10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2004

OR

o        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.

Maryland	04-3516029
(State or Other Jurisdiction of Incorporation or Organization)	(IRS Employer Identification No.)

400 Centre Street, Newton, Massachusetts 02458

617-796-8387

Indicate by check mark whether the registrant:  (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ý  No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes o  No ý

Number of Common Shares outstanding at August 11, 2004: 8,534,634 shares of common stock, $0.01 par value.

FIVE STAR QUALITY CARE, INC.

FORM 10-Q

JUNE 30, 2004

INDEX

PART I	Financial Information
Item 1.	Consolidated Financial Statements (unaudited)
	Consolidated Balance Sheet – June 30, 2004 and December 31, 2003
	Consolidated Statement of Operations – Three and Six Months Ended June 30, 2004 and 2003
	Consolidated Statement of Cash Flows – Six Months Ended June 30, 2004 and 2003
	Notes to Consolidated Financial Statements
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.	Quantitative and Qualitative Disclosures About Market Risk
Item 4.	Controls and Procedures
PART II	Other Information
Item 1.	Legal Proceedings
Item 2.	Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
Item 4.	Submission of Matters to a Vote of Security Holders
Item 6.	Exhibits and Report on Form 8-K
	Signatures

As used herein the terms “we”, “us”, “our” and “Five Star” include Five Star Quality Care, Inc. and its consolidated subsidiaries unless otherwise expressly stated or the context otherwise requires.

Part I.Financial Information

Item 1.  Financial Statements

FIVE STAR QUALITY CARE, INC.

CONSOLIDATED BALANCE SHEET

(in thousands, except share amounts)

	June 30, 2004			December 31, 2003
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	28,879		$	17,611
Accounts receivable, net of allowance of $4,828 and $4,305 at June 30, 2004 and December 31, 2003, respectively	32,590			30,581
Due from Senior Housing Properties Trust	—			544
Prepaid expenses	3,476			4,305
Other current assets	3,449			3,022
Total current assets	68,394			56,063
Property and equipment, net	40,526			55,484
Restricted cash, insurance arrangements	8,430			8,430
Restricted cash, other	21,334			18,964
Mortgage notes receivable	6,035			6,143
Other long term assets	1,218			2,286
	$	145,937		$	147,370
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	10,885		$	9,866
Accrued expenses	15,640			14,118
Accrued compensation and benefits	8,926			8,936
Due to Senior Housing Properties Trust	6,846			6,605
Due to Sunrise Senior Living Services, Inc.	—			6,134
Mortgage note payable	48			54
Secured revolving credit facility	—			4,000
Accrued real estate taxes	4,825			5,142
Continuing care contracts	2,271			2,221
Other current liabilities	1,700			1,069
Total current liabilities	51,141			58,145
Long term liabilities:
Mortgage note payable	4,959			6,381
Continuing care contracts	10,392			10,164
Other long term liabilities	13,512			8,253
Total long term liabilities	28,863			24,798
Commitments and contingencies
Shareholders’ equity:
Preferred stock, par value $0.01: 1,000,000 shares authorized, none issued	—			—
Common stock, par value $0.01: 10,000,000 shares authorized, 8,534,634 and 8,513,634 shares issued and outstanding at June 30, 2004 and December 31, 2003, respectively	85			85
Additional paid-in capital	86,301			86,244
Accumulated deficit	(20,453		)	(21,902		)
Total shareholders’ equity	65,933			64,427
	$	145,937		$	147,370

See accompanying notes.

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FIVE STAR QUALITY CARE, INC.

CONSOLIDATED STATEMENT OF OPERATIONS

(dollars in thousands, except per share amounts)

(unaudited)

