section. A Participant shall not be entitled to receive any greater payment under Section 1.09 than the applicable Lender would have been entitled to receive with respect to the participation sold to such Participant, unless the sale of the participation to such Participant is made with the Borrower's prior written consent. (f) Any Lender may at any time pledge or assign a security interest in all or any portion of its rights under this Agreement to secure obligations of such Lender, including any pledge or assignment to secure obligations to a Federal Reserve Bank, and this Section shall not apply to any such pledge or assignment of a security interest; provided that no such pledge or assignment of a security interest shall release a Lender from any of its obligations hereunder or substitute any such pledgee or assignee for such Lender as a party hereto. Section 5.04. Further Assurances. The Borrower shall, at its cost and expense, upon the request of the Program Manager or the Collateral Agent, duly execute and deliver, or cause to be duly executed and delivered, to such Person such further instruments and do and cause to be done such further acts as may be necessary or proper in the reasonable opinion of the Program Manager or the Collateral Agent to carry out more effectively the provisions and purposes of this Agreement. 15 Section 5.05. Costs and Expenses; Collection Costs. The Borrower agrees to pay on demand (i) all reasonable non-legal costs and expenses in connection with the preparation, execution and delivery of this Agreement; (ii) the reasonable fees and out-of-pocket expenses of counsels for the Program Manager, the Collateral Agent, the Syndication Agent, the Lead Arranger, the Initial Lenders and their respective Affiliates in connection with this transaction (including the allocated fees and expenses of internal counsel); and (iii) all reasonable costs and expenses, if any (including reasonable counsel fees and expenses (including the allocated fees and expenses of internal counsel)), of the Program Manager, the Collateral Agent, the Syndication Agent, the Lead Arranger, the Initial Lenders and their respective Affiliates in connection with any waiver, modification, supplement or amendment hereto, or the enforcement of this Agreement. The Borrower further agrees to pay on the Initial Funding Date (and with respect to costs and expenses incurred following the Initial Funding Date, within seven days of demand therefor) (a) all reasonable costs and expenses incurred by the Program Manager or its agent in connection with up to four periodic audits of the Receivables during any calendar year; provided, however, that during the continuance of an Event of Default, the Borrower shall pay all reasonable costs and expenses incurred by the Program Manager or its agent in connection with all audits of the Receivables, (b) all reasonable costs and expenses incurred by the Master Servicer or the Program Manager to accommodate any significant coding or data system changes made by the Borrower that would affect the transmission or interpretation of data received through the interface, and (c) all reasonable costs and expenses incurred by the Lender for additional time and material expenses of the Master Servicer resulting from a lack of either cooperation or responsiveness of the Borrower to agreed-upon protocol and schedules with the Master Servicer; provided, that the Borrower has been informed of the alleged lack of cooperation or responsiveness and has been provided the opportunity to correct such problems. (a) In the event that the Program Manager or Collateral Agent shall retain an attorney or attorneys to collect, enforce, protect, maintain, preserve or foreclose its interests, for the benefit of the Lenders, with respect to this Agreement, any other Document, any Lender Debt, any Receivable or the Lien on any Collateral or any other security for the Lender Debt or under any instrument or document delivered pursuant to this Agreement, or in connection with any Lender Debt, the Borrower shall pay all of the reasonable costs and expenses of such collection, enforcement, protection, maintenance, preservation or foreclosure, including reasonable attorneys' fees, which amounts shall be part of the Lender Debt, and the Program Manager and/or Collateral Agent may take judgment for all such amounts. The attorney's fees arising from such services, including those of any appellate proceedings, and all reasonable expenses, costs, charges and other fees incurred by such counsel in any way or with respect to or arising out of or in connection with or relating to any of the events or actions described in this Section 5.05 shall be payable by the Borrower to the Program Manager or Collateral Agent, as the case may be, on demand (with interest accruing from the earlier of two Business Days following (i) the date of such demand and (ii) the date the Borrower became aware of the incurrence of such cost), and shall be additional obligations under this Agreement. Without limiting the generality of the foregoing, such expenses, costs, charges and fees may include: recording costs, appraisal costs, paralegal fees, costs and expenses; accountants' fees, costs and expenses; court costs and expenses; photocopying and duplicating expenses; court reporter fees, costs and expenses; long distance telephone charges; air express 16 charges; telegram charges; telecopier charges; secretarial overtime charges; and expenses for travel, lodging and food paid or incurred in connection with the performance of such legal services. Section 5.06. Confidentiality. The Program Manager hereby agrees to, and shall take reasonable steps to cause each member of the Lender Group to, comply with all applicable laws regarding confidential patient information, if any, it receives in connection with the transactions described in this Agreement. Section 5.07. Term and Termination; Early Termination Fee. This Agreement shall commence on the Initial Funding Date and expire on October 24, 2005. (a) The obligations of the Lenders under this Agreement shall continue in full force and effect from the date hereof until the Maturity Date. (b) The Borrower may terminate this Agreement at any time prior to the Maturity Date upon payment in full of all Lender Debt, including all accrued interest, applicable fees, charges, premiums and costs with respect thereto, all as provided hereunder, and the termination of the Revolving Commitment hereunder. (c) If the Revolving Commitment is reduced or terminated or the Revolving Loan becomes due and payable prior to October 24, 2003 (including by reason of an Event of Default), the Borrower shall pay to the Program Manager, for the account of the Lenders, the Early Termination Fee. (d) The termination of this Agreement shall not affect any rights of the Program Manager, the Collateral Agent or any Lender or any obligations of the Borrower arising on or prior to the effective date of such termination, and the provisions hereof shall continue to be fully operative until all Lender Debt incurred on or prior to such termination has been paid and performed in full. (e) Upon the giving of notice of a Default or an Event of Default under this Agreement, all Lender Debt shall be due and payable on the date of Default or the Event of Default specified in such notice. (f) The Liens and rights granted to the Lender hereunder shall continue in full force and effect, notwithstanding the termination of this Agreement, until all of the Lender Debt has been indefeasibly paid in full in cash. Upon the (i) the termination of all commitments and obligations of the Lenders, and (ii) the indefeasible payment in full of all Lender Debt, the Collateral Agent and the Program Manager shall take all actions and deliver all assignments, certificates, releases, notices and other documents, at the Borrower's expense, as the Borrower may reasonably request to evidence such termination. (g) All indemnities, representations, warranties, covenants, waivers and agreements contained herein shall survive termination hereof unless otherwise provided. 17 (h) Notwithstanding the foregoing, if after receipt of any payment of all or any part of the Lender Debt, any Lender is for any reason compelled to surrender such payment to any Person or entity because such payment is determined to be void or voidable as a preference, an impermissible setoff, a diversion of trust funds or for any other reason, this Agreement shall continue in full force (except that the Revolving Commitments of the Lenders shall have been terminated), and the Borrower shall be liable to, and shall indemnify and hold each such Lender harmless for the amount of such payment surrendered until such Lender or Lenders shall have been finally and irrevocably paid in full. The provisions of the foregoing sentence shall be and remain effective notwithstanding any contrary action which may have been taken by any Lender in reliance upon such payment, and any such contrary action so taken shall be without prejudice to any Lender's rights under this Agreement and shall be deemed to have been conditioned upon such payment having become final and irrevocable. Section 5.08. No Liability; No Fiduciary Duty. Neither this Agreement nor any document executed in connection herewith shall constitute an assumption by any Agent or any Lender of any obligation to any Obligor, or any patient or customer of the Borrower or any Provider. (a) Notwithstanding any other provision herein, no recourse under any obligation, covenant, agreement or instrument of an Agent or a Lender contained herein or with respect hereto shall be had against any Related Party whether arising by breach of contract, or otherwise at law or in equity (including any claim in tort), whether express or implied, it being understood that the agreements and other obligations of each Agent and each Lender herein and with respect hereto are solely its corporate obligations; provided, however, nothing herein above shall operate as a release of any liability which may arise as a result of such Related Party's gross negligence or willful misconduct. The provisions of this Section 5.08 shall survive the termination of this Agreement. (b) The Borrower hereby acknowledges that (i) none of the Agents or the Lenders has any fiduciary relationship with or fiduciary duty to the Borrower arising out of or in connection with this Agreement or any of the other Documents, and the relationship between the Lenders and the Borrower in connection herewith is solely that of debtor and creditor; and (ii) no joint venture is created hereby or by any other Documents or otherwise exists by virtue of the transactions contemplated hereby between the Borrower and any of the Agents or the Lenders. (c) The Borrower hereby acknowledges that it has been advised by counsel in the negotiation, execution and delivery of this Agreement and the other Documents. Section 5.09. Entire Agreement; Severability. This Agreement, including all exhibits and schedules hereto and the documents referred to herein, embody the entire agreement and understanding of the parties concerning the subject matter contained herein. This Agreement supersedes any and all prior agreements and understandings between the parties, whether written or oral. 18 (a) If any provision of this Agreement shall be declared invalid or unenforceable, the parties hereto agree that the remaining provisions of this Agreement shall continue in full force and effect. Section 5.10. GOVERNING LAW. THIS AGREEMENT SHALL, IN ACCORDANCE WITH SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK, BE GOVERNED BY THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO ANY CONFLICTS OF LAWS PRINCIPLES THEREOF THAT WOULD CALL FOR THE APPLICATION OF THE LAWS OF ANY OTHER JURISDICTION EXCEPT TO THE EXTENT THAT THE VALIDITY OR PERFECTION OF THE SECURITY INTERESTS GRANTED HEREUNDER, OR REMEDIES RELATED THERETO, IN RESPECT OF ANY PARTICULAR COLLATERAL ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF NEW YORK. Section 5.11. WAIVER OF JURY TRIAL, JURISDICTION AND VENUE. EACH OF THE PARTIES HERETO HEREBY WAIVES ALL RIGHTS TO A TRIAL BY JURY IN THE EVENT OF ANY LITIGATION WITH RESPECT TO ANY MATTER RELATED TO THIS AGREEMENT, AND HEREBY IRREVOCABLY CONSENTS TO THE JURISDICTION OF THE STATE AND FEDERAL COURTS LOCATED IN NEW YORK COUNTY, NEW YORK CITY, NEW YORK IN CONNECTION WITH ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT. IN ANY SUCH LITIGATION, EACH OF THE PARTIES HERETO WAIVES PERSONAL SERVICE OF ANY SUMMONS, COMPLAINT OR OTHER PROCESS AND AGREES THAT SERVICE THEREOF MAY BE MADE BY CERTIFIED OR REGISTERED MAIL DIRECTED TO THE PARTIES HERETO AT THEIR ADDRESSES SET FORTH ON THE SIGNATURE PAGE HEREOF. THE PARTIES HERETO SHALL APPEAR IN ANSWER TO SUCH SUMMONS, COMPLAINT OR OTHER PROCESS WITHIN THE TIME PRESCRIBED BY LAW, FAILING WHICH THE PARTY FAILING TO SO APPEAR SHALL BE DEEMED IN DEFAULT AND JUDGMENT MAY BE ENTERED BY THE OTHER PARTY FOR THE AMOUNT OF THE CLAIM AND OTHER RELIEF REQUESTED THEREIN. Section 5.12. Execution in Counterparts. This Agreement may be executed in counterparts, each of which when so executed shall be deemed to be an original and all of which when taken together shall constitute one and the same agreement. Section 5.13. No Proceedings. The Borrower hereby agrees that it will not institute against any Lender any proceeding of the type referred to in clause (i) of Exhibit V so long as any senior indebtedness issued by such Lender shall be outstanding or there shall not have elapsed one year plus one day since the last day on which any such senior indebtedness shall have been outstanding. 19 ARTICLE VI. AGENTS Each of the Lenders hereby irrevocably appoints the Program Manager as its agent, the Collateral Agent as its collateral agent and Dresdner Kleinwort Wasserstein LLC as the Syndication Agent and authorizes each Agent to take such actions on its behalf and to exercise such powers as are delegated to such Agent by the terms hereof and the other Documents, together with such actions and powers as are reasonably incidental thereto. Each Person serving as an Agent hereunder and under the other Documents shall have the same rights and powers in its capacity as a Lender as any other Lender and may exercise the same as though it were not an Agent and each such Person and their respective Affiliates may accept deposits from, lend money to and generally engage in any kind of business with the Borrower or any Subsidiary or other Affiliate thereof as if it were not an Agent hereunder. No Agent shall have any duties or obligations except those expressly set forth herein or in the other Financing Documents. Without limiting the generality of the foregoing, (a) no Agent shall be subject to any fiduciary or other implied duties, regardless of whether a Default has occurred and is continuing, (b) no Agent shall have any duty to take any discretionary action or exercise any discretionary powers, except discretionary rights and powers expressly contemplated hereby or thereby that such Agent is required to exercise in writing by the Required Lenders (or such other number or percentage of the Lenders as shall be necessary under the circumstances as provided in Section 5.01), and (c) except as expressly set forth herein, no Agent shall have any duty to disclose, and shall not be liable for any failure to disclose, any information relating to the Borrower, the Primary Servicer or any of the Providers that is communicated to or obtained by such Person serving as an Agent or any of its Affiliates in any capacity. No Agent shall be liable for any action taken or not taken by it with the consent or at the request of the Required Lenders (or such other number or percentage of the Lenders as shall be necessary under the circumstances as provided in Section 5.01) or in the absence of its own gross negligence or wilful misconduct. No Agent shall be deemed to have knowledge of any Default unless and until written notice thereof is given to such Agent by the Borrower or a Lender, and no Agent shall be responsible for or have any duty to ascertain or inquire into (i) any statement, warranty or representation made in or in connection with this Agreement, (ii) the contents of any certificate, report or other document delivered hereunder or in connection herewith, (iii) the performance or observance of any of the covenants, agreements or other terms or conditions set forth herein, (iv) the validity, enforceability, effectiveness or genuineness of this Agreement or any other agreement, instrument or document, or (v) the satisfaction of any condition set forth in Exhibit II or elsewhere herein, other than to confirm receipt of items expressly required to be delivered to such Agent. Each Agent shall be entitled to rely upon, and shall not incur any liability for relying upon, any notice, request, certificate, consent, statement, instrument, document or other writing believed by it to be genuine and to have been signed or sent by the proper Person. Each Agent also may rely upon any statement made to it orally or by telephone and believed by it to be made by the proper Person, and shall not incur any liability for relying thereon. Each Agent may consult with legal counsel (who may be counsel for the Borrower), independent accountants and other experts 20 selected by it, and shall not be liable for any action taken or not taken by it in accordance with the advice of any such counsel, accountants or experts. Each Agent may perform any and all of its duties and exercise its rights and powers by or through any one or more sub-agents appointed by such Agent. Each Agent and any such sub-agent may perform any and all its duties and exercise its rights and powers through their respective Related Parties. The exculpatory provisions of the preceding paragraphs shall apply to any such sub-agent and to the Related Parties of such Agent and any such sub-agent, and shall apply to their respective activities in connection with the syndication of the credit facilities provided for herein as well as activities as such Agent. With respect to the release of Collateral, the Lenders hereby irrevocably authorize the Program Manager, at its option and in its discretion, to direct the Collateral Agent to release any Lien granted to or held by the Collateral Agent upon any property covered by this Agreement or the other Documents (i) upon termination or expiration of the Revolving Commitments, the payment and satisfaction of all Lender Debt; or (ii) constituting property being sold or disposed of in compliance with the provisions of the Documents (and the Program Manager may rely in good faith conclusively on any certificate stating that the property is being sold or disposed of in compliance with the provisions of the Documents, without further inquiry); provided, however, that (x) the Program Manager shall not be required to cause the Collateral Agent to execute any release on terms which, in the Program Manager's opinion, would expose the Program Manager or the Collateral Agent to liability or create any obligation or entail any consequence other than the release of such Liens without recourse or warranty, and (y) such release shall not in any manner discharge, affect or impair any Liens upon all interests retained, all of which shall continue to constitute part of the property covered by the Documents. With respect to perfecting security interests in Collateral which, in accordance with Article 9 of the Uniform Commercial Code or any comparable provision of any Lien perfection statute in any applicable jurisdiction, can be perfected only by possession, each Lender hereby appoints each other Lender its agent for the purpose of perfecting such interest. Should any Lender (other than the Collateral Agent) obtain possession of any such Collateral, such Lender shall notify the Program Manager, and, promptly upon the Program Manager's request, shall deliver such Collateral to the Collateral Agent or in accordance with the Program Manager's instructions. Each Lender agrees that it will not have any right individually to enforce or seek to enforce this Agreement or any other Document or to realize upon any Collateral for the Lender Debt, it being understood and agreed that such rights and remedies may be exercised only by or with the approval of the Program Manager. In the event that a petition seeking relief under Title 11 of the United States Code or any other Federal, state or foreign bankruptcy, insolvency, liquidation or similar law is filed by or against the Borrower, the Primary Servicer, any Provider or any other Person obligated under any Document, the Program Manager is authorized, to the fullest extent permitted by applicable law, to file a proof of claim on behalf of itself and the Lenders in such proceeding for the total amount of obligations owed by such Person. With respect to any such proof of claim which the Program Manager may file, each Lender acknowledges that without reliance on such proof of claim, such 21 Lender shall make its own evaluation as to whether an individual proof of claim must be filed in respect of such obligations owed to such Lender and, if so, take the steps necessary to prepare and timely file such individual claim. Subject to the appointment and acceptance of a successor Agent as provided in this paragraph, any Agent (including the Program Manager and the Collateral Agent) may resign at any time by notifying the Lenders and the Borrower. Upon any such resignation, the Required Lenders shall have the right, to appoint a successor. If no successor shall have been so appointed by the Required Lenders and shall have accepted such appointment within 30 days after the retiring Agent gives notice of its resignation, then the retiring Agent may, on behalf of the Lenders, appoint a successor Agent. Upon the acceptance of its appointment as an Agent hereunder by a successor, such successor shall succeed to and become vested with all the rights, powers, privileges and duties of the retiring Agent, and the retiring Agent shall be discharged from its duties and obligations hereunder. The fees payable by the Borrower to a successor Agent shall be the same as those payable to its predecessor unless otherwise agreed between the Borrower and such successor. After an Agent's resignation hereunder, the provisions of this Article and Sections 1.10 and 5.05 shall continue in effect for the benefit of such retiring Agent, its sub-agents and their respective Related Parties in respect of any actions taken or omitted to be taken by any of them while it was acting as such Agent. Each Lender acknowledges that it has, independently and without reliance upon any Agent or any Related Party thereof or any other Lender and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Lender also acknowledges that it will, independently and without reliance upon any Agent or any Related Party thereof or any other Lender and based on such documents and information as it shall from time to time deem appropriate, continue to make its own decisions in taking or not taking action under or based upon this Agreement, any related agreement or any document furnished hereunder or thereunder. Each Lender acknowledges the potential conflict of interest of each other Lender as a result of Lenders holding disproportionate interests in the Revolving Loans, and expressly consents to and waives any claim based upon such conflict of interest. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 22 IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their respective officers thereunto duly authorized, as of the date first above written. BORROWER: FSQC FUNDING CO., LLC By: /s/ Bruce J. Mackey, Jr. Name: Bruce J. Mackey, Jr. Title: Chief Financial Officer, Treasurer and Assistant Secretary 400 Center Street Newton, MA 02458 Attention: Bruce J. Mackey, Jr. Facsimile Number: 617-796-8385 LENDERS: DRESDNER BANK AG, NEW YORK AND GRAND CAYMAN BRANCHES By: /s/ I. M. Leffler Name: Title: By: /s/ Stephen Kovach Name: Title: 1301 Avenue of the Americas New York, NY 10019 Attention: Michael Leffler/Stephen Kovach Facsimile Number: (212) 895-1723/1774 Revolving Commitment: $1,250,000 HFG HEALTHCO-4 LLC By: HFG Healthco-4, Inc., a member By: /s/ Orlando Figueroa Name: Orlando Figueroa Title: Vice President c/o Lord Securities Corporation 48 Wall Street, 27th Floor New York, NY 10005 Attention: Orlando Figueroa Facsimile Number: (212) 346-9012 Revolving Commitment: $11,250,000 PROGRAM MANAGER: DRESDNER KLEINWORT WASSERSTEIN LLC By: /s/ I. M. Leffler Name: Title: By: /s/ Stephen Kovach Name: Title: 1301 Avenue of the Americas New York, NY 10019 Attention: Michael Leffler/Stephen Kovach Facsimile Number: (212) 895-1723/1774 HEALTHCARE FINANCE GROUP, INC. By: /s/ Robert D. Lynch Name: Robert D. Lynch Title: Chief Operating Officer 110 Wall Street, 2nd Floor New York, NY 10005 Attention: David Hyams Facsimile Number: (212) 785-9211 LEAD ARRANGER AND SYNDICATION AGENT: DRESDNER KLEINWORT WASSERSTEIN LLC By: /s/ I. M. Leffler Name: Title: By: /s/ Stephen Kovach Name: Title: 1301 Avenue of the Americas New York, NY 10019 Attention: Michael Leffler/Stephen Kovach Facsimile Number: (212) 895-1723/1774 COLLATERAL AGENT: HFG HEALTHCO-4 LLC By: HFG Healthco-4, Inc., a member By: /s/ Orlando Figueroa Name: Orlando Figueroa Title: Vice President c/o Lord Securities Corporation 48 Wall Street, 27th Floor New York, NY 10005 Attention: Orlando Figueroa Facsimile Number: (212) 346-9012 EXHIBIT I DEFINITIONS As used in the Agreement (including its Exhibits and Schedules), the following terms shall have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined): "Accounts" means all health-care-insurance receivables, accounts, chattel paper, instruments, general intangibles and goodwill, whether now existing or hereafter arising, including, all Receivables and all payments due from any Governmental Entity based on a cost report settlement or expected settlement, and all proceeds of any of the foregoing. "Accrued Amounts" means, as at any date, the aggregate amount of accrued but unpaid (whether or not due and payable) (a) interest, (b) Non-Utilization Fees, and (c) Collateral Tracking Fees. "Additional Collateral" means all of the Borrower's (i)(a) present and future securities, security entitlements and securities accounts (collectively, "Investment Property"); (b) all deposit accounts and all other goods and personal property (including, without limitation, patents, patent applications, trade names and trademarks and Federal, state and local tax refund claims of all kinds), whether tangible or intangible, or whether now owned or hereafter acquired and wherever located; and (c) all proceeds of every kind and nature, including proceeds of proceeds, of any and all of the foregoing, and (ii) money and cash; and all books, records and other property relating to or referring to any of the foregoing including all books, records, ledger cards, data processing records, computer software and other property and general intangibles at any time used or useful in connection with, evidencing, embodying, referring to, or relating to, any of the foregoing. "Affiliate" means, as to any Person, any other Person that, directly or indirectly, is in control of, is controlled by or is under common control with such Person or is a director or officer of such Person. For the purposes of this definition, "control", when used with respect to any specified Person, means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise. "Agent" means each of the Program Manager, the Collateral Agent and the Syndication Agent. "Agreement" has the meaning set forth in the preamble hereto. "Assignment of Contracts" means that certain Assignment of Contracts as Collateral Security, dated the date hereof, between the Borrower and the Collateral Agent, in substantially the form attached hereto as Exhibit X, as such agreement may be amended, modified or supplemented from time to time in accordance with its terms. I-1 "Authorized Representative" means each Person designated from time to time, as appropriate, in a Written Notice by the Borrower to the Program Manager for the purposes of giving notices of borrowing, conversion or renewal of Revolving Loans, which designation shall continue in force and effect until terminated in a Written Notice to the Program Manager. "Borrower" has the meaning set forth in the preamble hereto. "Borrower Account" means initially account # 1135638907 of the Borrower at Citizens Bank of Massachusetts, ABA #211070175, or, thereafter, such other bank account designated by the Borrower by Written Notice to the Master Servicer and the Program Manager from time to time. "Borrower Lockbox Account(s)" means, collectively, the Primary Borrower Account and the Local Borrower Accounts set forth on Schedule IV hereto established by the Borrower to deposit all cash collections, wire transfers, electronic funds transfers and other cash proceeds of Receivables from non-Governmental Entities, including collections received in the form of a check and collections received by wire transfer directly from non-Governmental Entities. "Borrower's Certificate" has the meaning set forth in Section 1.03. "Borrowing Base" means, as of any time, an amount equal to 75% of the Expected Net Value of Eligible Receivables the Obligors of which are Governmental Entities; provided, however, that no more than 6% of all Eligible Receivables included in the Borrowing Base at any time shall be aged more than 120 days from its Last Date of Service. All items in the prior sentence, including the proviso, shall at all times be determined by reference to and as set forth in the most recent Borrowing Base Certificate required to be delivered to the Program Manager by the Borrower as of such time pursuant to Exhibit IV, clause (j)(i). "Borrowing Base Certificate" means a certificate (which may be sent by Transmission) signed by the Borrower and the Primary Servicer, substantially in the form set forth in Exhibit VII-A hereto, which shall provide the most recently available information (including updated information) with respect to the Eligible Receivables of the Borrower (segregated by the classes (if any) set forth on Schedule V hereto) that is set forth in the aged accounts receivable trial balance and books and records of the Providers, in form and substance satisfactory to the Lender and the Master Servicer. "Borrowing Base Deficiency" means, as of any date, the positive difference, if any, between (i) (x) the aggregate outstanding principal amount of all Revolving Loans, plus (y) Accrued Amounts minus (ii) the Borrowing Base indicated on the most recent Borrowing Base Certificate. "Borrowing Limit" has the meaning set forth in Section 1.01(a). "Business Day" means any day on which banks are not authorized or required to close in New York City, New York. I-2 "CHAMPUS" means the Civilian Health and Medical Program of the Uniformed Service, a program of medical benefits covering former and active members of the uniformed services and certain of their dependents, financed and administered by the United States Departments of Defense, Health and Human Services and Transportation and established pursuant to 10 USC Sectionss. 1071-1106, and all regulations promulgated thereunder including without limitation (a) all federal statutes (whether set forth in 10 USC Sectionss. 1071-1106 or elsewhere) affecting CHAMPUS; and (b) all rules, regulations (including 32 CFR 199), manuals, orders and administrative, reimbursement and other guidelines of all Governmental Entities (including, without limitation, the Department of Health and Human Services, the Department of Defense, the Department of Transportation, the Assistant Secretary of Defense (Health Affairs), and the Office of CHAMPUS, or any Person or entity succeeding to the functions of any of the foregoing) promulgated pursuant to or in connection with any of the foregoing (whether or not having the force of law) in each case as may be amended, supplemented or otherwise modified from time to time. "Change in Law" means (a) the adoption of any law, rule or regulation after the date of this Agreement or (b) any change in any law, rule or regulation or in the interpretation or application thereof by any Governmental Entity after the date of this Agreement or (c) compliance by any Lender (or, for purposes of Section 1.11(b), by any lending office of such Lender or by such Lender's holding company, if any) with any request, guideline or directive (whether or not having the force of law) of any Governmental Entity made or issued after the date of this Agreement. "Claims" has the meaning set forth in Section 1.10(b). "CMS" means the Centers for Medicare and Medicaid Services of the United States Department of Health and Human Services. "Collateral" has the meaning set forth in Section 4.01(a). "Collateral Agent" means HFG Healthco-4 LLC as collateral agent for the Lenders, and its successors and assigns in such capacity. "Collateral Tracking Fee" has the meaning set forth in Section 1.06(b). "Collection Account" means the Program Manager's account maintained at The Bank of New York, ABA # 021000018, GLA 111565, For Further Credit to Account #205779, Ref: HEALTHCO-4/FSQC, Attn: Scott Tepper, or such other bank account designated by the Program Manager from time to time. "Collections" means all cash collections, wire transfers, electronic funds transfers and other cash proceeds of Receivables deposited in or transferred to the Collection Account, including, without limitation, all cash proceeds thereof. "Control Agreement" means each Control Agreement, dated as of the date hereof, among the Primary Servicer, the Provider named therein, the Borrower, the Program Manager, the Collateral Agent and the bank named therein, in substantially the form attached hereto as Exhibit XI, I-3 as such agreement may be amended, modified or supplemented from time to time in accordance with its terms. "Credit and Collection Policy" means those receivables credit and collection policies and practices of the Borrower in effect on the date of the Agreement and set forth in Schedule II hereto, as modified from time to time in accordance with the provisions of the Agreement. "Debt" of any Person means (without duplication): (i) all obligations of such party for borrowed money, (ii) all obligations of such party evidenced by bonds, notes, debentures, or other similar instruments, (iii) all obligations of such party to pay the deferred purchase price of property or services (other than trade payables in the ordinary course of business), (iv) all "capital leases" (as defined by GAAP) of such party, (v) all Debt of others directly or indirectly guaranteed (which term shall not include endorsements in the ordinary course of business) by such party, (vi) all obligations secured by a Lien existing on property owned by such party, whether or not the obligations secured thereby have been assumed by such party or are non-recourse to the credit of such party (but only to the extent of the value of such property), and (vii) all reimbursement obligations of such party (whether contingent or otherwise) in respect of letters of credit, bankers' acceptances and similar instruments. "Default" means an event, act or condition which with the giving of notice or the lapse of time, or both, would constitute an Event of Default. "Defaulted Receivable" means a Receivable (i) as to which the Obligor therefor or any other Person obligated thereon has taken any action, or suffered any event to occur, of the type described in paragraph (i) of Exhibit V, or (ii) which, consistent with the Credit and Collection Policy, would be written off the applicable Provider's books as uncollectible; provided, however, that a Receivable as to which the Obligor therefor has suffered a temporary governmental shutdown or delay shall not be a "Defaulted Receivable". "Delinquency Ratio" means, as of the last Business Day of each Month, a percentage equal to: DLR --- ENV where: DLR = The Expected Net Value of all Receivables which were transferred to the Borrower and which became Delinquent Receivables in the Month immediately prior to the date of calculation. ENV = The Expected Net Value of Eligible Receivables which were transferred to the Borrower in the Month that is six Months immediately prior to the date of calculation. I-4 "Delinquent Receivable" means a Receivable (a) that has not been paid in full on or following the 180th day following the date of original invoicing thereof, or (b) that is a Denied Receivable. "Denied Receivable" means any Receivable as to which any related representations or warranties have been discovered at any time to have been breached. "Depositary Agreement" means that certain Depositary Agreement, dated as of the date hereof, among the Primary Servicer, the Providers, the Borrower, the Program Manager, the Collateral Agent, and the Lockbox Bank, in substantially the form attached hereto as Exhibit VIII, as such agreement may be amended, modified or supplemented from time to time in accordance with its terms. "Distribution" means any dividend payment or other distribution of assets, properties, cash, rights, obligations or securities on account of any capital interest in the Borrower, or return any capital to its members as such, or purchase, retire, defease, redeem or otherwise acquire for value or make any payment in respect of any shares of any class of capital interests in the Borrower or any warrants, rights or options to acquire any such interests, now or hereafter outstanding. "Documents" means this Agreement, the Depositary Agreement, the Government Depositary Agreement, the Control Agreements, the Assignment of Contracts, the RPTA, each other Provider Document, each Borrower's Certificate, each Borrowing Base Certificate, and each other document or instrument now or hereafter executed and delivered to the Lender by or on behalf of the Borrower pursuant to or in connection herewith or therewith (including, without limitation, each other agreement now existing or hereafter created providing collateral security for the payment or performance of any Lender Debt). "Early Termination Fee" means an amount equal to .50% of the Revolving Commitment (or portion of Revolving Commitment being terminated). "Eligibility Criteria" means the criteria and basis for determining whether a Receivable shall be deemed by the Program Manager to qualify as an Eligible Receivable, all as set forth in Exhibit VI hereto, as such Eligibility Criteria may be modified from time to time by the Program Manager in its good faith discretion and based on historical performance and other Obligor-related factually-based credit criteria upon Written Notice to the Borrower. "Eligible Receivables" means Receivables that satisfy the Eligibility Criteria, as determined by the Program Manager. "Employee Benefit Plan" means any employee benefit plan within the meaning of Section 3(3) of ERISA maintained by any Provider, the Borrower, any of their respective ERISA Affiliates, or with respect to which any of them have any liability. "EOB" means the explanation of benefit from an Obligor that identifies the services rendered on account of the Receivable specified therein. I-5 "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. "ERISA Affiliate" means any entity which is under common control with the Borrower within the meaning of ERISA or which is treated as a single employer with the Borrower under the Internal Revenue Code of 1986, as amended. "Event of Default" means any of the events specified in Exhibit V hereto. "Event of Termination" has the meaning set forth in the RPTA. "Excluded Claims" has the meaning set forth in Section 1.10(b). "Excluded Taxes" means taxes upon or determined by reference to a Lender's net income imposed by the jurisdiction in which such Lender is organized or has its principal or registered office. "Expected Net Value" means, with respect to any Eligible Receivable, the gross unpaid amount of such Receivable on date of creation thereof, times the applicable Net Value Factor. "Five Star" means Five Star Quality Care, Inc., a corporation organized under the laws of the State of Maryland, together with its successors and assigns. "Funding Date" means the Initial Funding Date and any Business Day on which a Revolving Loan is made at the Borrower's request in accordance with provisions of the Agreement. "GAAP" means generally accepted accounting principles in the United States of America, applied on a consistent basis as set forth in Opinions of the Accounting Principles Board of the American Institute of Certified Public Accountants and/or in statements of the Financial Accounting Standards Board and/or the rules and regulations of the Securities and Exchange Commission and/or their respective successors and which are applicable in the circumstances as of the date in question. "Government Depositary Agreement" means each Depositary Agreement, dated as of the date hereof, among the Primary Servicer, the Provider named therein, the Borrower, the Program Manager, the Collateral Agent and the bank named therein, in substantially the form attached hereto as Exhibit XI, as such agreement may be amended, modified or supplemented from time to time in accordance with its terms. "Government Lockbox(es)" means each of the lockboxes identified on Schedule IV hereto as a Government Lockbox, established to receive checks and EOB's with respect to Receivables payable by Governmental Entities to the Providers listed on Schedule VI hereto. "Government Lockbox Account(s)" means each of the accounts identified on Schedule IV hereto as a Government Lockbox Account in the name of a Provider listed on Schedule VI hereto and associated with the Government Lockbox established and controlled by such I-6 Provider to deposit all cash collections, wire transfers, electronic funds transfers and other cash proceeds of Receivables from the applicable Governmental Entity listed on Schedule VI, including collections received in the associated Government Lockbox and collections received by wire transfer directly from applicable the Governmental Entity, all as more fully set forth in the Government Depositary Agreement. "Governmental Entity" means the United States of America, any state, any political subdivision of a state and any agency or instrumentality of the United States of America or any state or political subdivision thereof and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. Payments from Governmental Entities shall be deemed to include payments governed under the Social Security Act (42 U.S.C. Section 1395 et seq.), including payments under Medicare, Medicaid and CHAMPUS, and payments administered or regulated by CMS. "Group-Wide Event of Termination" has the meaning set forth in the RPTA. "Indemnified Party" has the meaning set forth in Section 1.10(b). "Initial Funding Date" means the date of the first borrowing under the Agreement. "Initial Lenders" means, collectively, Dresdner Bank AG, New York and Grand Cayman Branches and HFG Healthco-4 LLC. "Insurer" means any Person (other than a Governmental Entity) which in the ordinary course of its business or activities agrees to pay for healthcare goods and services received by individuals, including commercial insurance companies, nonprofit insurance companies (such as Blue Cross, Blue Shield entities), employers or unions which self-insure for employee or member health insurance, prepaid health care organizations, preferred provider organizations, health maintenance organizations, commercial hospitals, physician's groups or any other similar person. "Insurer" includes insurance companies issuing health, personal injury, workers' compensation or other types of insurance but does not include any individual guarantors. "Interest Period" means (a) with respect to any LIBOR Loan, the period commencing on the date of such LIBOR Loan and ending on the numerically corresponding day in the Month that is one Month thereafter, (b) with respect to any Market Rate Loan, the period commencing on the date of such Market Rate Loan and ending on any day that is less than one Month thereafter, and (c) with respect to any Prime Rate Loan, the period commencing on the date of such Prime Rate Loan and ending on either (x) the numerically corresponding day in the Month that is one Month thereafter or (y) any day prior to such date; provided, that (i) if any Interest Period would end on a day other than a Business Day, such Interest Period shall be extended to the next succeeding Business Day and (ii) in the case of a LIBOR Loan or a Prime Rate Loan with an Interest Period pursuant to clause (c)(x), an Interest Period that commences on a day for which there is no numerically corresponding day in the last calendar month of such Interest Period shall end on the last Business Day of the last calendar month of such Interest Period. For purposes hereof, the date of a Revolving Loan initially I-7 shall be the date on which such Revolving Loan is made and thereafter shall be the effective date of the most recent continuation of such Revolving Loan. "Last Service Date" means, with respect to any Eligible Receivable, the date set forth on the related invoice or statement as the most recent date on which services or merchandise were provided by the related Provider to the related patient or customer. "Lender Debt" means and includes any and all amounts due, whether now existing or hereafter arising, under the Agreement, including, without limitation, any and all principal, interest, penalties, fees, charges, premiums, indemnities and costs owed or owing to any Lender, the Program Manager or the Master Servicer by the Borrower, any Provider, or any Affiliate of the Borrower or any Provider, arising under or in connection with this Agreement or any other Document, in each instance, whether absolute or contingent, direct or indirect, secured or unsecured, due or not, arising by operation of law or otherwise, and all interest and other charges thereon, including, without limitation, post-petition interest whether or not such interest is an allowable claim in a bankruptcy. "Lender Group" means each Lender, the Program Manager, the Master Servicer, the Collateral Agent and their respective agents, delegates, designees and assigns identified from time to time. "Lenders" means the Persons listed on Schedule 1.01 and any other Person that shall have become a party hereto pursuant to an Assignment and Assumption, other than any such Person that ceases to be a party hereto pursuant to an Assignment and Assumption. "LIBOR" means, with respect to any Revolving Loan for any Interest Period, (i)(a) the rate appearing on Page 3750 of the Dow Jones Market (or on any successor or substitute page of such Service, or any successor to or substitute for such Service, providing rate quotations comparable to those currently provided on such page of such Service, as determined by the Program Manager from time to time for purposes of providing quotations of interest rates applicable to dollar deposits in the London interbank market) at approximately 11:00 a.m., London time, two Business days prior to the commencement of such Interest Period, as the rate for dollar deposits with a maturity comparable to such Interest Period, or (b) if the rate set forth in clause (a) is not available at such time for any reason, then the rate at which dollar deposits of $5,000,000 and for a maturity comparable to such Interest Period are offered by the principal London office of Dresdner Bank AG in immediately available funds in the London interbank market at approximately 11:00 a.m., London time, two Business Days prior to the commencement of such Interest Period or (c) if the rate set forth in clause (a) is not available and Dresdner Bank AG is not quoting lending rates, then the rate per annum applicable to the most recent Interest Period for which one of the prior provisions applied divided by (ii) a percentage equal to 100% minus the then stated maximum rate of all reserve requirements (including, without limitation, any marginal, emergency, supplemental special or other reserves required by applicable law) applicable to any member bank of the Federal Reserve System in respect of Eurocurrency funding or liabilities as defined in Regulation D of the Board of Governors of the Federal Reserve System as from time to time in effect and any successor to all or I-8 a portion thereof establishing reserve requirements (or an successor category of liabilities under Regulation D). "LIBOR Loan" means a loan bearing interest based on LIBOR. "Lien" means any lien, mortgage, security interest, tax lien, pledge, hypothecation, assignment, preference, priority, other charge or encumbrance, or any other type of preferential arrangement of any kind or nature whatsoever by or with any Person (including, without limitation, any conditional sale or title retention agreement), whether arising by contract, operation of law, or otherwise. "Local Borrower Account(s)" means each of the accounts identified on Schedule IV hereto as a Local Borrower Account established by the Borrower to deposit all cash collections, wire transfers, electronic funds transfers and other cash proceeds of Receivables from non-Governmental Entities, including collections received in the form of a check and collections received by wire transfer directly from non-Governmental Entities. "Lockbox Bank" means Citizens Bank of Massachusetts, as lockbox bank under the Depositary Agreement. "Loss-to-Liquidation Ratio" means, as of the last Business Day of each Month, a percentage equal to: DR -- C where: DR = The Expected Net Value of all Eligible Receivables which became Defaulted Receivables in the Month immediately prior to the date of calculation. C = Collections on such Eligible Receivables in the Month immediately prior to the date of calculation. "Market Rate" means a rate of interest per annum determined by the Program Manager. "Market Rate Loan" means a loan bearing interest based on the Market Rate. "Master Servicer" means Healthcare Finance Group, Inc. and any other Person then identified by the Program Manager to the Borrower as being authorized to administer and service Receivables. I-9 "Material Adverse Effect" means any