	Three months ended June 30,						Six months ended June 30,
	2004			2003			2004			2003
Revenues:
Net revenues from residents and patients	$	150,497		$	140,448		$	298,362		$	282,004
Pharmacy revenue	2,851			—			5,019			—
Interest and other income	206			112			1,664			228
Total revenues	153,554			140,560			305,045			282,232
Expenses:
Wages and benefits	79,872			77,951			161,302			154,278
Other operating expenses	41,823			35,549			79,928			74,552
Management fee to Sunrise Senior Living Services, Inc.	4,557			4,232			9,191			8,519
Rent to Senior Housing Properties Trust	20,455			18,979			40,582			37,971
General and administrative	4,817			4,049			9,935			8,393
Depreciation and amortization	865			920			1,839			1,739
Interest expense	98			307			245			593
Total expenses	152,487			141,987			303,022			286,045
Income (loss) from continuing operations before income taxes	1,067			(1,427		)	2,023			(3,813		)
Provision for income taxes	—			—			—			—
Income (loss) from continuing operations	1,067			(1,427		)	2,023			(3,813		)
Loss from discontinued operations	(124		)	(650		)	(574		)	(699		)
Net income (loss)	$	943		$	(2,077	)	$	1,449		$	(4,512	)
Weighted average shares outstanding	8,526			8,456			8,520			8,454
Basic and diluted income (loss) per share from:
Continuing operations	$	0.13		$	(0.17	)	$	0.24		$	(0.45	)
Discontinued operations	(0.02		)	(0.08		)	(0.07		)	(0.08		)
Net income (loss) per share	$	0.11		$	(0.25	)	$	0.17		$	(0.53	)

See accompanying notes.

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FIVE STAR QUALITY CARE, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

(dollars in thousands)

(unaudited)

	Six months ended June 30,
	2004			2003
Cash flows from operating activities:
Net income (loss)	$	1,449		$	(4,512	)
Adjustments to reconcile net income (loss) to cash provided by operating activities:
Depreciation and amortization	1,839			1,739
Loss from discontinued operations	574			699
Provision for bad debt expense	1,791			(383		)
Changes in assets and liabilities:
Accounts receivable	(3,800		)	3,284
Prepaid expenses and other current assets	1,474			416
Accounts payable and accrued expenses	2,542			7,830
Accrued compensation and benefits	(10		)	(323		)
Due to / from Sunrise Senior Living Services, Inc.	(6,134		)	—
Due from Senior Housing Properties Trust	785			5,844
Other current and long term liabilities	5,851			(2,463		)
Cash provided by operating activities	6,361			12,131
Net cash used in discontinued operations	(574		)	(699		)
Cash flows from investing activities:
Deposits into restricted cash accounts	(6,331		)	(12,056		)
Withdrawals from restricted cash for purchases of furniture, fixture and equipment	3,961			—
Proceeds from real estate sales	26,830			—
Change in assets held for sale	766			—
Furniture, fixtures and equipment purchases	(14,316		)	(6,683		)
Cash provided by (used in) investing activities	10,910			(18,739		)
Cash flows from financing activities:
Repayments of borrowings on revolving credit facility	(19,500		)	(12,000		)
Proceeds from borrowings on revolving credit facility	15,500			13,500
Proceeds from mortgage note payable	5,007
Repayments of mortgage note payable	(6,436		)	—
Cash (used in) provided by financing activities	(5,429		)	1,500
Change in cash and cash equivalents	11,268			(5,807		)
Cash and cash equivalents at beginning of period	17,611			10,270
Cash and cash equivalents at end of period	$	28,879		$	4,463
Supplemental cash flow information:
Cash paid for interest	$	222		$	838
Non-cash investing and financing activities:
Issuance of common stock	7			6
Capital contribution	—			5,593

See accompanying notes.

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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 all of our 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, 2003.  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.  Reclassifications have been made to the prior year’s financial statements to conform to the current year’s presentation.

At June 30, 2004, our business included 101 communities containing 13,967 living units, including 47 primarily independent and assisted living communities containing 8,994 living units, and 54 nursing homes containing 4,973 living units.  Our business also includes an institutional pharmacy that services 17 communities (five operated by us) with 1,620 residents.

During the first quarter of 2004, we closed one assisted living community that was managed by Sunrise Senior Living Services, Inc., or SLS, a wholly owned subsidiary of Sunrise Senior Living, Inc., or Sunrise (see Note 6.)

Note 2.  Income Taxes

We have a short operating history and have only recently generated taxable income.  Consequently, we have fully reserved the value of our net deferred tax assets arising from tax loss carryforwards due to the uncertainty of their future realization.

Note 3.  Per Common Share Amounts

Net income (loss) per share for the periods ended June 30, 2004 and 2003 is computed using the weighted average number of shares outstanding during the periods.  We have no common share equivalents, instruments convertible into common shares or other dilutive instruments.

Note 4.  Accounts Related to Management Agreements with SLS

Under the terms of the management agreements for our 30 communities managed for us by SLS we provide SLS with working capital.  The working capital, which consists primarily of cash and cash equivalents, inventories, trade accounts receivable and accounts payable, is controlled and maintained by SLS on our behalf.  Accordingly, we include the individual components of working capital for the SLS managed communities in our consolidated balance sheet.

Restricted cash, other as of June 30, 2004, includes $5,268 escrowed for future capital expenditures, as required by the management agreements with SLS and $8,607 escrowed cash related to resident security deposits for certain SLS managed communities.

At some of our communities that are managed by SLS, residents can enter into continuing care contracts.  These contracts require residents to make advance payments, some of which are refundable and are carried as liabilities until they are refunded and some of which are not refundable and are carried as liabilities until they are amortized into revenues during the periods we expect to provide the service.

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Note 5.  Indebtedness

We have a $12,500 revolving credit facility that is secured by some of our accounts receivable. The amount which we may borrow is subject to limitations based upon qualifying collateral. The interest rate on borrowings, which was 4.85% as of June 30, 2004, is LIBOR plus a premium.  The facility is available for acquisitions, working capital and general business purposes until October 24, 2005, its maturity date.  In certain circumstances, and subject to available collateral and lender approvals, the maximum amounts that we may draw under this credit agreement may be increased to $25,000.  As of June 30, 2004 and August 11, 2004, no amounts were outstanding under the facility.  Interest expense related to this facility was $18 and $54 for the three months ended June 30, 2004 and 2003, respectively.  Interest expense related to this facility was $132 and $75 for the six months ended June 30, 2004 and 2003, respectively.

A property acquired by one of our subsidiaries in October 2002 was encumbered by two mortgage notes secured by first and second deeds of trust.  In December 2003, we prepaid the first mortgage note and on March 1, 2004, we prepaid the second mortgage note for $6,436.

On April 19, 2004, we purchased from Senior Housing Properties Trust, or Senior Housing, a property that was previously leased to us by Senior Housing.  We funded this purchase with proceeds we received from a new Department of Housing and Urban Development, or HUD, insured mortgage in the amount of $5,015 and cash on hand.  The interest rate on this mortgage is 5.6% and the mortgage matures in April 2039.  The mortgage requires monthly principal and interest payments of  $27.  Interest expense related to this mortgage was $46 for the three and six months ended June 30, 2004.

Note 6.  Discontinued Operations

During 2003, we ceased operating one nursing home that we leased from Senior Housing.  In August 2003, we sold an assisted living community and we received $3,500, consisting of $350 of cash and a $3,150 six-year mortgage note at 8% interest.  We deferred the $1,100 gain on the sale and we expect to recognize the gain as income over the life of the note in proportion to note principal payments that we receive.  In December 2003, we sold five assisted living communities and we received $3,550, consisting of $440 of cash and a $3,110 fifteen year mortgage note at 9% interest.  We deferred the $1,200 gain on the sale and we expect to recognize the gain as income when the buyer demonstrates it has the ability to pay the mortgage note.  These deferred gains are included in other long term liabilities on our consolidated balance sheet.

During the first quarter of 2004, we ceased operations at one assisted living community managed for us by SLS that we lease from Senior Housing.  We and Senior Housing are exploring other uses for that property as well as its potential sale.

As of June 30, 2004, we have disposed of substantially all of our assets and settled all liabilities related to these closed communities.  We have reclassified the statement of operations for all periods presented to show the results of operations of these communities as discontinued.  Below is a summary of the operating results of these discontinued operations included in the financial statements for the three and six months ended June 30, 2004 and 2003:

	Three months ended June 30,						Six months ended June 30,
	2004			2003			2004			2003
Revenues	$	—		$	2,080		$	282		$	4,379
Expenses	124			2,730			856			5,078
Net loss	$	(124	)	$	(650	)	$	(574	)	$	(699	)

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Note 7.  Commitments and Contingencies

Connecticut Strike Costs.  During 2001, we incurred costs to hire temporary staff and to provide security services for residents and temporary employees during a Connecticut labor strike.  At the time of this strike, the Governor of Connecticut and the Connecticut Department of Social Services agreed to adjust Medicaid rates to compensate for a portion of these increased costs.  During the second quarter of 2004 we received $666, which represents substantially all amounts due from the Connecticut Department of Social Services related to this matter.