event, condition, change or effect that (a) has a materially adverse effect on the business, Properties, capitalization, liabilities, operations, prospects or financial condition of (i) the Providers, taken as a whole, (ii) the Borrower, or (iii) Five Star, (b) materially impairs the ability of the Borrower to perform its obligations under this Agreement or any of the other Documents, (c) materially impairs the ability of the Primary Servicer, any Provider or the Borrower to perform their respective obligations under the RPTA or any of the other Provider Documents, or (d) materially impairs the validity or enforceability of, or materially impairs the rights, remedies or benefits available to the Collateral Agent for the benefit of the Lenders, under this Agreement or (as assignee of the Borrower) under the RPTA or any of the other Provider Documents. "Maturity Date" means the earlier of (a) the date on which this Agreement terminates in accordance with the provisions of Section 5.07(a), and (b) the occurrence of an Event of Default unless such event is waived by the Required Lenders in writing. "Maximum Permissible Rate" has the meaning set forth in Section 1.14(a). "Medicaid" means the medical assistance program established by Title XIX of the Social Security Act (42 U.S.C. Secs. 1396 et seq.) and any statutes succeeding thereto. "Medicare" means the health insurance program for the aged and disabled established by Title VXII of the Social Security Act (42 U.S.C. Secs. 3395 et seq.) and any statutes succeeding thereto. "Month" means a calendar month. "Multiemployer Plan" means a plan, within the meaning of Section 3(37) of ERISA, as to which the Borrower or any ERISA Affiliate contributed or was required to contribute within the preceding five years. "Net Value Factor" means, initially, the percentages set forth on Schedule V attached hereto, as such percentages may be adjusted, upwards or downwards with notice (which may be telephonic) to the Borrower, in the good faith discretion of the Program Manager, based on historical actual final collections received on the Receivables within the 180 days of the Last Service Date of such Receivables (without regard to the factors set forth in the definition of "Defaulted Receivable"). "Non-Utilization Fee" has the meaning set forth in Section 1.06(a). "Notice" has the meaning set forth in the RPTA. "Obligor" means each Person who is responsible for the payment of all or any portion of a Receivable. "Other Entities" means any Provider and each of its direct and indirect parents or subsidiaries (in whatever business form such Person exists) other than the Borrower. I-10 "Other Taxes" has the meaning set forth in Section 1.09(b). "Outstanding Balance" means, as of any date of determination, the aggregate outstanding principal balance of all Revolving Loans (plus interest that is due and payable thereon that remains unpaid beyond the first Business Day of such Month); provided that, for purposes of interest calculation only, any Collections utilized to reduce the outstanding principal amount of the Revolving Loans shall reduce the "Outstanding Balance" hereunder only following a one Business Day clearance period applied thereto. "PBGC" means the Pension Benefit Guaranty Corporation or any entity succeeding to all or any of its functions under ERISA. "Permitted Overadvances" means involuntary overadvances that may result from time to time due to the fact that any borrowing formulas set forth in the Documents were unintentionally exceeded (whether at the time of any Revolving Loan or otherwise) for any reason (other than the Program Manager's gross negligence or willful misconduct), including Receivables believed to be eligible in fact being or becoming ineligible. To the extent any Permitted Overadvances are made, each Lender shall bear its pro rata (based on its Revolving Commitment) share thereof. "Person" means an individual, partnership, corporation (including a business trust), limited liability company, joint stock company, trust, unincorporated association, joint venture or other entity, an Insurer or a Governmental Entity. "Prime Rate" means the rate of interest per annum publicly announced from time to time by JPMorgan Chase Bank at its principal office in New York City as its prime rate in effect at such time. "Prime Rate Loan" means a loan bearing interest based on the Prime Rate. "Primary Borrower Account" means the account identified on Schedule IV hereto as the Primary Borrower Account, established by the Borrower to deposit all cash collections, wire transfers, electronic funds transfers and other cash proceeds of Receivables from non-Governmental Entities, including collections received in the Local Borrower Accounts and collections received by wire transfer directly from non-Governmental Entities, all as more fully set forth in the Depositary Agreement. "Primary Provider Account" means the account set forth on Schedule IV hereto in the name of the Providers established and controlled by the Providers to deposit all cash collections, wire transfers, electronic funds transfers and other cash proceeds of Receivables from Governmental Entities, collections received in the Government Lockbox Accounts and collections received by wire transfer directly from Governmental Entities, all as more fully set forth in the Depositary Agreement and the Government Depositary Agreement. "Primary Servicer" has the meaning set forth in the RPTA. I-11 "Program Manager" means (i) collectively, Dresdner Kleinwort Wasserstein LLC and Healthcare Finance Group, Inc., in their capacity as program manager hereunder and any successors or assigns in such capacity or (ii) any other Person identified by the then Program Manager in writing to the Borrower as being authorized to provide administrative services with respect to the Borrower and the funding and collection of healthcare receivables by and on behalf of the Lenders. "Property" means property of all kinds, movable, immovable, corporeal, incorporeal, real, personal or mixed, tangible or intangible (including, without limitation, all rights relating thereto), whether owned or acquired on or after the date of this Agreement. "Provider" has the meaning set forth in the RPTA "Provider Account(s)" means, collectively, the Primary Provider Account and the Government Lockbox Accounts set forth on Schedule IV hereto in the name of the Providers and associated, in the case of the Government Lockbox Accounts, with the Government Lockboxes established and controlled by the Providers to deposit all cash collections, wire transfers, electronic funds transfers and other cash proceeds of Receivables from Governmental Entities, including collections received in the Government Lockboxes and collections received by wire transfer directly from Governmental Entities, all as more fully set forth in the Depositary Agreement and the Government Depositary Agreements. "Provider Documents" has the meaning set forth in the RPTA. "Receivable Information" has the meaning set forth in the RPTA. "Receivables" means all third-party reimbursable portions or third-party directly payable portions of health-care-insurance receivables, all accounts and general intangibles, and all other obligations for the payment of money, in each case, owing (or in the case of Unbilled Receivables, to be owing) by an Obligor and arising out of the rendition of medical, surgical, diagnostic or other professional medical services or the sale of medical products by a Provider in the ordinary course of its business, including all rights to reimbursement under any agreements with and payments from Obligors, customers, residents, patients or other Persons, together with, to the maximum extent permitted by law, all accounts and general intangibles related thereto, all rights, remedies, guaranties, security interests and Liens in respect of the foregoing, all books, records and other Property evidencing or related to the foregoing, and all proceeds of any of the foregoing. "Related Party" means, with respect to any specified Person, such Person's Affiliates, incorporators, members and stockholders and the respective agents, attorneys, advisors, officers, directors, members, managers, employees or partners of such Person and such Person's Affiliates, incorporators, members and stockholders. "Required Lenders" means, at any time, Lenders holding Revolving Commitments representing at least 66 2/3% of the Total Revolving Commitment or, if the Revolving Commitments I-12 shall have been terminated, having at least 66 2/3% of all outstanding Revolving Loans; provided, that if at any time there are only two Lenders, Required Lenders shall mean both such Lenders. "Revolving Commitment"means, with respect to each Lender, the commitment of such Lender to make Revolving Loans hereunder in an aggregate amount at any time outstanding not in excess of the amount set forth under the name of such Lender on the signature pages hereof, or, if applicable, the amount set forth in the Assignment and Assumption pursuant to which such Lender became a Lender hereunder, as such commitment may be reduced or increased from time to time pursuant to the term of this Agreement. "Revolving Loan" means a Revolving Loan made pursuant to Section 1.03. "RPTA" means that certain Receivables Purchase and Transfer Agreement, dated as of the date of this Agreement, among the Primary Servicer, the Providers and the Borrower, as such agreement may be amended, modified or supplemented from time to time in accordance with the terms hereof and thereof. "Syndication Agent" means Dresdner Kleinwort Wasserstein LLC, in its capacity as syndication agent hereunder. "Tangible Net Worth" with respect to the Borrower, means, at any time, the excess of (i) the Expected Net Value of all Receivables owned by the Borrower and not financed by the Lender, plus cash, plus investments, plus amounts which are owing from the Lenders to the Borrower minus (ii) the sum of all accrued unpaid monetary obligations and accrued unpaid fees and expenses payable hereunder or otherwise owed by the Borrower. "Total Revolving Commitment" means the sum of the Lenders' Revolving Commitments, as the same may be reduced or increased from time to time pursuant to this Agreement. "Transmission" means, upon establishment of computer interface between the Borrower and the Master Servicer in accordance with the specifications established by the Master Servicer, the transmission of Receivable Information through computer interface to the Master Servicer in a manner satisfactory to the Master Servicer. "UCC" means the Uniform Commercial Code as from time to time in effect in the specified jurisdiction. "Unbilled Receivable" means a Receivable in respect of which the goods have been shipped, or the services rendered, to the relevant customer or patient, and rights to payment therefor have accrued, but the invoice has not been rendered to the applicable Obligor. "Written Notice" and "in writing" means any form of written communication or a communication by means of telex, telecopier device, telegraph or cable. I-13 Other Terms. All accounting terms not specifically defined herein shall be construed in accordance with GAAP. All terms used in Article 9 of the UCC in the State of New York, and not specifically defined herein, are used herein as defined in such Article 9. I-14 EXHIBIT II CONDITIONS OF REVOLVING LOANS 1. Conditions Precedent on Initial Funding Date. The making of the Revolving Loan on the Initial Funding Date is subject to the conditions precedent that the Program Manager shall have received on or before the Initial Funding Date the following, each (unless otherwise indicated) dated such date, in form and substance reasonably satisfactory to the Program Manager: (a) A certificate issued by the Secretary of State of the State of Delaware, dated as of a recent date, as to the legal existence and good standing of the Borrower (which certificate may be dated not more than 20 days prior to the Initial Funding Date). (b) Certified copies of the organizational documents and all amendments thereto, certified copies of resolutions of the managers of the Borrower approving this Agreement, certified copies of all documents filed to register any and all assumed/trade names of the Borrower, and certified copies of all documents evidencing other necessary corporate action and governmental approvals, if any, with respect to this Agreement. (c) A certificate of the Secretary or Assistant Secretary of the Borrower certifying the names and true signatures of the officers of the Borrower authorized to sign this Agreement and the other documents to be delivered by it hereunder. (d) A copy of the opening balance sheet of the Borrower as at the Initial Funding Date, certified by the chief financial officer of the Borrower. (e) Acknowledgment or time-stamped receipt copies of proper financing statements (showing the Borrower as debtor and the Collateral Agent as secured party) duly filed on or before the Initial Funding Date under the UCC of all jurisdictions that the Collateral Agent may deem necessary or reasonably desirable in order to perfect the security interests contemplated by the Agreement. (f) Completed requests for information (UCC search results) and a schedule thereof listing all effective financing statements filed in the applicable jurisdictions that name the Borrower as debtor, together with copies of such financing statements. (g) Releases of, and acknowledgment copies of proper termination statements (Form UCC-3), if any, necessary to evidence the release of all security interests, ownership and other rights of any Person previously granted by Borrower in the Collateral. (h) With respect to each Provider, a copy of each of such Provider's existing forms of patient consents, as well as a copy of each new patient consent form to be signed by each patient for which a Receivable will be created after the Initial Funding Date, which consent forms authorize certain demographic and medical information with respect to such patient to be disclosed by such Provider to its servicing agents and by such servicing agents to any third party obligors II-1 thereon, certified by a Secretary or Assistant Secretary of such Provider as being true, complete and correct. (i) A favorable opinion of Schnader Harrison Segal & Lewis LLP, counsel to the Borrower, substantially in the form attached hereto as Exhibit IX-A, and as to such other matters as the Lender Group requests. (j) A favorable opinion of Schnader Harrison Segal & Lewis LLP, counsel for the Borrower, substantially in the form attached hereto as Exhibit IX-B, and as to such other matters as the Lender Group requests. (k) The Assignment of Contracts with respect to the RPTA and the other Provider Documents and assignments of all other documents, lockboxes and lockbox accounts with respect to the RPTA and the other Provider Documents, duly executed by the Borrower and acknowledged by the other Persons party to such Provider Documents. (l) Originally executed copies of the RPTA and the other Provider Documents, all other documentation required to be delivered with respect to this Agreement, the RPTA and the other Documents, all in form and substance satisfactory to the Program Manager, which agreements shall be in full force and effect and enforceable in accordance with their respective terms. (m) Evidence that all of the conditions precedent with respect to the initial purchase under the RPTA have been satisfied or waived. (n) A duly executed Depositary Agreement, together with evidence satisfactory to the Program Manager that the Primary Borrower Account and the Primary Provider Account and the Government Lockboxes and the Government Lockbox Accounts have been established. (o) Duly executed Government Depositary Agreements, together with evidence satisfactory to the Program Manager that the Government Lockboxes and the Government Lockbox Accounts have been established. (p) Duly executed Control Agreements, together with evidence satisfactory to the Program Manager that the Local Borrower Accounts have been established. (q) Payment of all fees and other amounts due and payable, on or prior to the Initial Funding Date under this Agreement, the RPTA or otherwise, including the reimbursement or payment of all out-of-pocket expenses required to be reimbursed or paid and all reasonable attorneys' fees and disbursements incurred by the Lender Group. (r) Evidence that the capitalization of the Borrower is satisfactory to the Program Manager. (s) Completion of a due diligence review by the Program Manager (or its agent) of the Providers, the results of which are satisfactory to the Program Manager. II-2 2. Conditions Precedent on All Funding Dates. Each Revolving Loan on a Funding Date (including the Initial Funding Date) shall be subject to the further conditions precedent that the Borrower and the Program Manager shall have agreed upon the terms of such Revolving Loan and also that: (a) the Borrower shall have delivered to the Program Manager, at least two Business Days prior to such Funding Date, in form and substance satisfactory to the Program Manager a completed Borrower's Certificate, together with a completed Borrowing Base Certificate and such additional information as may reasonably be requested by the Program Manager or the Master Servicer; (b) on such Funding Date the following statements shall be true and correct (and acceptance of the proceeds of such Revolving Loan shall be deemed a representation and warranty by the Borrower that such statements are then true and correct): (i) the representations and warranties contained in Exhibits III and VII are true and correct in all material respects on and as of the date of such Revolving Loan as though made on and as of such date (except any representations or warranty that expressly indicates that it is being made as of a specific date, in which case such representation or warranty shall be true and correct as of such date), and (ii) no event has occurred and is continuing, or would result from such Revolving Loan or any actions connected therewith, that constitutes a Default or an Event of Default; and (c) the Program Manager shall have received such other approvals, opinions or documents as it may reasonably request. II-3 EXHIBIT III REPRESENTATIONS AND WARRANTIES The Borrower represents and warrants as follows: (a) The Borrower is a limited liability company duly organized, validly existing and in good standing under the laws of the State of Delaware, and is duly qualified to do business, and is in good standing, in every jurisdiction where the nature of its business requires it to be so qualified. (b) The execution, delivery and performance by the Borrower of the Agreement and the other documents to be delivered by it thereunder, (i) are within the Borrower's powers, (ii) have been duly authorized by all necessary limited liability company action, (iii) do not contravene (1) the Borrower's operating agreement or certificate of formation, (2) any law, rule or regulation applicable to the Borrower, (3) any contractual restriction binding on or affecting the Borrower or its Property, or (4) any order, writ, judgment, award, injunction or decree binding on or affecting the Borrower or its Property, and (iv) do not result in or require the creation of any Lien upon or with respect to any of its Properties, other than the security interest created by the Agreement. The Agreement has been duly executed and delivered by the Borrower. The Borrower has previously furnished to the Lender a correct and complete copy of the Borrower's certificate of formation and operating agreement including all amendments thereto. (c) No authorization or approval or other action by, and no notice to or filing with, any Governmental Entity is required for the due execution, delivery and performance by the Borrower of the Agreement or any other document to be delivered thereunder. (d) The Agreement constitutes the legal, valid and binding obligation of the Borrower, enforceable against the Borrower in accordance with its terms, except as limited by bankruptcy, insolvency, moratorium, fraudulent conveyance or other laws relating to the enforcement of creditors' rights generally and general principles of equity (regardless of whether enforcement is sought at equity or law). (e) The Borrower has all power and authority, and has all permits, licenses, accreditations, certifications, authorizations, approvals, consents and agreements of all Insurers, Governmental Entities, accreditation agencies and any other Person necessary or required for the Borrower (i) to own the assets (including Receivables) that it now owns, (ii) to carry on its business as now conducted, (iii) to execute, deliver and perform the Agreement and the other Documents to which it is a party, and (iv) to receive payments from the Obligors in the manner contemplated in the Agreement and the RPTA, except, in each case, where the failure to do so would not reasonably be expected to result in a Material Adverse Effect. (f) Except as disclosed on Schedule III, no Provider has been notified by any Insurer, Governmental Entity or instrumentality, accreditation agency or any other person, during the immediately preceding 24 Month period, that such party has rescinded or not renewed, or is III-1 reasonably likely to rescind or not renew, any such permit, license, accreditation, certification, authorization, approval, consent or agreement granted by it to such Provider or to which it and such Provider are parties. (g) As of the Initial Funding Date, all conditions precedent set forth in Exhibit II have been fulfilled or waived in writing by the Program Manager, and as of each Funding Date, the conditions precedent set forth in paragraph 2 of such Exhibit II shall have been fulfilled or waived in writing by the Lender. (h) The opening balance sheet of the Borrower, copies of which have been furnished to the Program Manager, fairly present the financial condition of the Borrower as of the date thereof all in accordance with GAAP. (i) The RPTA is in full force and effect and no Event of Termination or Group-Wide Event of Termination (without regard to waivers granted or sought) is continuing thereunder. (j) There is no pending or, to the Borrower's knowledge, any threatened action or proceeding or injunction, writ or restraining order affecting the Borrower or any Provider before any court, Governmental Entity or arbitrator which would reasonably be expected to result in a Material Adverse Effect, or which purports to affect the legality, validity or enforceability of the Agreement, the RPTA or any other Document, and neither the Borrower nor any Provider is currently the subject of, or has any present intention of commencing, an insolvency proceeding or petition in bankruptcy. (k) The Borrower is the legal and beneficial owner of the Collateral free and clear of any Lien. No effective financing statement or other instrument similar in effect covering any item of Collateral is on file in any recording office, except those being terminated on or before the Initial Funding Date and those filed in favor of the Borrower relating to the purchase of the Receivables under the RPTA and those in favor of the Collateral Agent relating to the Agreement, and no competing notice or notice inconsistent with the transactions contemplated in the Agreement has been sent to any Obligor. (l) All Receivable Information, information provided in the application for the program effectuated by the Agreement, and each other Document, report and Transmission provided by the Borrower to the Lender Group is or shall be accurate in all material respects as of its date and as of the date so furnished, and no such document contains or will contain any untrue statement of a material fact or omits or will omit to state a material fact necessary in order to make the statements contained therein, in the light of the circumstances under which they were made, not misleading. (m) The principal place of business and chief executive office of the Borrower and the office where the Borrower keeps its records concerning the Collateral are located at the address referred to on the signature page of the Agreement or in a Written Notice pursuant to clause (b) of Exhibit IV and there have been no other such locations for the four immediately prior Months. III-2 (n) The provisions of the Agreement create legal and valid Liens in all of the Collateral in favor of the Collateral Agent, for the benefit of the Lenders, and when all proper filings and other actions necessary to perfect such Liens have been completed, will constitute a perfected and continuing Lien on all of the Collateral, having priority over all other Liens on such Collateral, enforceable against the Borrower and all third parties. (o) The Borrower has not changed its principal place of business or chief executive office in the last five years. (p) The exact name of the Borrower is as set forth on the signature page of the Agreement, and except as notified in writing to the Program Manager, the Borrower has not changed its name in the last 12 Months, and, except as notified in writing to the Program Manager, the Borrower did not use, nor does the Borrower now use, any fictitious or trade name. (q) With respect to the Borrower, any Providers or the Primary Servicer, since the Funding Date prior to the making of this representation, there has occurred no event which has or is reasonably likely to result in a Material Adverse Effect. (r) Neither the Borrower nor any Provider is in violation under any applicable statute, rule, order, decree or regulation of any court, arbitrator or governmental body or agency having jurisdiction over the Borrower or such Provider which has or is reasonably likely to result in a Material Adverse Effect. (s) The Borrower has filed on a timely basis, including applicable extensions, all tax returns (federal, state and local) required to be filed and has paid, or made adequate provision for payment of, all taxes, assessments and other governmental charges due from the Borrower. No tax Lien has been filed and is now effective against the Borrower or any of its Properties except any Lien in respect of taxes and other charges not yet due or contested in good faith by appropriate proceedings. To the Borrower's knowledge, there is no pending investigations of the Borrower by any taxing authority nor any pending but unassessed tax liability of the Borrower. The Borrower does not have any obligation under any tax sharing agreement. (t) The Borrower is solvent and will not become insolvent after giving effect to the transactions contemplated by this Agreement; the Borrower has not incurred debts or liabilities beyond its ability to pay nor does it intend to incur such debts or liabilities; the Borrower will, after giving effect to the transaction contemplated by this Agreement, have an adequate amount of capital to conduct its business in the foreseeable future; the transactions contemplated under the Documents are made in good faith and without intent to hinder, delay or defraud present or future creditors. (u) The Providers maintain only the Government Lockboxes, the Government Accounts and the Provider Accounts as described on Schedule IV to the Agreement, for Receivables the Obligor of which is a Governmental Entity (except those lockboxes and lockbox accounts terminated or being terminated prior to or on the Initial Funding Date); the Providers do not maintain any lockboxes and the Local Borrower Accounts are the only lockbox accounts maintained for Receivables, the Obligors of which are non-Governmental Entities; and no direction is in effect III-3 directing Obligors to remit payments on Receivables other than to the applicable Provider, Borrower Lockbox Account, Government Lockbox or Provider Account, each as described on Schedule IV. (v) The Borrower has no pension plans or profit sharing plans. (w) Except as disclosed on Schedule III hereto, there are no pending civil or criminal investigations by any Governmental Entity involving the Borrower, any Provider or any of their respective officers or directors and none of the Borrower, any Provider or any of their respective officers or directors has been involved in, or the subject of, any civil or criminal investigation by any Governmental Entity that would reasonably be expected to result in a Material Adverse Effect. (x) The sole business of the Borrower is as provided in its organizational documents. (y) The assets of the Borrower are free and clear of any Liens in favor of the Internal Revenue Service, any Employee Benefit Plan, any Multiemployer Plan or the PBGC other than inchoate tax Liens resulting from an assessment of a Provider or the Borrower. (z) None of the Eligible Receivables constitutes or has constituted an obligation of any Person which is an Affiliate of the Borrower. (aa) The Obligor of each Eligible Receivable has not been the Obligor of any Defaulted Receivables in the past 12 Months (other than, for the purpose of this clause, as a result of good faith disputes). (bb) No transaction contemplated under this Agreement requires compliance with any bulk sales act or similar law. (cc) The Borrower has no Debt except hereunder and under the RPTA. III-4 EXHIBIT IV COVENANTS Until the payment in full of all Lender Debt and the termination of the Revolving Commitment hereunder: (a) Compliance with Laws, etc. The Borrower will comply in all material respects with all applicable laws, rules, regulations and orders and preserve and maintain its limited liability company existence, rights, franchises, qualifications, and privileges. (b) Offices, Records and Books of Account. The Borrower will keep its principal place of business and chief executive office and the office where it keeps its records concerning the Collateral at the address of the Borrower set forth under its name on the signature page to the Agreement or, upon 30 days' prior Written Notice to the Program Manager, at any other locations in jurisdictions where all actions reasonably requested by the Lender or otherwise necessary to protect and perfect the Collateral Agent's interest in the Collateral have been taken and completed. The Borrower shall keep its books and accounts in accordance with GAAP and shall make a notation on its books and records, including any computer files, to indicate that the Receivables have been assigned as security to the Collateral Agent, for the benefit of the Lenders. The Borrower shall maintain and implement administrative and operating procedures (including, without limitation, an ability to recreate records evidencing Receivables and related contracts in the event of the destruction of the originals thereof), and keep and maintain all documents, books, records and other information reasonably necessary or advisable for collecting all Receivables (including, without limitation, records adequate to permit the daily identification of each Receivable and all Collections of and adjustments to each existing Receivable) and for providing the Receivable Information. (c) Performance and Compliance with Contracts and Credit and Collection Policy. The Borrower will, at its expense, timely and fully perform and comply (and will cause the Primary Servicer, the Providers or their designees to fully perform and comply) with all material provisions, covenants and other promises required to be observed by it under the contracts related to the Receivables, and timely and fully comply in all material respects with the Credit and Collection Policy in regard to each Receivable and the related contract, and the Borrower shall maintain, at its expense, in full operation each of the bank accounts and lockboxes required to be maintained under the Agreement. The Borrower shall do nothing, nor suffer or permit any other Person, to impede or interfere with the collection by the Program Manager or the Master Servicer on behalf of the Lenders, of the Receivables. (d) Notice of Breach of Representations and Warranties. The Borrower shall promptly (and in no event later than five Business Days following actual knowledge thereof) inform the Program Manager and the Master Servicer of any breach of covenants or representations and warranties hereunder and under the RPTA, including, without limitation, upon discovery of a breach of the Eligibility Criteria set forth in Exhibit VI hereof and thereof. IV-1 (e) Debt, Sales, Liens, etc. The Borrower will not incur or assume any Debt or issue any securities except under or as contemplated by this Agreement. The Borrower will not sell, assign (by operation of law or otherwise) or otherwise dispose of, or create or suffer to exist any Liens upon or with respect to, the Borrower's Properties, or upon or with respect to any account to which any Collections are sent, or assign any right to receive income in respect thereof except (i) those Liens in favor of Collateral Agent, for the benefit of the Lenders or any assignee of any Lender relating to the Agreement, and (ii) those assignments of Denied Receivables upon receipt by the Borrower of the respective Repurchase Prices (as defined in the RPTA). (f) Extension or Amendment of Receivables. The Borrower shall not amend, waive or agree, or otherwise suffer or permit any Provider to amend, waive or agree, to any deviation from the terms or conditions of any Receivable owned by the Borrower in a manner inconsistent with the Credit and Collection Policy. (g) Change in Credit and Collection Policy; Change in Business. The Borrower will not make any material change in the Credit and Collection Policy without the prior written consent of the Program Manager; provided, however, that during the continuance of an Event of Default, it will not make any change in the Credit and Collection Policy. The Borrower will not make any change in the character of its business that is reasonably likely to result in a Material Adverse Effect. (h) Audits and Visits. The Borrower will, from time to time during regular business hours as requested by the Program Manager, permit the Lender upon reasonable notice, without interfering with the Borrower's or the Providers' businesses or operations and subject to compliance with applicable law in the case of review of patient/customer information, or its agents or representatives (including the Master Servicer), (i) to examine and make copies of and abstracts from all books, records and documents (including, without limitation, computer tapes and disks) in the possession or under the control of the Borrower relating to Receivables including, without limitation, the related contracts, and (ii) to visit the offices and properties of the Borrower for the purpose of examining and auditing such materials described in clause (i) above, and to discuss matters relating to Receivables or the Borrower's performance hereunder or under the contracts with any of the officers or employees of the Borrower having knowledge of such matters. The Borrower shall, at any time and from time to time during regular business hours as requested by the Master Servicer, permit the Master Servicer to have at least one of its agents or representatives physically present in the Borrower's administrative office, upon reasonable notice, to assist the Borrower in the collection of Receivables; provided, however, that no notice shall be required upon the occurrence and during the continuance of an Event of Default. (i) Change in Payment Instructions. The Borrower will not terminate the Primary Provider Account, the Borrower Lockbox Account, any Government Lockbox Account or any Government Lockbox or make any change or replacement in the instructions contained in any invoice, Notice or otherwise, or regarding payments with respect to the Receivables to be made to the Borrower, the Lenders or the Master Servicer, except upon the prior and express direction of the Program Manager. IV-2 (j) Reporting Requirements. The Borrower will provide to the Program Manager (in multiple copies, if requested by the Program Manager) the following: (i) on or prior to the 15th of each Month, a copy of the "Monthly Report" delivered by the Primary Servicer to the Borrower pursuant to Section 1.03 of the RPTA, together with a Borrowing Base Certificate, which shall be a revised Borrowing Base Certificate based on reconciliations and adjustments reflected in such Monthly Report if a Borrowing Base Certificate was delivered with respect to a Funding Date occurring after delivery of the prior "Monthly Report", in each case, certified by the chief financial officer of the Borrower and the Primary Servicer; (ii) as soon as available and in any event within 45 days after the end of each of the first three quarters of each fiscal year of the Borrower, balance sheets of the Borrower as of the end of such quarter and statements of income, cash flows and retained earnings of the Borrower for the period commencing at the beginning of the current fiscal year and ending with the end of such quarter, certified by the chief financial officer of the Borrower, and accompanied by a certificate of an authorized officer of the Borrower stating that, as of such date, (i) no Event of Default exists and is continuing, (ii) all representations and warranties are true and correct in all material respects (except any representation or warranty that expressly indicates that it is being made as of a specific date, in which case such representation or warranty shall be true and correct on and as of such date) and (iii) the conditions precedent set forth in paragraph 2 of Exhibit II have been fulfilled or waived in writing by the Program Manager, and detailing its compliance for such fiscal period with the financial covenants contained in this Agreement; (iii) as soon as available and in any event within 90 days after the end of each fiscal year of the Borrower, balance sheets as of, and statements of income for, such fiscal year, and accompanied by a certificate of an authorized officer of the Borrower stating that, as of such date, (i) no Event of Default exists and is continuing, (ii) all representations and warranties are true and correct in all material respects (except any representation or warranty that expressly indicates that it is being made as of a specific date, in which case such representation or warranty shall be true and correct on and as of such date) and (iii) the conditions precedent set forth in paragraph 2 of Exhibit II have been fulfilled or waived in writing by the Program Manager, and detailing its compliance for such fiscal period with the financial covenants contained in this Agreement; (iv) promptly and in any event within five Business Days after the occurrence of each Default or Event of Default, a statement of the chief financial officer of the Borrower setting forth details of such Default or Event of Default, and the action that the Borrower has taken and proposes to take with respect thereto; (v) at least ten Business Days prior to any change in the Borrower's name, a notice setting forth the new name and the proposed effective date thereof; IV-3 (vi) promptly (and in no event later than five Business Days following actual knowledge or receipt thereof), Written Notice in reasonable detail, of (w) any Lien asserted or claim made against a Receivable, (x) the occurrence of an Event of Default, including the occurrence of any other event which could have a material adverse effect on the value of a Receivable, (y) any notice of any investigations or similar audits of any Provider being conducted by any federal, state or county Governmental Entity or its agents or designees or (z) the results of any cost report filed and reviewed by any Governmental Entity or its fiscal intermediary or settled, and investigations or similar audits of any Provider being conducted by any federal, state or county Governmental Entity or its agents or designees; (vii) no later than five Business Days after the commencement thereof, Written Notice of all actions, suits, and proceedings before any Governmental Entity or arbitrator affecting the Borrower which, if determined adversely to the Borrower, could result in a Material Adverse Effect; (viii) as soon as possible and in any event within five Business Days after becoming aware of the occurrence thereof, Written Notice of any matter that would reasonably be expected to result in a Material Adverse Effect; (ix) within 90 days after the end of each fiscal year of the Borrower, a certificate of independent certified public accountants stating that to their knowledge no Group-Wide Event of Termination has occurred and exists as of the end of such fiscal year, or if in their opinion such a Group-Wide Event of Termination has occurred and is continuing, a statement as to the nature thereof; and (x) such other information respecting the Receivables or the condition or operations, financial or otherwise, of the Borrower as the Program Manager or any Lender may from time to time reasonably request. (k) Notice of Proceedings; Overpayments. The Borrower shall promptly notify the Master Servicer (and modify the next Borrowing Base Certificate to be delivered hereunder) in the event of any action, suit, proceeding, dispute, set-off, deduction, defense or counterclaim that is or may be asserted by an Obligor with respect to any Receivable. The Borrower shall make, or cause to be made, all payments to the Obligors necessary to prevent the Obligors from offsetting any earlier overpayment to the Borrower or any Provider against any amounts the Obligors owe on any Receivables. (l) Officer's Certificate. On the dates the financial statements referred to in clause (j) above are to be delivered after the Initial Funding Date, the chief financial officer of the Borrower shall deliver a certificate to the Program Manager, stating that, as of such date, (i) all representations and warranties are true and correct, (ii) the conditions precedent set forth in paragraph 2 of Exhibit II have been fulfilled or waived in writing by the Program Manager, and (iii) no Event of Default exists and is continuing. IV-4 (m) Further Instruments, Continuation Statements. The Borrower shall, at its expense, promptly execute and deliver all further instruments and documents, and take all further action that the Program Manager or the Collateral Agent may reasonably request, from time to time, in order to perfect, protect or more fully evidence the Collateral Agent's security interest in the Collateral, or to enable the Collateral Agent or the Program Manager to exercise or enforce the rights of the Collateral Agent, for the benefit of the Lender, hereunder or in the Collateral. Without limiting the generality of the foregoing, the Borrower will upon the request of the Program Manager execute and file such UCC financing or continuation statements, or amendments thereto or assignments thereof, and such other instruments or notices, as may be, in the opinion of the Program Manager, necessary or appropriate. The Borrower hereby authorizes the Program Manager to file one or more financing or continuation statements and amendments thereto and assignments thereof, relative to all or any of the Collateral now existing or hereafter arising without the signature of the Borrower where permitted by law. If the Borrower fails to perform any of its agreements or obligations under the Agreement, the Program Manager may (but shall not be required to) itself perform, or cause performance of, such agreement or obligation, and the expenses of the Program Manager incurred in connection therewith shall be payable by the Borrower. (n) Merger, Consolidation. The Borrower shall not merge with or into, consolidate with or into, or enter into any agreement to merge or consolidate with or into, another Person, or convey, transfer, lease or otherwise dispose of all or substantially all of its assets (whether now owned or hereafter acquired). (o) No "Instruments". The Borrower shall not take any action which would allow, result in or cause any Eligible Receivable to be evidenced by an "instrument" within the meaning of the UCC of the applicable jurisdiction. (p) Preservation of Company Existence. The Borrower shall preserve and maintain its existence, rights, franchises and privileges in the jurisdiction of its organization, and qualify and remain qualified in good standing as a foreign corporation in each jurisdiction where the failure to preserve and maintain such existence, rights, franchises, privileges and qualification would result in a Material Adverse Effect. (q) Provider Documents. The Borrower will, at its sole expense, timely and fully perform and comply with all provisions, covenants and other promises required to be observed by it under the Provider Documents, maintain the Provider Documents in full force and effect, enforce each Provider Document in accordance with its terms, take all such action to such end as may be from time to time reasonably requested by the Program Manager, and make to any party to the Provider Documents such demands and requests for information and reports or for action as the Borrower is entitled to make thereunder and as may be from time to time reasonably requested by the Program Manager. The Borrower shall not permit any waiver, modification or amendment of any Provider Document. (r) New Providers. The Borrower shall not cause or suffer or permit any other Person to become a "Provider" under the RPTA without the prior written consent of the Program Manager. IV-5 (s) Master Servicer Certificate. On or before the 30th calendar day after the Initial Funding Date, the Program Manager shall receive a certificate from the Master Servicer stating that all computer linkups and interfaces necessary or desirable, in the judgment of the Master Servicer, to effectuate the transactions and information transfers contemplated hereunder, are fully operational to the reasonable satisfaction of the Master Servicer. IV-6 SPECIAL COVENANTS ENTITY SEPARATENESS Until the payment in full of all Lender Debt and the termination of the Total Revolving Commitment hereunder: (i) The Borrower will at all times maintain at least one independent manager who is (x) not a current or former officer, director, manager or employee of an Affiliate of the Borrower or any Other Entity and who is not a current or former officer or employee of the Borrower and (y) not a stockholder or the holder of any other equity interests of any Other Entity or any of their respective Affiliates. (ii) The Borrower will not direct or participate in the management of any of the Other Entities' operations. (iii) The Borrower will at all times be adequately capitalized in light of its contemplated business. (iv) The Borrower will at all times provide for its own operating expenses and liabilities from its own funds. (v) Subject to consolidation with the Providers for accounting and tax purposes, the Borrower will maintain its assets and transactions separately from those of the Other Entities and reflect such assets and transactions in financial statements separate and distinct from those of the Other Entities and evidence such assets and transactions by appropriate entries in books and records separate and distinct from those of the Other Entities. The Borrower will not hold itself out as being liable, primarily or secondarily, for any obligations of the Other Entities. (vi) The Borrower will not maintain any joint account with any Provider or any Other Entity, or be a party, whether as a co-obligor or otherwise, to any agreement to which any Other Entity is a party (other than any Provider Document) or become liable as a guarantor or otherwise with respect to any indebtedness or contractual obligation of any Other Entity. (vii) Other than as contemplated under this Agreement or under any other Document and the payment of dividends or distributions to its members, the Borrower will not make any payment or distribution of assets with respect to any obligation of any Other Entity or grant a Lien on any of its assets to secure any obligation of any Other Entity. (viii) The Borrower will not make any loans, advances or otherwise extend credit to any of the Other Entities; provided, that the Borrower may issue dividends or distributions to each of its members to the extent otherwise permitted under this Agreement and under applicable law. (ix) The Borrower will hold regular duly noticed meetings of its members and make and retain minutes of such meetings. IV-7 (x) The Borrower will comply in full with the procedures set forth in the Documents with respect to the assignment of all assets from any of the Other Entities. (xi) The Borrower will not engage in any transaction with any of the Other Entities or any of their respective subsidiaries, except as permitted or contemplated by the Agreement and as contemplated by the Documents. (xii) The Borrower will not enter into any transaction with any Affiliate or third party except (a)(x) as permitted or contemplated by this Agreement or the Documents, or (y) investments of cash and cash equivalents with third parties and (b) on terms and conditions which reasonably approximate an arm's length transaction between unaffiliated parties. (xiii) The Borrower will not amend, modify or supplement its organizational documents. (xiv) The Borrower will not have any subsidiaries nor ownership interest in any other entities. IV-8 EXHIBIT V EVENTS OF DEFAULT Each of the following shall be an "Event of Default": (a) The Borrower shall default in the due and punctual payment of the principal of any Revolving Loan when and as the same shall become due and payable (except that the Borrower shall have up five Business Days to cure such a default with respect to a Borrowing Base Deficiency) whether pursuant to Article II of this Agreement, at maturity, by acceleration or otherwise. (b) The Borrower shall default in the due and punctual payment of any installment of interest on any Revolving Loan or any other Lender Debt, including, without limitation, any fee or expense owing to the Program Manager or any Lender pursuant to any of the Documents, when and as such amount of interest, fee or expense shall become due and payable and such default shall continue unremedied for three Business Days. (c) Any material provision of any Document