Receivables from Integrated Health Services, Inc. and the United States Department of Health and Human Services.    During 2000, we assumed the operations of 40 nursing homes from Integrated Health Services, Inc. and certain related entities, collectively, IHS, a company then in bankruptcy, pursuant to a court approved settlement agreement.  Because of complex legal and governmental processes necessary to transfer nursing home licenses and Medicare and Medicaid payments, arrangements were agreed upon for IHS to continue to receive payments from Medicare and Medicaid third party payors for services provided at the nursing homes following our assumption of operations, including an agreement among us, IHS and the Secretary of the United States Department of Health and Human Services, or HHS.  These arrangements were approved by the bankruptcy court and generally honored by IHS with respect to approximately $42,000 received by IHS for our account.  We initially believed IHS had received an additional $2,000 that was due to us.  When IHS refused to pay this amount we commenced suit against IHS in the bankruptcy court in August 2002.  Following the filing of the suit, settlement discussions were started.  In December 2002, IHS paid approximately $700 of the receivable balance.  IHS has asserted that it is only obligated to deliver funds it received from third-party payors, including HHS, and that HHS has withheld payments that are due to us.  In March 2003, we commenced suit against IHS, HHS and the State of Colorado Department of Healthcare Policy and Financing concerning the remaining receivable balance.  Shortly after we commenced this litigation, settlement was reached with the State of Colorado providing us a payment of approximately $400.  In December 2003, the court granted a motion to dismiss HHS, but took no action on IHS’s motion to dismiss.  In January 2004, we appealed the courts decision to dismiss HHS.  On February 24, 2004, the court denied in all material respects IHS’s motion to dismiss.  We intend to pursue these claims, but we cannot predict the outcome of this litigation.

SLS Management Agreements.  During 2002, about the time Marriott International Inc., or Marriott, decided to sell Marriott Senior Living Services, Inc., or MSLS, to Sunrise, we and Senior Housing became involved in litigation with Marriott and MSLS.  On January 7, 2004, we and Senior Housing settled the pending litigation with Marriott and MSLS.  Under the terms of the settlement we and Senior Housing, and Marriott and MSLS, agreed to dismiss all claims and counterclaims asserted in the litigation.  Also under the terms of the settlement, Marriott paid to us and Senior Housing $1,250 each.  The settlement was a compromise of the parties’ disputes entered into to avoid the expense and inconvenience of litigation and neither us or Senior Housing, nor Marriott or MSLS, has admitted any liability, violation of law or wrongdoing in connection with the matters in the litigation.  We believe the settlement resolves all of our litigation with Marriott. This settlement does not affect our or Senior Housing’s rights vis-à-vis SLS or Sunrise which arise by reason of events after Sunrise purchased MSLS.  This settlement is included in other income for the six months ended June 30, 2004.

Note 8.  Related Party Transactions

On April 19, 2004, we purchased one property from Senior Housing for its appraised value of $5,900 that was previously leased by Senior Housing to us.  The sale of a second property is expected to occur later in 2004 for $4,600, its appraised value, but remains contingent upon our obtaining HUD insured financing for its purchase.

In 2003, Senior Housing evicted a nursing home tenant that had defaulted on its obligations to Senior Housing.  Until May 2004, we managed this nursing home for Senior Housing’s account.  Effective on May 1, 2004, we agreed with Senior Housing to add this nursing home to one of our multi-property leases with Senior Housing and to increase the annual rent by $180.  All other lease terms remained unchanged.

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One of the properties we lease from Senior Housing was subject to a ground lease with an unaffiliated third party.  We have been responsible for paying the ground rent of $307 per year.  On June 3, 2004, Senior Housing exercised an option to purchase this land for $3,600 and acquired the landlord’s rights and obligations under the ground lease.  We now pay the ground lease rent to Senior Housing.

During 2004, pursuant to the terms of our leases with Senior Housing, we sold, at cost, $4,318 of improvements made to properties leased to Senior Housing, and the annual rent payable to Senior Housing was increased by 10% of the amounts Senior Housing paid, or $432.

Note 9. Subsequent Events

On August 9, 2004, we entered into an agreement to acquire an institutional pharmacy located in Nebraska that services 24 communities with approximately 1,450 beds for approximately $3,000.

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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

RESULTS OF OPERATIONS

Key Statistical Data (for the three and six months ended June 30, 2004 and 2003):

The following tables present an overview of our portfolio for the quarters ended June 30, 2004 and 2003:

	Three Months ended 6/30							Six months ended 6/30
	2004			2003			Change	2004			2003			Change
Revenues from residents (in 000s)	$	150,497		$	140,448		7%	$	298,362		$	282,004		6%
Community expenses (in 000s)	$	121,695		$	113,500		7%	$	241,230		$	228,830		5%
Total expenses (in 000s)	$	152,487		$	141,987		7%	$	303,022		$	286,045		6%
No. of facilities (end of period)	101			100			+1	101			100			+1
No. of living units (end of period)	13,967			13,862			+105	13,967			13,862			+105
Occupancy	89		%	89		%	—	89		%	89		%	—
Average daily rate	$	132		$	124		6%	$	132		$	126		5%
Revenue per day per available unit	$	117		$	110		6%	$	117		$	112		5%
Percent of revenues from Medicare / Medicaid	43		%	42		%	+1%	43		%	43		%	—
Percent of revenues from Private / Other	57		%	58		%	-1%	57		%	57		%	—

“Same Store” Communities (communities that we operated continuously since April 1, 2003 and January 1, 2003, respectively):

	Three Months ended 6/30							Six months ended 6/30
	2004			2003			Change	2004			2003			Change
Revenues from residents (in 000s)	$	148,730		$	140,125		6%	$	295,576		$	281,682		5%
Community expenses (in 000s)	$	118,184		$	113,248		4%	$	234,992		$	228,578		3%
No. of facilities (end of period)	97			97			—	97			97			—
No. of living units (end of period)	13,719			13,719			—	13,719			13,719			—
Occupancy	89		%	89		%	—	89		%	90		%	-1%
Average daily rate	$	132		$	125		6%	$	133		$	127		5%
Revenue per day per available unit	$	118		$	111		6%	$	118		$	113		4%
Percent of revenues from Medicare / Medicaid	43		%	42		%	+1%	43		%	43		%	—
Percent of revenues from Private / Other	57		%	58		%	-1%	57		%	57		%	—

Three Months Ended June 30, 2004, Compared to Three Months Ended June 30, 2003

Total revenues from residents for the three months ended June 30, 2004 were $150.5 million, an increase of 7% over revenues from residents of $140.5 million for the three months ended June 30, 2003. This increase is due primarily to higher per diem charges to residents and revenues from three additional communities that we began to operate on May 30, 2003.  Revenues from residents at the communities that we have operated continuously since April 1, 2003, were $148.7 million and $140.1 million, for the three months ended June 30, 2004 and 2003, respectively, an increase of 6%.  This increase is due primarily to higher per diem charges to residents.  Approximately 43% and 42% of our revenues from residents in the three months ended June 30, 2004 and 2003, respectively, were received from Medicare and Medicaid.  Revenues from our pharmacy, which was acquired in September 2003, were $2.9 million for the three months ended June 30, 2004.

Interest and other income increased by $94,000 in the three months ended June 30, 2004 to $206,000, compared to $112,000 in the three months ended June 30, 2003, primarily due to interest earned on mortgage notes receivable. The notes were received in the second half of 2003 as a result of asset sales.

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Expenses for the three months ended June 30, 2004 were $152.5 million, an increase of  7% over expenses of $142.0 million for the three months ended June 30, 2003. Our wages and benefits costs increased from $78.0 million to $79.9 million, or 2%, primarily due to wage increases as well as wages related to three communities we began to operate on May 30, 2003 and the pharmacy we acquired in September 2003.  Other operating expenses, which include utilities, housekeeping, dietary, maintenance, insurance and community level administrative costs, increased from $35.5 million to $41.8 million, or 18%, primarily as a result of our operation of three additional properties on May 30, 2003 and our pharmacy acquisition in September 2003 as well as increased charges from third parties.  Management fees related to the 30 communities managed for us by SLS for the three months ended June 30, 2004 and 2003, were $4.6 million and $4.2 million, respectively.  The increase in fees at these 30 communities is the result of increased revenues at these communities.  Rent expense to Senior Housing increased from $19.0 million to $20.5 million, or 8%, primarily due to the addition of three communities we began to lease in May 2003, and additional rent for capital improvements that were funded by Senior Housing in 2003 and 2004.  Community level operating expenses related to the communities we operated throughout the three months ended June 30, 2004 and June 30, 2003 were $118.2million and $113.2 million, respectively, an increase of 4%.  This increase is primarily due to wage increases as well as increased charges from third parties.

Our general and administrative expenses for the three months ended June 30, 2004 were $4.8 million, an increase of  19% over expenses of $4.0 million for the three months ended June 30, 2003, primarily due to costs resulting from our increased operations and wage increases for our corporate personnel.

Depreciation expense for the three months ended June 30, 2004 was $865,000, a decrease of 6% over depreciation expense of $920,000 for the three months ended June 30, 2003.  This change is the net effect of decreases attributable to our sale of three communities in the second half of 2003, offset by increases attributable to our purchase of furniture and fixtures related to the 30 communities that SLS manages.