is no longer in full force and effect or there shall be continuing a default in the performance or observance of any covenant, agreement or provision (other than as described in clause (a) or (b) above) contained in this Agreement or any other Document or in any instrument or document evidencing or creating any obligation, guaranty or Lien directly or indirectly in favor of the Collateral Agent, for the benefit of the Lenders, in connection with or pursuant to this Agreement or any Lender Debt, and, except in the case of the agreements and covenants contained in any Document as to each of which no notice or grace period shall apply, such default continues for a period of 30 days (or, in the case where agreements and covenants contained in any Document provide for a grace period that is less than 30 days, continuance of a default for such shorter period) after the earlier of (i) there has been given Written Notice of such default to either of the Borrower or the Primary Servicer on behalf of any Provider by the Program Manager or (ii) discovery thereof by the Borrower; or if this Agreement or any other Document or any such other instrument or document shall terminate, be terminated or become void or unenforceable for any reason whatsoever without the written consent of the Program Manager. (d) A Group-Wide Event of Termination shall have occurred under the RPTA (without regard to waivers granted or sought). (e) A Revocation Order (as defined in the Depositary Agreement) shall have been sent or any change or replacement shall have been made in the Standing Revocable Instruction (as defined in the Depositary Agreement). (f) Any representation or warranty made or deemed made by the Borrower (other than with respect to the eligibility of Receivables as Eligible Receivables hereunder) under or in connection with the Agreement or any other Document or any information or report delivered by the Borrower (other than with respect to the Providers) pursuant to the Agreement or any other V-1 Document shall prove to have been incorrect or untrue in any material respect when made or deemed made or delivered. (g) The Borrower shall incur any Debt other than under this Agreement or the RPTA. (h) This Agreement shall for any reason (other than pursuant to the terms hereof) fail or cease to create, or the security interest created by this Agreement fails or ceases to be, a valid and perfected first priority security interest in the Collateral free and clear of all Liens (other than Liens referred to in clauses (i) and (ii) of paragraph (e) of Exhibit IV). (i) The Borrower or any Provider shall generally not pay its debts as such debts become due, or shall admit in writing its inability to pay its debts generally, or shall make a general assignment for the benefit of creditors; or any proceeding shall be instituted by or against the Borrower or any Provider seeking to adjudicate it a bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief, or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking the entry of an order for relief or the appointment of a receiver, trustee, custodian or other similar official for it or for any substantial part of its Property and, in the case of any such proceeding instituted against it (but not instituted by it), either such proceeding shall remain undismissed or unstayed for a period of 30 days, or any of the actions sought in such proceeding (including, without limitation, the entry of an order for relief against, or the appointment of a receiver, trustee, custodian or other similar official for, it or for any substantial part of its Property) shall occur; or the Borrower or any Provider shall take any action to authorize any of the actions set forth above in this paragraph (i). (j) As of any date of determination, any Provider is found to have been overpaid by Governmental Entities by an amount equal to 10% of the Expected Net Value of all Eligible Receivables or more during any period covered by an audit conducted by CMS or any state authority and such overpayment is not repaid within 30 days of the earlier of receipt of a notice by, or the knowledge of, such Provider of a notice of such overpayment or reserved for in a manner reasonably acceptable to the Program Manager. (k) There shall have occurred any Material Adverse Effect since December 31, 2001. (l) The Borrower (x) shall have entered into any transaction or agreement and not provided prompt Written Notice thereof to the Program Manager, or (y) shall have consummated, any transaction or agreement intended to result in (i) the merger or consolidation of the Borrower, (ii) the acquisition of all or a substantial portion of the assets of any Person, (iii) the transfer, sale, assignment, lease or other disposition of all or a substantial portion of the Borrower's assets or Properties, (iv) a change in the general nature of the Borrower's business, (v) the sale of a controlling interest, directly or indirectly, in the Borrower, or (vi) a Change of Control with respect to Five Star. (m) The Loss-to-Liquidation Ratio at end of any Month exceeds 5%. V-2 (n) The Delinquency Ratio at the end of any Month exceeds 7%. (o) The arithmetic average of the Delinquency Ratios for any three consecutive Months exceeds 4.5%. (p) Judgments or orders for payment of money (other than judgments or orders in respect of which adequate insurance is maintained for the payment thereof) in excess of $100,000 in the aggregate against the Borrower remain unpaid, unstayed on appeal, undischarged, unbonded or undismissed for a period of 30 days or more. (q) Any governmental authority (including, without limitation, the Internal Revenue Service or the PBGC) files a notice of a Lien against (i) any of the Receivables or (ii) assets other than the Receivables involving an aggregate amount in excess of $100,000 which remains unpaid or discharged for a period of 30 days or more. (r) The Borrower shall fail to discharge within a period of 30 days after the commencement thereof any attachment, sequestration, forfeiture, or similar proceeding or proceedings involving an aggregate amount in excess of $100,000 against any of its Properties. (s) The Borrower does not pay or discharge at or before maturity or before becoming delinquent all taxes, levies, assessments, and governmental charges imposed on it or its income or profits or any of its Property, except any taxes, levies, assessments or charges contested in good faith by appropriate proceedings. (t) The Borrower sells, leases, assigns, transfers, or otherwise disposes of any of its Receivables, except as permitted or contemplated under the Agreement. (u) The Borrower declares or makes any Distribution, unless both prior and subsequent to the effectiveness of such proposed Distribution, (i) no Event of Default is continuing, (ii) such Distribution is in full compliance with applicable law, including the law of the State of Delaware as in effect at such time, and (iii) the Borrower and the recipient of such Distribution have taken all necessary and appropriate action to effectuate such Distribution. (v) The Borrower engages in any business other than solely the business of directly or indirectly purchasing Receivables from the Providers and in financing such Receivables with the Lenders hereunder and the other transactions permitted or contemplated hereby. (w) The Borrower shall at any time fail to maintain a Tangible Net Worth of at least 120% of the Borrowing Limit. (x) As of any date after the Initial Funding Date, more than 8% of all outstanding Eligible Receivables are aged more than 120 days but less than 180 days from the respective Last Service Dates of such Eligible Receivables. V-3 EXHIBIT VI ELIGIBILITY CRITERIA The following shall constitute the eligibility criteria for acceptance of Receivables for financing and inclusion in the Borrowing Base under the Agreement (the "Eligibility Criteria"): (a) The information provided by the Borrower with respect to each such Receivable is complete and correct and all documents, attestations and agreements relating thereto that have been delivered to the Program Manager are true and correct in all material respects. Except with respect to Unbilled Receivables, the related Provider has billed the applicable Obligor and has delivered to such Obligor all requested supporting claim documents with respect to such Receivable and no amounts with respect to such Receivable have been paid as of the date and time of the inclusion of such Receivable in the Borrowing Base. Each Provider has, or has the right to use, valid provider identification numbers and licenses to generate valid Receivables. Except with respect to Unbilled Receivables, all information set forth in the bill and supporting claim documents with respect to such Receivable is true, complete and correct; if additional information is requested by the Obligor, the Borrower (or the related Provider) has or will promptly provide the same, and if any error has been made with respect to such information, the Borrower (or the related Provider) will promptly correct the same and, if necessary, rebill such Receivable. (b) The related Provider's Medicare and Medicaid cost reports, if any, with respect to such Receivable for all cost reporting periods ending on or before the date of the last audited cost report have been examined and audited by (i), as to Medicaid, the applicable state agency or other CMS-designated agents or agents of such state agency, charged with such responsibility or (ii), as to Medicare, the Medicare intermediary or other CMS-designated agents charged with such responsibility; and there is no basis for any Governmental Entity to assert an offset against such Provider. (c) Each such Receivable (i) is payable, in an amount not less than its Expected Net Value, by the Obligor identified by the related Provider as being obligated to do so, (ii) is based on an actual and bona fide rendition of services or sale of goods to the patient by the related Provider in the ordinary course of business, (iii) is denominated and payable only in U.S. dollars in the United States, (iv) is an account or general intangible within the meaning of the UCC of the state in which the related Provider is incorporated, or is a right to payment under a policy of insurance or proceeds thereof, and is not evidenced by any instrument or chattel paper, and (v) shall be subject to a patient consent form as described in Exhibit II, Section 1(h) approved by the Program Manager and executed by the applicable patient. There is no payor other than the Obligor identified by the Borrower as the payor primarily liable on such Receivable. (d) Each such Receivable (i) is not the subject of any action, suit, proceeding or dispute (pending or threatened), setoff, counterclaim, defense, abatement, suspension, deferment, deductible, reduction or termination by the Obligor thereof (except for statutory rights of Governmental Entities that are not pending or threatened), (ii) is not past, or within 60 days of, the statutory limit for collection applicable to the Obligor thereof or is not aged more than 180 days from VI-1 its Last Service Date, and (iii) except with respect to Unbilled Receivables, was not billed to the Obligor thereof on a date more than 45 days after the Last Service Date. (e) Each such Receivable is not due from any Governmental Entity based on any cost report settlement or expected settlement. (f) Neither the Borrower nor the related Provider has any guaranty of, letter of credit providing credit support for, or collateral security for, such Receivable, other than any such guaranty, letter of credit or collateral security as has been assigned to the Collateral Agent, for the benefit of the Lenders, and any such guaranty, letter of credit or collateral security is not subject to any Lien in favor of any other Person. (g) The goods and services provided and reflected by such Receivable were medically necessary for the customer or patient, and the customer or patient has received such goods and services. (h) The fees charged for the goods and services constituting the basis for such Receivable are consistent with the usual, customary and reasonable fees charged by other similar medical providers for the same or similar goods in the related Provider's community and in the community in which the patient resides. (i) The Obligor with respect to each such Receivable is (i) not currently the subject of any bankruptcy, insolvency or receivership proceeding, nor is it unable to make payments on its obligations when due, (ii) located in the United States of America, (iii) not a subsidiary, parent or other Person that is an Affiliate of any Provider, (iv) not the Obligor of any Receivables that was a Defaulted Receivable in the past 12 Months and (v) a Governmental Entity. (j) The financing of such Receivable hereunder is made in good faith and without actual intent to hinder, delay or defraud present or future creditors of the Borrower. (k) The insurance policy, contract or other instrument obligating a Governmental Entity to make payment with respect to such Receivable (i) has been duly authorized and, together with the applicable Receivable, constitutes the legal, valid and binding obligation of the Governmental Entity in accordance with its terms, (ii) together with the applicable Receivable, does not contravene in any material respect any requirement of law applicable thereto, and (iii) was in full force and effect and applicable to the customer or patient at the time the goods or services constituting the basis for such Receivable were sold or performed. (l) No consents by any third party to the sale of such Receivable are required other than consents previously obtained in writing by the Borrower, a copy of each such consent having been provided to the Program Manager. (m) The inclusion of such Receivable in the Borrowing Base would not increase the fraction expressed as a percentage where (i) the numerator is the sum of the then outstanding principal amount of Eligible Receivables for any obligor (or group of obligors) listed below included VI-2 in the Borrowing Base, and (ii) the denominator is the Borrowing Base for all Eligible Receivables, above the corresponding maximum percentage listed below: Maximum Obligor Percentage - ------- ---------- Medicare 50% Medicaid from any single state 30% (n) Unless specifically verified and accepted by the Master Servicer or Program Manager, no single Eligible Receivable has an Expected Net Value greater than $15,000. (o) No prior sale or assignment of security interest which is still in effect on the applicable Funding Date has been made with respect to or granted in any such Receivable. (p) Such Receivable does not constitute or relate to a worker's compensation or personal injury claim. (q) An Event of Termination shall not have occurred and be continuing with respect to the related Provider. VI-3 SCHEDULE I ADDRESSES FOR NOTICE If to the Master Servicer: Healthcare Finance Group, Inc. 110 Wall Street, 2nd Floor New York, New York 10005 Attention: David Hyams, Chief Credit Officer Tel: (212) 785-9212 Fax: (212) 785-9211 OMITTED EXHIBITS AND SCHEDULES The following Exhibits and Schedules to the Loan and Security Agreement have been omitted: Exhibit Number Exhibit Title - -------------- ------------- VII-A Form of Borrowing Base Certificate VII-B Form of Borrower's Certificate VIII Form of Depository Agreement IX-A Form of Opinion of Counsel with Respect to Certain Corporate and UCC Matters IX-B Form of Opinion of Counsel with Respect to "True Sale" and Substantive Consolidation X Form of Assignment of Contracts XI Form of Governmental Depositary Agreement Schedule Number Schedule Title - --------------- -------------- Schedule II Credit and Collection Policy Schedule III Disclosures Schedule IV Lockbox Information Schedule V Net Value Factors The Registrant agrees to furnish supplementally a copy of the foregoing omitted exhibits and schedules to the Securities and Exchange Commission upon request. EX-10.4 5 ex10-4.txt EXHIBIT 10.4 GUARANTY GUARANTY dated as of October 24, 2002 (this "Guaranty"), by FIVE STAR QUALITY CARE, INC., FIVE STAR QUALITY CARE TRUST AND FIVE STAR QUALITY CARE HOLDING CO., INC. (each, together with its successors and assigns, a "Guarantor" and, collectively, the "Guarantors"), in favor of FSQC FUNDING CO., LLC, a Delaware limited liability company (the "Purchaser"). PRELIMINARY STATEMENTS. The Purchaser has entered into that certain Receivables Purchase and Transfer Agreement, dated as of the date hereof (as amended, restated, modified or supplemented from time to time, the "RPTA"; capitalized terms used herein and not defined herein shall have the meanings attributed thereto in the RPTA) with each of the entities named on Schedule I of the RPTA (each, together with each one's successors and assigns, a "Provider" and, collectively, the "Providers") and Five Star Quality Care, Inc., a Maryland corporation, as Primary Servicer. The Guarantors will derive substantial benefit from the transactions contemplated by the RPTA and the Loan and Security Agreement, dated as of the date hereof (as amended, restated, modified or supplemented from time to time, the "LSA") among the Purchaser, the lenders party thereto (the "Lenders"), Dresdner Kleinwort Wasserstein LLC, as Co-Program Manager, Syndication Agent and Lead Arranger, Healthcare Finance Group, Inc., as Co-Program Manager, and HFG Healthco-4 LLC, as Collateral Agent. It is a condition precedent to the effectiveness of the RPTA and the LSA and the making of any financial accommodations thereunder that the Guarantors shall have executed and delivered a guaranty in the form hereof of the due and punctual payment and performance of (i) the obligations of the Providers to purchase Denied Receivables under Section 4.01 of the RPTA, (ii) the indemnification obligations of the Providers to the Purchaser under Section 4.02 of the RPTA, and (iii) all obligations of the Providers to pay costs, expenses and fees under Section 5.05 of the RPTA (collectively, the "Guaranteed Obligations"). NOW, THEREFORE, in consideration of the premises, and in order to induce the Lenders under the LSA to make loans to the Purchaser or other financial accommodations thereunder, each Guarantor hereby agrees as follows: Section 1. Guaranty. Each Guarantor hereby, jointly and severally, irrevocably and unconditionally guarantees the punctual payment when due and the punctual performance of all present and future Guaranteed Obligations, and agrees to pay any and all costs and expenses (including reasonable counsel fees and expenses) paid or incurred by the Purchaser, the Lenders, the Program Manager or the Collateral Agent in enforcing any rights under this Guaranty or in enforcing payment of the Guaranteed Obligations or otherwise in connection with the provisions hereof. Without limiting the generality of the foregoing, the Guarantors' liability shall extend to all amounts that constitute part of the Guaranteed Obligations and would be owed by the Providers under the RPTA but for the fact that they are unenforceable or not allowable due to the existence of a bankruptcy, reorganization or similar proceeding involving a Provider. (a) Any and all payments by or on behalf of the Guarantors hereunder shall be made free and clear of and without deduction or withholding for any and all present or future taxes unless required by law. Section 2. Guaranty Absolute. The Guarantor guarantees that the Guaranteed Obligations will be paid or performed in accordance with the terms of the RPTA regardless of any law, regulation or order now or hereafter in effect in any jurisdiction affecting any of such terms or the rights of the Providers or the Borrower with respect thereto. This Guaranty is one of payment and performance, and not of collection, and the obligations of the Guarantors hereunder are independent of the obligations of the Providers under the RPTA and a separate action or actions may be brought or prosecuted against each Guarantor to enforce this Guaranty, irrespective of whether action is brought against the Providers or whether the Providers are joined in any such action or actions. The liability of the Guarantors under this Guaranty shall, to the fullest extent permitted under applicable law, be absolute and unconditional, and shall not be affected or released in any way, irrespective of: (a) any lack of validity or enforceability or any irregularity, voidability or voidness of the RPTA, the LSA or any agreement or instrument relating thereto (collectively, the "Documents") or of all or any part of the Guaranteed Obligations or of any security therefore; (b) any change in the manner, place or terms of payment or performance of, and/or any change or extension or the time of payment or performance of, renewal or alteration of all or any of the Guaranteed Obligations, any security therefor, or any liability incurred directly or indirectly in respect thereof, or any other amendment or waiver of or any consent to departure from any Document including, without limitation, any increase in the Guaranteed Obligations; (c) any taking and holding of collateral or additional guarantees for all or any of the Guaranteed Obligations, or any amendment, alteration, exchange, substitution, sale, transfer, enforcement, waiver, subordination, termination or release of or realization upon any collateral or such guarantees, or non-perfection, failure to perfect or continue the perfection of or delay in perfection of any Lien on any collateral, or any waiver or consent to departure from any such guaranty, for all or any of the Guaranteed Obligations; (d) any manner of application of collateral, or proceeds thereof, to all or any of the Guaranteed Obligations, or any manner of sale or other disposition of any collateral for all or any of the Guaranteed Obligations or any other assets of any Provider or any 2 other Person; (e) any exercise or failure to exercise any rights against the Providers or any other Person (including the Guarantors); (f) any settlement or compromise of any Guaranteed Obligation, any security therefor or any liability (including any of those hereunder) incurred directly or indirectly in respect thereof or hereof, and any subordination of the payment of all or any part thereof to the payment of a Guaranteed Obligation (whether due or not) of the Providers to creditors of the Providers other than the Guarantors; (g) any change, restructuring or termination of the existence of any of the Providers, the Purchaser or any of their affiliates, or any consent by the Purchaser, any Provider, any Lender, the Program Manager or the Collateral Agent or any other Person to any such change, restructuring or termination, and any corresponding restructure of the Guaranteed Obligations, or any other restructure or refinancing of the Guaranteed Obligations or any portion thereof; or (h) any other agreements or circumstance of any nature whatsoever which might otherwise constitute a defense available to, or a discharge of, this Guaranty and/or obligations of the Guarantors hereunder, or a defense to, or discharge of, any of the Providers or any other Person or party relating to this Guaranty or the obligations of the Guarantors hereunder. Without limiting the generality of the foregoing, each Guarantor hereby consents to, and hereby agrees, that the rights of the Purchaser hereunder, and the liability of each Guarantor hereunder, shall not be affected by any and all releases of any collateral, whether for purposes of commercially reasonable sales or other dispositions of assets or for any other purpose. The Purchaser may at any time and from time to time (whether or not after revocation or termination of this Guaranty) without the consent of, or notice (except as shall be required by applicable law that cannot be waived) to, the Guarantors, and without incurring responsibility to the Guarantors or impairing or releasing the obligations of the Guarantors hereunder, apply any sums by whomsoever paid or howsoever realized to any Guaranteed Obligation regardless of what Guaranteed Obligations remain unpaid. This Guaranty shall continue to be effective or be reinstated, as the case may be, if claim is ever made upon the Purchaser, any Lender, any Program Manager or the Collateral Agent for repayment or recovery of any amount or amounts received by the Purchaser, such Lender, such Program Manager or the Collateral Agent in payment or on account of any of the Guaranteed Obligations and the Purchaser, such Lender, such Program Manager or the Collateral Agent repays all or part of said amount by reason of any judgment, decree or order of any court or administrative body having jurisdiction over the Purchaser, such Lender, such Program Manager or the Collateral Agent or the respective property of each, or any settlement or compromise of any such claim effected 3 by the Purchaser, such Lender, such Program Manager or the Collateral Agent with any such claimant (including the Providers), the Guarantors shall be and remain liable to the Purchaser, such Lender, such Program Manager and/or the Collateral Agent hereunder for the amount so repaid or recovered to the same extent as if such amount had never originally been received by the Purchaser, such Lender, such Program Manager or the Collateral Agent. Section 3. Waiver. Each Guarantor hereby absolutely, unconditionally and irrevocably waives, to the fullest extent permitted by law, (i) promptness, diligence, notice of acceptance and any other notice with respect to this Guaranty, (ii) presentment, demand of payment, protest, notice of dishonor or nonpayment and any other notice with respect to the Guaranteed Obligations, (iii) any requirement that the Purchaser, the Lenders, the Program Manager or the Collateral Agent or any other Person protect, secure, perfect or insure any security interest or Lien or any property subject thereto or exhaust any right or take any action against the Providers or any other Person or any collateral, (iv) any other action, event or precondition to the enforcement of this Guaranty or the performance by each Guarantor of its obligations hereunder, and (v) any duty on the part of the Purchaser, the Lenders, the Program Manager or the Collateral Agent or any other Person to disclose to the Guarantors any matter, fact or thing relating to the business, operation or condition of the Providers and their assets now known or hereafter known by such Person. Section 4. Waiver of Subrogation and Contribution. Until the later to occur of the Facility Termination Date and payment in full of all Guaranteed Obligations, each Guarantor hereby irrevocably waives any claim or other rights which he may now or hereafter acquire against any Provider that arises from the existence, payment, performance or enforcement of the Guarantors' obligations under this Guaranty, including, without limitation, any right of subrogation, reimbursement, exoneration, contribution or indemnification and any right to participate in any claim or remedy against a Provider or any collateral which the Purchaser, a Lender, the Program Manager or the Collateral Agent now has or hereafter acquires, whether or not such claim, remedy or right arises in equity, or under contract, statute or common law, including, without limitation, the right to take or receive from a Provider or, directly or indirectly, in cash or other property or by set-off or in any other manner, payment or security on account of such claim, remedy or other right. If any amount shall be paid to a Guarantor in violation of the preceding sentence at any time prior to the later to occur of the Facility Termination Date and payment in full of all Guaranteed Obligations, such amount shall be deemed to have been paid to such Guarantor for the benefit of, and held in trust for the benefit of, the Purchaser, and shall forthwith be paid to the Purchaser to be credited and applied to the Guaranteed Obligations and all other amounts payable under this Guaranty, whether matured or unmatured, in accordance with the terms of the Documents, or to be held as collateral for any Guaranteed Obligations or other amounts payable under this Guaranty thereafter arising. Each Guarantor acknowledges that it will receive direct and indirect benefits from the financing arrangements contemplated by the Documents and that the waiver set forth in this subsection is knowingly made in contemplation of such benefits. Section 5. Representations and Warranties. Each Guarantor hereby represents and warrants as follows: 4 (a) Such Guarantor has the power to execute and deliver this Guaranty and to incur and perform its obligations hereunder; (b) Such Guarantor has duly taken all necessary action to authorize the execution, delivery and performance of this Guaranty and to incur and perform its obligations hereunder; (c) No consent, approval, authorization or other action by, and no notice to or of, or declaration or filing with, any governmental or other public body, or any other Person, is required for the due authorization, execution, delivery or performance by such Guarantor of this Guaranty or the consummation of the transactions contemplated hereby; (d) The execution, delivery and performance by such Guarantor of this Guaranty do not and will not violate or otherwise conflict with any term or provision of any material agreement, instrument, judgment, decree, order or any statute, rule or governmental regulation applicable to such Guarantor or result in the creation of any Lien upon any of its properties or assets pursuant thereto (other than any Liens created pursuant to the Documents); (e) This Guaranty has been duly authorized, executed and delivered by such Guarantor and constitutes the legal, valid and binding obligation of such Guarantor, and is enforceable against such Guarantor in accordance with its terms, except as enforcement thereof may be subject to the effect of any applicable bankruptcy, insolvency, reorganization, moratorium or similar law affecting creditors' rights generally, and general principles of equity (regardless of whether such enforcement is sought in a proceeding in equity or at law); (f) No proceeding referred to in paragraph (g) of Exhibit V of the RPTA is pending against such Guarantor and no other event referred to in such paragraph (g) of such Exhibit V has occurred and is continuing with respect to such Guarantor, and the property of such Guarantor is not subject to any assignment for the benefit of creditors; (g) Such Guarantor is the sole direct or indirect shareholder or member, as the case may be, of the Providers and Guarantors listed below its name on Schedule I attached hereto, and there are no outstanding rights, options, warrants or agreements pursuant to which any such Provider or such Guarantor may be required to sell any of its capital stock or membership interests, as applicable; and Section 6. Amendments, Etc. No amendment or waiver of any provision of this Guaranty nor consent to any departure by the Guarantors therefrom shall in any event be effective unless the same shall be in writing and signed by the Purchaser, the Program Manager and the Collateral Agent (and in an amendment, by the Guarantors), and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. Section 7. Remedies Upon Event of Termination. Upon the occurrence and 5 during the continuance of any Event of Termination, the Purchaser may, without notice to or demand upon the Providers or the Guarantors, declare any Guaranteed Obligations immediately due and payable, and shall be entitled to enforce the obligations of the Guarantors hereunder. Section 8. Statute of Limitations. Any acknowledgment or new promise, whether by sale or contribution of a Receivable or otherwise and whether by the Providers or others (including any Guarantor), with respect to any of the Guaranteed Obligations shall, to the fullest extent permitted under applicable law, if the statute of limitations in favor of the Guarantors against the Purchaser or the Collateral Agent (for the benefit of the Lenders), as assignee hereunder, shall have commenced to run, toll the running of such statute of limitations and, if the period of such statute of limitations shall have expired, prevent the operation of such statute of limitations. Section 9. ASSIGNABILITY. SUBJECT TO SECTION 5.03(a) OF THE LSA, THIS GUARANTY AND THE PURCHASER'S RIGHTS AND OBLIGATIONS HEREIN SHALL BE ASSIGNABLE BY THE PURCHASER AND ITS SUCCESSORS AND ASSIGNS. EACH GUARANTOR HEREBY ACKNOWLEDGES AND CONFIRMS THAT, AS COLLATERAL SECURITY FOR ANY AND ALL OBLIGATIONS OF THE PURCHASER PURSUANT TO THE LSA, THE PURCHASER IS GRANTING TO THE COLLATERAL AGENT, FOR THE BENEFIT OF THE LENDERS, A SECURITY INTEREST IN, AND COLLATERAL ASSIGNMENT OF, THIS GUARANTY AND ALL OF THE PURCHASER'S RIGHTS, TITLE AND INTERESTS HEREUNDER, INCLUDING, ALL MONIES DUE OR TO BECOME DUE TO THE PURCHASER, UNDER OR IN CONNECTION WITH THIS GUARANTY. Section 10. No Waiver; Remedies. No failure on the part of the Purchaser or the Collateral Agent (for the benefit of the Lenders), as assignee hereunder, to exercise, and no delay in exercising, any right hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right hereunder preclude any other or further exercise thereof or the exercise of any other right. The remedies herein provided are cumulative and not exclusive of any remedies provided by law or any other Document. Section 11. Continuing Guaranty. This Guaranty is a continuing one and shall (i) remain in full force and effect until the later to occur of the Facility Termination Date and payment in full of all Guaranteed Obligations, (ii) be binding upon each Guarantor, its successors and assigns, and (iii) inure to the benefit of, and be enforceable by, the Purchaser and its successors, transferees and assigns, including, without limitation, the Collateral Agent (for the benefit of the Lenders). All obligations to which this Guaranty applies or may apply under the terms hereof shall be conclusively presumed to have been created in reliance hereon. Section 12. Financial Condition of the Providers. Each Guarantor represents to the Purchaser (and its successors and assigns, including, without limitation, the Collateral Agent, for the benefit of the Lenders) that it is now and will be completely familiar with the prospects, business, operations and condition (financial and otherwise) of the Providers, and each Guarantor hereby waives and relinquishes any duty on the part of the Purchaser, the Lenders, the Collateral Agent, the 6 Program Manager or any other Person to disclose any matter, fact or thing relating to the prospects, business, assets, liabilities, operations or condition (financial or otherwise) of any Provider now known or hereafter known by the Purchaser, the Lenders, the Collateral Agent, the Program Manager or any other Person. Section 13. Admissibility of Guaranty. Each Guarantor agrees that any copy of this Guaranty signed by the Guarantor and transmitted by telecopier for delivery to the Collateral Agent (for the benefit of the Lenders) shall be admissible in evidence as the original itself in any judicial or administrative proceeding, whether or not the original is in existence. Section 14. Notices. All notices and other communications hereunder shall, unless otherwise stated herein, be in writing (which may include facsimile communication) and shall be faxed or delivered to such party at its address set forth under its name on the signature page hereof or at such other address as shall be designated by such party in a Written Notice to the other party. Notices and communications by facsimile shall be effective when sent (and shall be followed by hard copy sent by regular mail) and notices and communications sent by other means shall be effective when received. Section 15. Counterparts. This Guaranty may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each of which when so executed and delivered shall be an original and all of which shall together constitute one and the same agreement. Section 16. GOVERNING LAW. THIS GUARANTY SHALL, IN ACCORDANCE WITH SECTION 5-1401 OF THE GENERAL OBLIGATION LAW OF THE STATE OF NEW YORK, BE GOVERNED BY THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO ANY CONFLICTS OF LAWS PRINCIPLES THEREOF. Section 17. WAIVER OF JURY TRIAL, JURISDICTION AND VENUE. EACH OF THE PARTIES HERETO HEREBY WAIVES ALL RIGHTS TO A TRIAL BY JURY IN THE EVENT OF ANY LITIGATION WITH RESPECT TO ANY MATTER RELATED TO THIS GUARANTY, AND HEREBY IRREVOCABLY CONSENTS TO THE JURISDICTION OF THE STATE AND FEDERAL COURTS LOCATED IN NEW YORK COUNTY, NEW YORK CITY, NEW YORK IN CONNECTION WITH ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS GUARANTY. IN ANY SUCH LITIGATION, EACH OF THE PARTIES HERETO WAIVES PERSONAL SERVICE OF ANY SUMMONS, COMPLAINT OR OTHER PROCESS AND AGREES THAT SERVICE THEREOF MAY BE MADE BY CERTIFIED OR REGISTERED MAIL DIRECTED TO THE PARTIES HERETO AT THEIR ADDRESSES SET FORTH ON THE SIGNATURE PAGE HEREOF. THE PARTIES HERETO SHALL APPEAR IN ANSWER TO SUCH SUMMONS, COMPLAINT OR OTHER PROCESS WITHIN THE TIME PRESCRIBED BY LAW, FAILING WHICH THE PARTY FAILING TO SO APPEAR SHALL BE DEEMED IN DEFAULT AND JUDGMENT MAY BE ENTERED BY THE OTHER PARTY FOR THE 7 AMOUNT OF THE CLAIM AND OTHER RELIEF REQUESTED THEREIN. Section 18. Captions; Separability. The captions of the Sections and subsections of this Guaranty have been inserted for convenience only and shall not in any way affect the meaning or construction of any provision of this Guaranty. (a) If any term of this Guaranty shall be held to be invalid, illegal or unenforceable, the validity of all other terms hereof shall in no way be affected thereby. Section 19. Acknowledgment of Receipt. Each Guarantor acknowledges receipt of a copy of this Guaranty and each of the Documents. [Remainder of this page intentionally left blank] 8 IN WITNESS WHEREOF, each party hereto has caused this Guaranty to be duly executed as of the date first above set forth. FIVE STAR QUALITY CARE, INC. By: /s/ Bruce J. Mackey, Jr. Bruce J. Mackey, Jr. Chief Financial Officer, Treasurer and Assistant Secretary Address: 400 Center Street Newton, MA 02458 FIVE STAR QUALITY CARE TRUST By: /s/ Bruce J. Mackey, Jr. Bruce J. Mackey, Jr. Chief Financial Officer, Treasurer and Assistant Secretary Address: 400 Center Street Newton, MA 02458 FIVE STAR QUALITY HOLDING CO., INC. By: /s/ Bruce J. Mackey, Jr. Bruce J. Mackey, Jr. Chief Financial Officer, Treasurer and Assistant Secretary Address: 400 Center Street Newton, MA 02458 ACCEPTED AND AGREED: FSQC FUNDING CO., LLC By: /s/ Bruce J. Mackey, Jr. Bruce J. Mackey, Jr. Chief Financial Officer, Treasurer and Assistant Secretary Address: 400 Center Street Newton, MA 02458 with a copy to: Dresdner Kleinwort Wasserstein LLC 1301 Avenue of the Americas New York, New York 10019 Attention: Michael Leffler/Stephen Kovach Fax: 212-895-1723/1774 and Healthcare Finance Group, Inc. 110 Wall Street - 2nd Floor New York, New York 10005 Attention: Robert Lynch Fax: 212-785-9211 SCHEDULE I Five Star Quality Care - AZ, LLC Five Star Quality Care - CA, LLC Five Star Quality Care - Colorado, LLC Five Star Quality Care - CT, LLC Five Star Quality Care - GA, LLC Five Star Quality Care - IA, LLC Five Star Quality Care - KS, LLC Five Star Quality Care - MI, LLC Five Star Quality Care - MO, LLC Five Star Quality Care - NE, LLC Five Star Quality Care - WI, LLC Five Star Quality Care - WY, LLC Five Star Quality Care - CA, Inc. Five Star Quality Care - IA, Inc. Five Star Quality Care - MI, Inc. Five Star Quality Care - NE, Inc. EX-10.5 6 ex10-5.txt EXHIBIT 10.5 PLEDGE AGREEMENT PLEDGE AGREEMENT dated as of October 24, 2002 among FIVE STAR QUALITY CARE TRUST and FIVE STAR QUALITY CARE HOLDINGS CO., INC. (each, together with its successors and assigns, a "Grantor" and, collectively, the "Grantors"), FSQC FUNDING CO., LLC, a Delaware limited liability company (together with its successors and assigns, the "Purchaser"), and HFG HEALTHCO-4 LLC, a Delaware limited liability company, as Collateral Agent for the benefit of the Lenders and as assignee of the Purchaser (together with its successors and assigns, the "Assignee") under a certain Assignment of Contracts, dated as of the date hereof. PRELIMINARY STATEMENTS. The Purchaser has entered into that certain Receivables Purchase and Transfer Agreement, dated as of the date hereof (as amended, restated, modified or supplemented from time to time, the "RPTA"; capitalized terms used herein and not defined herein shall have the meanings attributed thereto in the RPTA) with each of the entities parties thereto as providers (each, together with its successors and assigns, a "Provider" and, collectively, the "Providers") and Five Star Quality Care, Inc., as Primary Servicer. The Purchaser, the Lenders, Dresdner Kleinwort Wasserstein LLC, as Co- Program Manager, Syndication Agent and Lead Arranger, Healthcare Finance Group, Inc., as Co- Program Manager, and the Assignee have entered into that certain Loan and Security Agreement, dated as of the date hereof (as amended, restated, modified or supplemented from time to time, the "LSA"). In connection with the RPTA, the Grantors have made that certain Guaranty, dated as of the date hereof, in favor of the Purchaser (the "Parent Guaranty"). It is a condition precedent to the effectiveness of the RPTA and the LSA and the making of any financial accommodations thereunder that the Grantors execute and deliver a pledge agreement in the form hereof to secure the following (collectively, the "Obligations"): the full and prompt payment, at any time and from time to time as and when due, of all liabilities and obligations of the Grantors, whether now existing or hereafter incurred, created or arising and whether direct or indirect, absolute or contingent, due or to become due under, arising out of or in connection with the Parent Guaranty or this Pledge Agreement, including, without limitation, any and all fees, costs and expenses, (including reasonable counsel fees and expenses) paid or incurred in enforcing any rights under the Parent Guaranty or this Pledge Agreement. Without limiting the generality of the foregoing, the Grantors' liability shall extend to all amounts that constitute part of the Obligations and would be owed by the Grantors under the Parent Guaranty or this Pledge Agreement but for the fact that they are unenforceable or not allowable due to the existence of a bankruptcy, reorganization or similar proceeding involving any of the Grantors. NOW, THEREFORE, the Grantors, the Purchaser and the Assignee hereby agree as follows: 1. Defined Terms. For purposes of this Agreement, in addition to the terms defined elsewhere herein, the following terms shall have the meanings set forth below: "Bankruptcy Code" shall mean 11 U.S.C. Sections 101 et seq., as amended from time to time, and any successor statute. "Collateral" shall have the meaning given to such term in Section 2(a). "Equity Interest" shall mean, collectively, all of the issued and outstanding shares, interests or other equivalents of capital stock of any corporation at any time now or hereafter owned by any Grantor in any Provider, whether voting or non-voting and whether common or preferred, all partnership, joint venture, limited liability company or other equity interests in any Provider not a corporation at any time now or hereafter owned by any Grantor, all options, warrants and other rights to acquire, and all securities convertible into, any of the foregoing, all rights to receive interest, income, dividends, distributions, returns of capital and other amounts (whether in cash, securities, property, or a combination thereof), and all additional stock, warrants, options, securities, interests and other property, from time to time paid or payable or distributed or distributable in respect of any of the foregoing (but subject to the provisions of Section 6(b)), including, without limitation, all rights of such Grantor to receive amounts due and to become due under or in respect of any Investment Agreement or upon the termination thereof, all rights of access to the books and records of any such Provider, and all other rights, powers, privileges, interests, claims and other property in any manner arising out of or relating to any of the foregoing, of whatever kind or character (including any tangible or intangible property or interests therein), and whether provided by contract or granted or available under applicable law in connection therewith, including, without limitation, such Grantor's right to vote and to manage and administer the business of any such Provider pursuant to any applicable Investment Agreement, together with all certificates, instruments and entries upon the books of securities intermediaries at any time evidencing any of the foregoing, in each case whether now owned or existing or hereafter acquired or arising. "Investment Agreement" shall mean any articles or certificate of incorporation, partnership agreement, joint venture agreement, limited liability company operating agreement, stockholders agreement or other agreement creating, governing or evidencing any Equity Interests and to which any Grantor is now or hereafter becomes a party, as any such agreement may be amended, modified, supplemented, restated or replaced from time to time. "Obligations" shall have the meaning given to such term in the Preliminary Statements. "Partner Obligations" shall have the meaning given to such term in Section 15. 2 "Pledged Securities" shall have the meaning given to such term in Section 2(a). "Uniform Commercial Code" shall mean the Uniform Commercial Code as the same may be in effect from time to time in the State of New York; provided that if, by reason of applicable law, the validity or perfection or the effect of perfection or non-perfection or the priority of any security interest in any Collateral granted under this Agreement is governed by the Uniform Commercial Code as in effect in a jurisdiction other than New York, then as to the validity or perfection or the effect of perfection or non-perfection or the priority, as the case may be, of such security interest, "Uniform Commercial Code" shall mean the Uniform Commercial Code as in effect in such other jurisdiction. 2. Pledge. (a) As security for the payment and performance in full of the Obligations, each Grantor hereby transfers, grants, bargains, sells, conveys, hypothecates, pledges, sets over, endorses over, and delivers unto the Assignee, and grants to the Assignee, for the benefit of the Lenders and the Purchaser, a Lien upon and a security interest in, all of such Grantor's right, title and interest in and to the following, in each case whether now owned or existing or hereafter acquired or arising or in which such Grantor now has or at any time in the future may acquire any rights, title or interest (collectively, the "Collateral"): (i) all Equity Interests; and (ii) any and all proceeds, as such term is defined in the Uniform Commercial Code of or from any of the foregoing including, without limitation, all cash, securities or other property at any time and from time to time receivable or otherwise distributed in respect of or in exchange for any of or all such Equity Interests. Each Grantor authorizes the Assignee to file financing statements under the Uniform Commercial Code describing the Collateral. Upon delivery to the Assignee, any securities or other interests now or hereafter included in the Collateral including, without limitation, the Equity Interests (the "Pledged Securities") shall be accompanied (in the case of Pledged Securities evidenced by certificates), by undated stock powers, undated equity interest powers or undated beneficial interest powers, as applicable, duly executed in blank or other instruments of transfer satisfactory to the Assignee and by such other instruments and documents as the Assignee may reasonably request. Each delivery of Pledged Securities shall be accompanied by a schedule showing a description of the securities or other interests theretofore and then being pledged hereunder, which schedule shall be attached hereto as Schedule I and made a part hereof. Each schedule so delivered shall supersede any prior schedules so delivered. (b) If any Pledged Securities now or hereafter included in the Collateral, are "uncertificated securities" within the meaning of the Uniform Commercial Code or are otherwise 3 not evidenced by any certificate or instrument, the Grantors will promptly notify the Assignee thereof and will promptly take and cause to be taken, and will (if the issuer of such uncertificated securities is a person other than a subsidiary of a Grantor) use its commercially reasonable efforts to cause the issuer to take, all actions required under Articles 8 and 9 of the Uniform Commercial Code and any other applicable law, to enable the Assignee to acquire "control" (within the meaning of such term under Section 8-106 (or its successor provision) of the Uniform Commercial Code) of such uncertificated securities and as may be otherwise necessary or deemed appropriate by the Assignee to perfect the security interest of the Assignee therein. 3. Delivery of Collateral. Each Grantor agrees to deliver promptly or cause to be delivered to the Assignee any and all Pledged Securities and any and all certificates or other instruments or documents representing any of the Collateral (together with any necessary endorsement). 4. Representations, Warranties. Each Grantor hereby represents and warrants to and with the Purchaser and the Assignee that: (a) except for the security interest granted to the Purchaser and assigned to the Assignee, such Grantor (i) is and will at all times continue to be the direct owner, beneficially and of record, of the Equity Interests that it is pledging hereunder, (ii) holds the Collateral that it is pledging hereunder free and clear of all Liens, charges, encumbrances and security interests of every kind and nature, and the Equity Interests are subject to no options to purchase or any similar or other rights of any person, (iii) will make no assignment, pledge, hypothecation or transfer of, or create any security interest in, the Collateral that it is pledging hereunder including, without limitation, by virtue of becoming bound by any agreement which restricts in any manner the rights of any present or future holder of any Equity Interests with respect thereto, and (iv) subject to Section 6 below, will cause any and all Collateral, whether for value paid by such Grantor or otherwise, to be forthwith deposited with the Assignee and pledged or assigned hereunder; (b) such Grantor (i) has good right and legal authority to pledge the Collateral it is pledging hereunder in the manner hereby done or contemplated, (ii) will not amend, modify or supplement any Pledged Security without the prior written consent of the Purchaser and the Assignee, nor forgive any indebtedness evidenced by any Pledged Security, and (iii) will defend its title or interest thereto or therein against any and all attachments, Liens, claims, encumbrances, security interests or other impediments of any nature, however arising, of all persons whomsoever; (c) no consent or approval of any governmental body or regulatory authority or any securities exchange was or is necessary to the validity of the pledge effected hereby; (d) by virtue of the execution and delivery by each Grantor of this Pledge Agreement, when the certificates, instruments or other documents representing or evidencing the 4 Collateral are delivered to the Assignee in accordance with this Pledge Agreement, the Purchaser and the Assignee will obtain a valid and perfected first Lien upon and security interest in such Collateral as security for the repayment of the Obligations, prior to all other Liens and encumbrances thereon and security interests therein; (e) the pledge effected hereby is effective to vest in the Purchaser and the Assignee the rights in the Collateral as set forth herein; and (f) all of the Equity Interests have been duly authorized and validly issued and are fully paid and nonassessable (or, in the case of partnership, limited liability company or similar Equity Interests, not subject to any capital call or other additional capital requirement) and not subject to any preemptive rights, warrants, options or similar rights or restrictions in favor of third parties or any contractual or other restrictions upon transfer. (g) as at the date hereof, the Pledged Securities constitute (i) all of the issued and outstanding shares of capital stock, equity interests or beneficial interests of the issuers listed on Schedule I annexed hereto owned by the Grantor, (ii) the percentage of the outstanding shares of capital stock, equity interests or beneficial interests of each issuer set forth on Schedule I annexed hereto and (iii) all of the Equity Interests of the Providers owned by the Grantor. All representations, warranties and covenants of the Grantors contained in this Pledge Agreement shall survive the execution, delivery and performance of this Pledge Agreement until the termi nation of this Pledge Agreement pursuant to Section 17 hereof. 5. Registration in Nominee Name; Denominations. Upon the occurrence and during the continuance of an Event of Termination, the Purchaser and the Assignee shall have the right (in their sole and absolute discretion with subsequent notice to the Grantors) to transfer to or to register the Pledged Securities in their own name or the name of their nominee. In addition, the Purchaser and the Assignee shall at all times have the right to exchange the certificates representing Pledged Securities for certificates of smaller or larger denominations for any purpose consistent with this Pledge Agreement. 6. Voting Rights; Dividends; etc. (a) Unless and until an Event of Termination under the RPTA shall have occurred and be continuing: (i) Each Grantor shall be entitled to exercise any and all voting and/or consensual rights and powers accruing to an owner of Pledged Securities or any part thereof for any purpose not inconsistent with the terms of this Pledge Agreement and the Parent Guaranty provided that such action would not adversely affect the rights inuring to the Purchaser and its successors, transferees and assigns, including, without limitation, the Assignee, under this Pledge Agreement or the Parent Guaranty or adversely affect the rights and remedies of the Purchaser or the Assignee under this Pledge Agreement or the Parent Guaranty or the ability of the Purchaser or the Assignee to exercise the same. 5 (ii) The Purchaser and the Assignee shall execute and deliver to the Grantors, or cause to be executed and delivered to the Grantors, all such proxies, powers of attorney, and other instruments as the Grantors may reasonably request for the purpose of enabling the Grantors to exercise the voting and/or consensual rights and powers which they are entitled to exercise pursuant to subparagraph (i) above. (iii) The Grantors shall be entitled to receive and retain any and all cash dividends paid on the Pledged Securities only to the extent that such cash dividends are permitted by, and otherwise paid in accordance with the terms and conditions of, the Parent Guaranty and applicable laws. Any and all a. noncash dividends, b. stock equity interests, beneficial interests or dividends paid or payable in cash or otherwise in connection with a partial or total liquidation or dissolution, and c. instruments, securities, other distributions in property, return of capital, capital surplus or paid-in surplus or other distributions made on or in respect of Pledged Securities (other than dividends permitted by this Section 6(a)(iii)), whether paid or payable in cash or otherwise, whether resulting from a subdivision, combination or reclassification of the outstanding capital stock, equity interest or beneficial interest of the issuer of any Pledged Securities or received in exchange for Pledged Securities or any part thereof, or in redemption thereof, as a result of any merger, consolidation, acquisition or other exchange of assets to which such issuer may be a party or otherwise, shall be and become part of the Collateral, and, if received by any Grantor, shall not be commingled by such Grantor with any of its other funds or property but shall be held separate and apart therefrom, shall be held in trust for the benefit of the Purchaser and the Assignee and shall be forthwith delivered to the Assignee in the same form as so received (with any necessary endorsement). (a) Upon the occurrence and during the continuance of an Event of Termination, all rights of the Grantors to receive any dividends, stock, instruments, securities and other distributions which any Grantor is authorized to receive pursuant to paragraph (a)(iii) of this Section 6 shall cease, and all such rights shall thereupon become vested in the Purchaser and the Assignee, which shall have the sole and exclusive right and authority to receive and retain such dividends. All dividends which are received by any Grantor contrary to the provisions of this Section 6(b) shall be received in trust for the benefit of the Purchaser and the Assignee, shall be segregated from other property or funds of such Grantor and shall be forthwith delivered to the Assignee as Collateral in the same form as so received (with any necessary endorsement). Any and all money and other property paid over to or received by the Assignee pursuant to the provisions of this Section 6(b) shall be retained by the Assignee in an account to be established 6 by the Assignee upon receipt of such money or other property and shall be applied in accordance with the provisions of Section 9 hereof. (b) Upon the occurrence and during the continuance of an Event of Termination, all rights of each Grantor to exercise the voting and consensual rights and pursuant to the irrevocable proxy granted herein, powers which it is entitled to exercise pursuant to Section 6(a)(i) shall cease, and all such rights shall thereupon become vested in the Assignee, which, to the extent permitted by applicable law, shall have the sole and exclusive right and authority to exercise (i) all voting, consensual and other rights and powers pertaining to the Equity Interests (whether or not transferred into the name of the Assignee), at any meeting of shareholders, partners, members or otherwise, and (ii) any and all rights of conversion, exchange, subscription and any other rights, privileges or options pertaining to the Equity Interests as if it were the absolute owner thereof (including, without limitation, the right to exchange at its discretion any and all of the Equity Interests upon the merger, consolidation, reorganization, reclassification, combination of shares or interests, similar rearrangement or other similar fundamental change in the structure of the applicable issuer, or upon the exercise by any Grantor or the Assignee of any right, privilege or option pertaining to such Equity Interests), and in connection therewith, the right to deposit and deliver any and all of the Equity Interests with any committee, depositary, transfer agent, registrar or other designated agency upon such terms and conditions as the Assignee may determine, and give all consents, waivers and ratifications in respect of the Equity Interests, all without liability except to account for any property actually received by it, but the Assignee shall have no duty to exercise any such right, privilege or option or give any such consent, waiver or ratification and shall not be responsible for any failure to do so or delay in so doing (c) In order to permit the Assignee to exercise the voting and other consensual rights which it may be entitled to exercise pursuant to Section 6(c) and to receive all dividends and other distributions which it may be entitled to receive under Section 6(a)(iii) or Section 6(b), each Grantor shall promptly execute and deliver (or cause to be executed and delivered) to the Assignee all such proxies, dividend payment orders and other instruments as the Assignee may from time to time reasonably request. Without limiting the effect of the foregoing, each Grantor does hereby constitute and appoint the Assignee as its proxy, and the Assignee shall have the right, upon the occurrence and during the continuance of an Event of Termination, to exercise all rights, benefits, privileges and powers accruing to such Grantor, as owner of the Pledged Securities including, without limitation, giving or withholding consent, calling and attending shareholders or members meetings to be held from time to time with full power to vote and act for and in the name, place, and stead of such Grantor and in the same manner, to the same extent, and with the same effect that such Grantor would if personally present at such meetings, giving to the Assignee full power of substitution and revocation, which proxy shall be effective, automatically and without the necessity of any action (including any transfer of any Pledged Securities on the record books of 7 the issuer thereof) by any person (including the issuer of the Pledged Securities or any officer or agent thereof). THIS PROXY IS IRREVOCABLE Any proxy or proxies heretofore given by any Grantor to any person or persons whatsoever are hereby revoked. This proxy shall continue in full force and effect until such time as all Obligations are paid and satisfied in full in accordance with the terms of the Parent Guaranty. 7. Issuance of Additional Interests. Each Grantor agrees that it will cause each of its subsidiaries not to issue any stock or other securities or interests, whether in addition to, by dividend or other distribution upon, or in substitution for, the Pledged Securities or otherwise. 8. Ownership; After-Acquired Equity Interests. (a) Each Grantor will cause the Equity Interests pledged by it hereunder to constitute at all times 100% of the capital stock or other Equity Interests in each issuer held by such Grantor thereof, such that the issuer thereof shall be a wholly owned subsidiary of such Grantor, and unless the Assignee shall have given its prior written consent, no Grantor will cause or permit any such issuer to issue or sell any new capital stock, any warrants, options or rights to acquire the same, or other Equity Interests of any nature to any person other than such Grantor, or cause, permit or consent to the admission of any other person as a stockholder, partner or member of any such issuer. (b) If any Grantor shall, at any time and from time to time after the date hereof, acquire any additional capital stock or other Equity Interests in any person of the types described in the definition of the term "Equity Interests," the same shall be automatically deemed to be Equity Interests, and to be pledged to the Assignee, for the benefit of the Lenders and the Purchaser pursuant to Section 2, and such Grantor will forthwith pledge and deposit the same with the Assignee and deliver to the Assignee any certificates or instruments therefor, together with the endorsement of such Grantor (in the case of any promissory notes or other instruments), undated stock powers (in the case of Equity Interests evidenced by certificates) or other necessary instruments of transfer or assignment, duly executed in blank and in form and substance satisfactory to the Assignee, together with such other certificates and instruments as the Assignee may reasonably request (including Uniform Commercial Code financing statements or appropriate amendments thereto), and will promptly thereafter deliver to the Assignee a fully completed and duly executed amendment to this Agreement in the form of Exhibit A (each, a "Pledge Amendment") in respect thereof. Each Grantor hereby authorizes the Assignee to attach each such Pledge Amendment to this Agreement, and agrees that all such Collateral listed on any Pledge Amendment shall for all purposes be deemed Collateral hereunder and shall be subject to the provisions hereof; provided that the failure of any Grantor to execute and deliver any Pledge Amendment with respect to any such additional Collateral as 8 required hereinabove shall not impair the security interest of the Assignee, for the benefit of the Lender and the Purchaser, in such Collateral or otherwise adversely, affect the rights and remedies of the Assignee, the Lender or the Purchaser hereunder with respect thereto. 9. Remedies upon Event of Default. If an Event of Termination shall have occurred and be continuing, subject to strict compliance with all applicable federal and state securities laws, the Assignee may sell or otherwise dispose of all or any part of the Collateral, at public or private sale or at any broker's board or on any securities exchange, for cash, upon credit or for future delivery as the Assignee shall deem appropriate. Each such purchaser at any such sale shall hold the property sold absolutely, free from any claim or right on the part of any Grantor, and each Grantor hereby waives (to the extent permitted by law) all rights of redemption, stay and appraisal which the Grantor now has or may at any time in the future have under any rule of law or statute now existing or hereafter enacted. The Assignee shall give the Grantors 30 days' written notice (which each Grantor agrees is reasonable notice within the meaning of Article 9 of the Uniform Commercial Code as in effect in New York) of the Assignee's intention to make any sale of Collateral. Such notice, in the case of a public sale, shall state the time and place for such sale and, in the case of a sale at a broker's board or on a securities exchange, shall state the board or exchange at which such sale is to be made and the day on which the Collateral, or portion thereof, will first be offered for sale at such board or exchange. Any such public sale shall be held at such time or times within ordinary business hours and at such place or places as the Assignee may fix and state in the notice (if any) of such sale. At any such sale, the Collateral, or portion thereof, to be sold may be sold in one lot as an entirety or in separate parcels, as the Assignee may (in its sole and absolute discretion) determine. The Assignee shall not be obligated to make any sale of any Collateral if it shall determine not to do so, regardless of the fact that notice of sale of such Collateral shall have been given. The Assignee may, without notice or publication, adjourn any public or private sale or cause the same to be adjourned from time to time by announcement at the time and place fixed for sale, and such sale may, without further notice, be made at the time and place to which the same was so adjourned. In case any sale of all or any part of the Collateral is made on credit or for future delivery, the Collateral so sold may be retained by the Assignee until the sale price is paid by the purchaser or purchasers thereof, but the Assignee shall not incur any liability in case any such purchaser or purchasers shall fail to take up and pay for the Collateral so sold and, in case of any such failure, such Collateral may be sold again upon like notice. At any public sale made pursuant to this Section 9, the Assignee may bid for or purchase, free (to the extent permitted by law) from any right of redemption, stay or appraisal on the part of the Grantors (all said rights being also hereby waived and released to the extent permitted by law), with respect to the Collateral or any part thereof offered for sale and the Assignee may make payment on account thereof by using any claim then due and payable to the Purchaser or the Assignee from the Grantors as a credit against the purchase price, and the Assignee may, upon compliance with the terms of sale, hold, retain and dispose of such property without further accountability to the Grantors therefor. For purposes hereof, a written agreement to purchase the Collateral or any portion thereof shall be treated as a sale thereof; the Purchaser and the Assignee shall be free to carry out such sale and purchase pursuant to such agreement, and the Grantors shall 9 not be entitled to the return of the Collateral or any portion thereof subject thereto, notwithstanding the fact that after the Assignee shall have entered into such an agreement all defaults under the Parent Guaranty shall have been remedied and the Obligations paid in full. The Grantors shall remain, jointly and severally, liable for any deficiency. As an alternative to exercising the power of sale herein conferred upon it, the Assignee may proceed by a suit or suits at law or in equity to foreclose this Pledge Agreement and to sell the Collateral or any portion thereof pursuant to a judgment or decree of a court or courts having competent jurisdiction or pursuant to a proceeding by a court-appointed receiver. 10. Application of Proceeds of Sale. The proceeds of any sale of Collateral, as well as any Collateral consisting of cash, shall be applied by the Assignee promptly as follows: FIRST, to the payment of all costs and expenses reasonably incurred by the Purchaser and the Assignee in connection with such sale or otherwise in connection with this Pledge Agreement or any of the Obligations, including, but not limited to, all court costs and the reasonable fees and expenses of the Assignee and its legal counsel, the repayment of all advances made by the Purchaser and the Assignee on behalf of the Grantors and as specified to the Grantors and any other reasonable costs or expenses incurred in connection with the exercise of any right or remedy hereunder; SECOND, pro rata to the payment in full of principal and interest in respect of any Revolving Loans outstanding (pro rata as among the Lenders in accordance with the amounts of the Revolving Loans made by them pursuant to the LSA); THIRD, pro rata to the payment in full of all Obligations (other than those referred to above) owed to the Lenders (pro rata as among the Lenders in accordance with their respective Revolving Commitment); and LAST, to the Grantors, their successors or assigns, or as a court of competent jurisdiction may otherwise direct. 11. The Assignee Appointed Attorney-in-Fact. Each Grantor hereby appoints the Assignee its attorney-in-fact for the purpose of carrying out the provisions of this Pledge Agreement and taking any action and executing any instrument which the Assignee may deem necessary or advisable to accomplish the purposes hereof, which appointment is irrevocable and coupled with an interest. Without limiting the generality of the foregoing the Assignee shall have the right, upon the occurrence and during the continuance of an Event of Termination, with full power of substitution either in the Purchaser's name or in the name of any Grantor, to ask for, demand, sue for, collect, receive receipt and give acquittance for any and all moneys due or to become due and under and by virtue of any Collateral, to endorse checks, drafts, orders and other instruments for the payment of money payable to any Grantor representing any interest or dividend, or other distribution payable in respect of the Collateral or any part thereof or on account thereof and to give full discharge for the same, to settle, compromise, prosecute or defend any action, claim or proceeding with respect 10 thereto, and to sell, assign, endorse, pledge, transfer and make any agreement respecting, or otherwise deal with, the same; provided, however, that nothing herein contained shall be construed as requiring or obligating the Assignee to make any commitment or to make any inquiry as to the nature or sufficiency of any payment received by the Assignee, or to present or file any claim or notice, or to take any action with respect to the Collateral or any part thereof or the moneys due or to become due in respect thereof or any property covered thereby, and no action taken by the Assignee or the Purchaser, or omitted to be taken with respect to the Collateral or any part thereof shall give rise to any defense, counterclaim or offset in favor of the Grantor or to any claim or action against the Assignee in the absence of the gross negligence or wilful misconduct of the Assignee. 12. No Waiver. No failure on the part of the Purchaser or the Assignee to exercise, and no delay in exercising, any right, power or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, power or remedy by the Purchaser or the Assignee preclude any other or further exercise thereof or the exercise of any other right, power or remedy. All remedies hereunder are cumulative and are not exclusive of any other remedies provided by law. The Purchaser and the Assignee shall not be deemed to have waived any rights hereunder or under any other agreement or instrument unless such waiver shall be in writing and signed by such parties. 13. Registration, etc. Each Grantor recognizes that, by reason of certain prohibitions contained in the Securities Act and applicable state securities laws as in effect from time to time, the Assignee may be compelled, with respect to any sale of all or any part of the Equity Interests conducted without registration or qualification under the Securities Act and such state securities laws, to limit purchasers to any one or more persons who will represent and agree, among other things, to acquire such Equity Interests for their own account, for investment and not with a view to the distribution or resale thereof. Each Grantor acknowledges that any such private sales may be made in such manner and under such circumstances as the Assignee may deem necessary or advisable in its sole and absolute discretion, including at prices and on terms less favorable than those obtainable through a public sale without such restrictions (including, without limitation, a public offering made pursuant to a registration statement under the Securities Act), and, notwithstanding such circumstances, agrees that any such private sale shall be deemed to have been made in a commercially reasonable manner and agrees that the Assignee shall have no obligation to conduct any public sales and no obligation to delay the sale of any Equity Interests for the period of time necessary to permit its registration for public sale under the Securities Act and applicable state securities laws, and shall not have any responsibility or liability as a result of its election so not to conduct any such public sales or delay the sale of any Equity Interests, notwithstanding the possibility that a substantially higher price might be realized if the sale were deferred until after such registration. Each Grantor hereby waives any claims against the Assignee, the Lenders or the Purchaser arising by reason of the fact that the price at which any Equity Interests may have been sold at any private sale was less than the price that might have been obtained at a public sale or was less than the aggregate amount of the Obligations, even if the Assignee accepts the first offer received and does not offer such Equity Interests to more than one offeree. 11 14. Security Interest Absolute. All rights of the Purchaser and the Assignee hereunder, the grant of a security interest in the Collateral and all obligations of the Grantors hereunder, shall be absolute and unconditional irrespective of (i) any lack of validity or enforceability of the Parent Guaranty, the RPTA, the LSA, any agreement with respect to any of the Obligations or any other agreement or instrument relating to any of the foregoing, (ii) any change in time, manner or place of payment of, or in any other term of, all or any of the Obligations, or any other amendment or waiver of or any consent to any departure from the Parent Guaranty, the RPTA, the LSA or any other agreement or instrument, (iii) any exchange, release or nonperfection of any other collateral, or any release or amendment or waiver of or consent to or departure from any guarantee, for all or any of the Obligations or (iv) any other circumstance which might otherwise constitute a defense available to, or a discharge of, the Grantors in respect of the Obligations or in respect of this Pledge Agreement. 15. The Grantors Remain Liable. Notwithstanding anything herein to the contrary, (i) each Grantor shall remain liable under all Investment Agreements to perform all of its obligations thereunder to the same extent as if this Agreement had not been executed, (ii) the exercise by the Assignee of any of its rights or remedies hereunder shall not release any Grantor from any of its obligations under any of such Investment Agreements, and (iii) except as specifically provided for hereinbelow, none of the Assignee, the Lenders or the Purchaser shall have any obligation or liability by reason of this Agreement under any of such Investment Agreements, nor shall the Assignee or any Lender be obligated to perform any of the obligations or duties of any Grantor thereunder or to take any action to collect or enforce any claim for payment assigned hereunder. This Agreement shall not in any way be deemed to obligate the Assignee, any Lender, the Purchaser or any other purchaser at a foreclosure sale under this Agreement to assume any of a Grantor's obligations, duties or liabilities under any Investment Agreement, including, without limitation, any Grantor's obligations, if any, to manage the business and affairs of the applicable partnership, joint venture, limited liability company, limited liability partnership or other issuer (collectively, the "Partner Obligations"), unless the Assignee, any Lender, the Purchaser or any other purchaser otherwise agrees in writing to assume any or all of such Partner Obligations. In the event of foreclosure by the Assignee hereunder, then except as provided in the preceding sentence, each applicable Grantor shall remain bound and obligated to perform its Partner Obligations and none of the Assignee, any Lender or the Purchaser shall be deemed to have assumed any Partner Obligations. In the event the Assignee, any Lender, the Purchaser or any other purchaser at a foreclosure sale elects to become a substitute partner or member in place of a Grantor, the party making such election shall adopt in writing such Investment Agreement and agree to be bound by the terms and provisions thereof; and subject to the execution of such written agreement, each Pledgor hereby irrevocably consents in advance to the admission of the Assignee, any Lender, the Purchaser or such other purchaser as a substitute partner or member to the extent of the Equity Interests acquired pursuant to such sale, and agrees to execute any documents or instruments and take any other action as may be necessary or as may be reasonably requested in connection therewith. The powers, rights and remedies conferred on the Assignee hereunder are solely to protect its interest and privilege in such Investment Agreements, as Collateral, and shall not impose any duty upon it to exercise any such powers, rights or remedies. 12 16. Purchaser's and Assignee's Fees and Expenses. Each Grantor, jointly and severally, shall be obligated to, upon demand, pay to the Purchaser and the Assignee the amount of any and all reasonable expenses, including the reasonable fees and expenses of their respective counsel and of any experts or agents which the Purchaser or the Assignee may incur in connection with (i) the administration of this Pledge Agreement, (ii) the custody or preservation of, or the sale of, collection from, or other realization upon, any of the Collateral, (iii) the exercise or enforcement of any of the rights of the Purchaser or the Assignee hereunder or (iv) the failure by a Grantor to perform or observe any of the provisions hereof. In addition, each Grantor, jointly and severally, indemnifies and holds the Purchaser and the Assignee harmless from and against any and all liability incurred by the Purchaser or the Assignee hereunder or in connection herewith, unless such liability shall be due to the gross negligence or wilful misconduct of the Purchaser or the Assignee, as the case may be. Any such amounts payable as provided hereunder or thereunder shall be additional Obligations secured hereby. 17. Termination. This Pledge Agreement shall terminate when (a) all of the Obligations have been fully paid in cash and (b) the Lenders have no further commitment to make any advances under the LSA, at which time the Purchaser and the Assignee shall reassign and deliver to each Grantor, or to such person or persons as the Grantors shall designate, against receipt, such of the Collateral (if any) as shall not have been sold or otherwise still be held by it hereunder, together with appropriate instruments of reassignment and release, including delivery of Uniform Commercial Code termination statements and similar documents reasonably requested by the Grantors; provided, however, that all indemnities of the Grantors contained in this Pledge Agreement shall survive, and remain operative and in full force and effect regardless of, the termination of this Pledge Agreement. Any such reassignment shall be without recourse to or warranty by the Purchaser and the Assignee and at the expense of the Grantors. 18. Notices. All communications and notices hereunder shall be in writing and given as provided in the RPTA. 19. Further Assurances. Each Grantor agrees to do such further acts and things, and to execute and deliver such additional conveyances, assignments, agreements and instruments, as the Purchaser and the Assignee may at any time reasonably request in connection with the administration and enforcement of this Pledge Agreement or with respect to the Collateral or any part thereof or in order better to assure and confirm unto the Purchaser and the Assignee their rights and remedies hereunder. 20. ASSIGNABILITY. SUBJECT TO SECTION 5.03(a) OF THE LSA, THIS PLEDGE AGREEMENT AND THE PURCHASER'S RIGHTS AND OBLIGATIONS HEREIN SHALL BE ASSIGNABLE BY THE PURCHASER AND ITS SUCCESSORS AND ASSIGNS. EACH GRANTOR HEREBY ACKNOWLEDGES AND CONFIRMS THAT, AS COLLATERAL SECURITY FOR ANY AND ALL OBLIGATIONS OF THE PURCHASER PURSUANT TO THE LSA, THE PURCHASER IS GRANTING TO THE ASSIGNEE, FOR THE BENEFIT OF THE 13 LENDERS, A SECURITY INTEREST IN, AND COLLATERAL ASSIGNMENT OF, THIS PLEDGE AGREEMENT AND ALL OF THE PURCHASER'S RIGHTS, TITLE AND INTERESTS HEREUNDER, INCLUDING, ALL MONIES DUE OR TO BECOME DUE TO THE PURCHASER, UNDER OR IN CONNECTION WITH THIS PLEDGE AGREEMENT. 21. Binding Agreement; Assignments. This Pledge Agreement, and the terms, covenants and conditions hereof, shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, except that the Grantors shall not be permitted to assign this Pledge Agreement or any interest herein or in the Collateral, or any part thereof, or otherwise pledge, encumber or grant any option with respect to the Collateral, or any part thereof, or any cash or property held by the Assignee as Collateral under this Pledge Agreement. 22. GOVERNING LAW. THIS PLEDGE AGREEMENT SHALL, IN ACCORDANCE WITH SECTION 5-1401 OF THE GENERAL OBLIGATION LAW OF THE STATE OF NEW YORK, BE GOVERNED BY THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO ANY CONFLICTS OF LAWS PRINCIPLES THEREOF. 23. Severability. In case any one or more of the provisions contained in this Pledge Agreement should be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired. 24. Counterparts. This Pledge Agreement may be executed in two or more counterparts, each of which shall constitute an original, but all of which, when taken together, shall constitute but one instrument. This Pledge Agreement shall be effective when counterparts which bear the signature of each Grantor shall have been delivered to the Assignee. 25. Section Headings. Section headings used herein are for convenience only and are not to affect the construction of, or be taken into consideration in interpreting, this Pledge Agreement. [Remainder of this page intentionally left blank] 14 IN WITNESS WHEREOF, the parties hereto have duly executed this Pledge Agreement as of the day and year first above written. FIVE STAR QUALITY CARE TRUST By /s/ Bruce J. Mackey, Jr. Name: Bruce J. Mackey, Jr. Title: Chief Financial Officer, Treasurer and Assistant Secretary FIVE STAR QUALITY CARE HOLDING CO., INC. By /s/ Bruce J. Mackey, Jr. Name: Bruce J. Mackey, Jr. Title: Chief Financial Officer, Treasurer and Assistant Secretary FSQC FUNDING CO., LLC By /s/ Bruce J. Mackey, Jr. Name: Bruce J. Mackey, Jr. Title: Chief Financial Officer, Treasurer and Assistant Secretary HFG HEALTHCO-4, LLC, as Collateral Agent and as Assignee By: HFG Healthco-4, Inc. By /s/ Orlando Figueroa Name: Orlando Figueroa Title: Vice President
SCHEDULE I to Pledge Agreement Percentage Number of of Name of Type of Certificate Par Value, if Shares/Units Outstanding Grantor Issuer Interests No(s). applicable if applicable Interests - -------------------------------------------------------------------------------------------------------------------------- Five Star Five Star Company N/A N/A N/A 100% Quality Care Quality Care- Interests Trust AZ, LLC Five Star Five Star Company N/A N/A N/A 100% Quality Care Quality Care- Interests Trust CA, LLC Five Star Five Star Company N/A N/A N/A 100% Quality Care Quality Care- Interests Trust Colorado, LLC Five Star Five Star Company N/A N/A N/A 100% Quality Care Quality Care- Interests Trust CT, LLC Five Star Five Star Company N/A N/A N/A 100% Quality Care Quality Care- Interests Trust GA, LLC Five Star Five Star Company N/A N/A N/A 100% Quality Care Quality Care- Interests Trust IA, LLC Five Star Five Star Company N/A N/A N/A 100% Quality Care Quality Care- Interests Trust KS, LLC Five Star Five Star Company N/A N/A N/A 100% Quality Care Quality Care- Interests Trust MI, LLC Five Star Five Star Company N/A N/A N/A 100% Quality Care Quality Care- Interests Trust MO, LLC Five Star Five Star Company N/A N/A N/A 100% Quality Care Quality Care- Interests Trust NE, LLC Five Star Five Star Company N/A N/A N/A 100% Quality Care Quality Care- Interests Trust WI, LLC
Percentage Number of of Name of Type of Certificate Par Value, if Shares/Units Outstanding Grantor Issuer Interests No(s). applicable if applicable Interests - -------------------------------------------------------------------------------------------------------------------------- Five Star Five Star Company N/A N/A N/A 100% Quality Care Quality Care- Interests Trust WY, LLC Five Star Five Star Shares of 2 $0.01 per 1,000 100% Quality Care Quality Care- Common share Holding Co., CA, Inc. Stock Inc. Five Star Five Star Shares of 2 $0.01 per 1,000 100% Quality Care Quality Care- Common share Holding Co., IA, Inc. Stock Inc. Five Star Five Star Shares of 2 $0.01 per 1,000 100% Quality Care Quality Care- Common share Holding Co., MI, Inc. Stock Inc. Five Star Five Star Shares of 2 $0.01 per 1,000 100% Quality Care Quality Care- Common share Holding Co., NE, Inc. Stock Inc.
EXHIBIT A PLEDGE AMENDMENT THIS AMENDMENT, dated as of ____________, 200_, is delivered by [NAME OF PLEDGOR] (the "Pledgor") pursuant to Section 8 of the Pledge Agreement referred to hereinbelow. The Pledgor hereby agrees that this Amendment may be attached to the Pledge Agreement, dated as of October __, 2002, made by the Pledgor and certain other pledgors named therein in favor of HFG HEALTHCO-4 LLC, a Delaware limited liability company, as Collateral Agent for the benefit of the Lenders and as assignee of the Purchaser (together with its successors and assigns, the "Assignee") under a certain Assignment of Contracts, dated as of the date hereof. (as amended, modified or supplemented from time to time, the "Pledge Agreement," capitalized terms defined therein being used herein as therein defined), and that the Equity Interests listed on Annex A to this Amendment shall be deemed to be part of the Equity Interests within the meaning of the Pledge Agreement and shall become part of the Collateral and shall secure all of the Obligations as provided in the Pledge Agreement. This Amendment and its attachments are hereby incorporated into the Pledge Agreement and made a part thereof. [NAME OF PLEDGOR] By:______________________________ Title:_____________________________ Annex A to Amendment to Pledge Agreement
Equity Interests No. of Percentage of Certificate No. Shares/Units Outstanding Name of Issuer Type of Interests (if applicable) (if applicable) Interests in Issuer -------------- ----------------- --------------- --------------- -------------------
EX-10.6 7 ex10-6.txt EXHIBIT 10.6 ASSIGNMENT OF CONTRACTS AS COLLATERAL SECURITY FOR VALUE RECEIVED, FSQC FUNDING CO., LLC (the "Assignor"), hereby grants a security interest in and assigns and transfers to HFG HEALTHCO-4 LLC, as the Collateral Agent, for the benefit of the Lenders (the "Assignee"), all right, title and interest of the Assignor in and to, all benefits of the Assignor under, and all monies due or to become due to the Assignor under or in connection with, each of the agreements more particularly described as follows: (i) that certain Receivables Purchase and Transfer Agreement, dated as of October 24, 2002, among Five Star Quality Care, Inc. ("Five Star"), as Primary Servicer, certain parties named therein, as Providers, and the Assignor, as Purchaser (as such agreement may be amended, restated, modified or supplemented from time to time in accordance with the terms thereof and hereof, the "Transfer Agreement"); (ii) that certain Guaranty, dated as of October 24, 2002, made by Five Star, FSQ, Inc., Five Star Quality Care Trust and Five Star Quality Care Holding Co., Inc. (collectively, "Guarantors") in favor of the Assignor (as such agreement may be amended, restated, modified or supplemented from time to time in accordance with the terms thereof and hereof, the "Guaranty"); and (iii) that certain Pledge Agreement, dated as of October 24, 2002, among the Guarantors, as Pledgors, and the Assignor, as Pledgee (as such agreement may be amended, restated, modified or supplemented from time to time in accordance with the provisions thereof and hereof, the "Pledge Agreement" and, collectively with the Transfer Agreement and the Guaranty, the "Documents"), as collateral security for any and all Lender Debt as arising under, and defined in, that certain Loan and Security Agreement, dated as of October 24, 2002, among the Assignor, the Lenders party thereto, Dresdner Kleinwort Wasserstein LLC, as a Program Manager, Syndication Agent and Lead Arranger, Healthcare Finance Group, Inc., as a Program Manager, and the Assignee, as Collateral Agent (as such may be amended, modified or supplemented from time to time, the "Loan Agreement", the terms defined therein and not otherwise defined herein being used herein as therein defined), whether at stated maturity, by acceleration or otherwise (including, without limitation, all interest thereon, whether accruing prior or subsequent to the commencement of a bankruptcy or similar proceeding involving the Assignor as a debtor), and all present and future obligations of the Assignor under this Assignment, whether at stated maturity, by acceleration or otherwise (all of the foregoing being herein referred to as the "Obligations"). The Assignor agrees, covenants, represents and warrants that: 1. The Assignor's right, title and interest in each of the Documents is owned by the Assignor free and clear of all claims, mortgages, pledges, liens, encumbrances and security interests of every nature whatsoever, except in favor of the Assignee. Without the Assignee's prior written consent, the Assignor will not sell, transfer, assign, pledge or grant a security interest in any Document to any other person. Any such sale, transfer, assignment, mortgage, pledge or encumbrance without the Assignee's written consent shall be void and of no force and effect. 2. Without the Assignee's prior written consent, the Assignor will not amend (directly or indirectly), modify, supplement, waive compliance with, seek or grant a waiver under or assent to non-compliance with any of the Documents. 3. The Assignor specifically acknowledges and agrees that the Assignee does not assume, and shall have no responsibility for, the payment of any sums due or to become due under any of the Documents by the Assignor or the performance of any obligations to be performed under or with respect to any of the Documents by the Assignor, and the Assignor hereby agrees to indemnify and hold the Assignee harmless with respect to any and all claims by any person relating thereto. The Assignee, in its discretion, may file or record this Assignment. 4. If an Event of Default shall occur and be continuing, in addition to all other rights and remedies of the Assignee pursuant to any agreements of the Assignor in favor of or assigned to and held by the Assignee or pursuant to applicable law or otherwise, the Assignee or its successor shall have all rights and benefits under the Documents, including, without limitation, any and all rights to indemnification, without modifying or discharging any of the Obligations, except to the extent payment in respect thereof is received. Upon the occurrence and continuance of an Event of Default, the Assignor agrees to execute any and all documents requested by the Assignee in its sole discretion to enable the Assignee to exercise all of the rights of the Assignor under each of the Documents. The specified remedies to which the Assignee may resort under the terms of this Assignment are cumulative and are not intended to be exclusive of any other remedies or means of redress to which the Assignee may be lawfully entitled in case of any breach or threatened breach by the Assignor of any provision hereof or of any of the Obligations. Nothing contained in this Assignment, and no act or action taken or done by the Assignee pursuant to the powers and rights granted to it hereunder, or under any instrument collateral hereto shall be deemed to be a waiver by the Assignee of any of its rights and remedies against the Assignor in connection with, or in respect of, any of the Obligations. The right of the Assignee to collect and enforce collection of the Obligations and to enforce any security and collateral held by it may be exercised by the Assignee prior to, simultaneously with, or subsequent to any action taken by the Assignee hereunder. 5. Upon the payment and satisfaction in full of all of the Obligations and the termination of any commitment by the Assignee to make loans or other financial 2 accommodations to or for the benefit of the Assignor under the Loan Agreement, this Assignment shall be terminated by the Assignee and shall be of no further force or effect, but the affidavit, certificate, letter or statement of any officer, agent or attorney of the Assignee showing that any part of the Obligations remains unpaid or unsatisfied shall be and constitute prima facie evidence of the validity, effectiveness and continuing force of this Assignment and any person may, and is hereby authorized to, rely thereon. 6. The Assignee may take, or release, in whole or in part, other security which it may hold for the payment of the Obligations, may release any party primarily or secondarily liable therefor, and may apply any other security held by it to the satisfaction, or partial satisfaction, of such Obligations, without prejudice to any of its rights under this Assignment. 7. This Assignment shall inure to the benefit of the Assignee and its successors, assigns and designees, and shall be binding upon any subsequent owner of the Assignor's interest in and to the Documents. 8. The Assignor covenants to execute and deliver to the Assignee, upon demand, such additional assurances, writings or other instruments as may be reasonably required by the Assignee to effectuate the purpose hereof. This Assignment may not be changed orally and is to be governed by the internal laws of the State of New York applicable to contracts executed and to be performed in such State. 9. The Assignor hereby irrevocably designates and appoints the Assignee as attorney-in-fact of the Assignor with power of substitution, and with authority from and after and during the continuance of an Event of Default: to execute and deliver for and on behalf of the Assignor any and all instruments, documents, agreements and other writings necessary or advisable for the exercise on behalf of the Assignor pursuant hereto of any rights, benefits or options created or existing under or pursuant to the Documents and in this regard; to endorse the name of the Assignor on its behalf on any and all notes, acceptances, checks, drafts, money orders, instruments or other evidences of collateral, that may come into the Assignee's possession; to execute proofs of claim and loss; to execute endorsements, assignments or other instruments of conveyance and transfer; to execute releases; and, to do all other acts and things necessary and advisable in the discretion of the Assignee to carry out and enforce this Assignment or the Obligations. All acts done by the Assignee under the foregoing authorization are hereby ratified and approved, and neither the Assignee or its successors nor any designee or agent thereof shall be liable for any acts of commission or omission (other than acts committed or omitted through bad faith, gross negligence or willful misconduct), for any error of judgment or for mistake of facts or law. This power of attorney being coupled with an interest is irrevocable while any of the Obligations shall remain unpaid and unperformed. 10. If an Event of Default shall occur and be continuing, the Assignee may, in its discretion, in its name or the Assignor's, notify any obligor under the Documents to make payment to the Assignee of all amounts due or to become due under the Documents. 3 11. If an Event of Default shall occur and be continuing, the Assignee may, in its discretion, demand, sue for, collect or receive any money or property at any time payable or receivable on account of or in exchange for the Documents, or, with respect to payments which have become due and payable under the Documents, make any compromise or settlement deemed desirable by the Assignee. 12. The Assignor agrees that any copy of this Assignment signed by the Assignor and transmitted by telefax for delivery to the Assignee shall be admissible in evidence as the original itself in any judicial or administrative proceeding, whether or not the original is in existence. 13. This Assignment may be executed in counterparts, each of which when so executed shall be deemed to be an original and all of which when taken together shall constitute one and the same agreement. [Remainder of this page intentionally left blank] 4 IN WITNESS WHEREOF, the undersigned has caused this Assignment to be executed this 24th day of October, 2002. FSQC FUNDING CO., LLC By: /s/ Bruce J. Mackey Jr. Bruce J. Mackey, Jr. Chief Financial Officer HFG HEALTHCO-4 LLC, as Collateral Agent By: HFG Healthco-4, Inc., a member By: /s/ Orlando Figueroa Name: Orlando Figueroa Title: Vice President Acknowledged: PRIMARY SERVICER: FIVE STAR QUALITY CARE, INC. By: /s/ Bruce J. Mackey Jr. Bruce J. Mackey Jr. Chief Financial Officer, Treasurer and Assistant Secretary [Signature page continued] PROVIDERS: FIVE STAR QUALITY CARE-AZ, LLC FIVE STAR QUALITY CARE-CA, LLC FIVE STAR QUALITY CARE-COLORADO, LLC FIVE STAR QUALITY CARE-CT, LLC FIVE STAR QUALITY CARE-GA, LLC FIVE STAR QUALITY CARE-IA, LLC FIVE STAR QUALITY CARE-KS, LLC FIVE STAR QUALITY CARE-MI, LLC FIVE STAR QUALITY CARE-MO, LLC FIVE STAR QUALITY CARE-NE, LLC FIVE STAR QUALITY CARE-WI, LLC FIVE STAR QUALITY CARE-WY, LLC FIVE STAR QUALITY CARE - CA, INC. FIVE STAR QUALITY CARE - IA, INC. FIVE STAR QUALITY CARE - MI, INC. FIVE STAR QUALITY CARE - NE, INC. By: /s/ Bruce J. Mackey Jr. Bruce J. Mackey, Jr. Chief Financial Officer, Treasurer and Assistant Secretary EX-99.1 8 ex99-1.txt Exhibit 99.1 Certification Required by 18 U.S.C. Sec. 1350 (Section 906 of the Sarbanes - Oxley Act of 2002) ------------------------------------------------- In connection with the filing by Five Star Quality Care, Inc. (the "Company") of the Quarterly Report on Form 10-Q for the period ending September 30, 2002 (the "Report"), each of the undersigned hereby certifies, to the best of his knowledge: 1. The Report fully complies with the requirements of Section 13(a) and 15(d) of the Securities Exchange Act of 1934. And 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Evrett W. Benton Evrett W. Benton President and Chief Executive Officer /s/ Bruce J. Mackey Jr. Bruce J. Mackey Jr. Treasurer and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----