Loss from discontinued operations for the three months ended June 30, 2004 was $124,000, a decrease of $526,000 over the loss for the three months ended June 30, 2003.  This decrease is primarily the result of our ceasing operations at seven properties in the 2003 period compared with one property in the 2004 period.

As a result of the factors described above, our net income for the three months ended June 30, 2004 was $943,000 compared to a loss of $2.1 million for the three months ended June 30, 2003.  Our net income per share for the three months ended June 30, 2004 was $0.11 compared to a loss per share of $0.25 for the three months ended June 30, 2003.

Six Months Ended June 30, 2004, Compared to Six Months Ended June 30, 2003

Total revenues from residents for the six months ended June 30, 2004 were $298.4 million, an increase of 6% over revenues from residents of $282.0 million for the six months ended June 30, 2003. This increase is due primarily to higher per diem charges to residents and our beginning operations at three additional communities on May 30, 2003. Revenues from residents at the communities that we have operated continuously since January 1, 2003 were $295.6 million and $281.7 million for the six months ended June 30, 2004 and June 30, 2003, respectively, an increase of 5%.  This increase is due primarily to higher per diem charges to residents somewhat offset by a decrease in occupancy.  Approximately 43% of our revenues from residents in the six months ended June 30, 2004 and 2003 were received from Medicare and Medicaid.  Revenues from our pharmacy, which was acquired in September 2003, were $5.0 million for the six months ended June 30, 2004.

Interest and other income increased by $1.5 million in the six months ended June 30, 2004 to $1.7 million compared to $228,000 in the six months ended June 30, 2003 due to our settlement with Marriott and MSLS.  On January 7, 2004, we and Senior Housing settled then pending litigation with Marriott and MSLS.  Under the terms of the settlement we and Senior Housing, and Marriott and MSLS, agreed to dismiss all claims and counterclaims asserted in the litigation.  Also under the terms of the settlement, Marriott paid to us and Senior Housing $1.3 million each.

Expenses for the six months ended June 30, 2004 were $303.0 million, an increase of 6% over expenses of $286.0 million for the six months ended June 30, 2003. Our wages and benefits costs increased from $154.3 million to $161.3 million, or 5%, primarily due to wage increases as well as wages related to three communities we began to operate on

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May 30, 2003 and the pharmacy we acquired in September 2003.  Other operating expenses, which include utilities, housekeeping, dietary, maintenance, insurance and community level administrative costs, increased from $74.6 million  to $79.9 million, or 7%, primarily as a result of increased charges from third parties, our operation of three additional properties on May 30, 2003 and our pharmacy acquisition in September 2003.  Management fees related to the 30 communities managed for us by SLS for the six months ended June 30, 2004 and 2003, were $9.2 million and $8.5 million, respectively.  The increase in fees at these 30 communities is the result of increased revenues at these communities.  Rent expense to Senior Housing increased from $38.0 million to $40.6 million, or 7%, primarily due to the addition of three communities that we began to lease in May 2003, and additional rent for capital improvements that were funded by Senior Housing in 2003.  Community level operating expenses related to the communities that we have operated throughout the six months ended June 30, 2004 and 2003 were $235.0 million and $228.6 million, respectively, an increase of 3%.  This increase is primarily due to wage increases as well as increased charges from third parties.

Our general and administrative expenses for the six months ended June 30, 2004 were $9.9 million, an increase of 16% over expenses for the six months ended June 30, 2003 of $8.5 million, primarily due to costs resulting from our increased operations.

Depreciation expense for the six months ended June 30, 2004 was $1.8 million an increase of 6% over depreciation expense of $1.7 million for the six months ended June 30, 2003.  This increase is primarily attributable to our purchase of furniture and fixtures related to the 30 communities which SLS manages offset by our sale of six communities in the second half of 2003.

Loss from discontinued operations for the six months ended June 30, 2004 was $574,000, a decrease of $125,000 over the loss for the six months ended June 30, 2003.  This decrease is primarily the result of our ceasing operations at seven properties in the 2003 period compared with one property in the 2004 period.

As a result of the factors described above, our net income for the six months ended June 30, 2004 was $1.5 million compared to a loss of $4.5 million for the six months ended June 30, 2003.  Our net income per share for the six months ended June 30, 2004 was $0.17 compared to a loss per share of $0.53 for the six months ended June 30, 2003.

LIQUIDITY AND CAPITAL RESOURCES

Our total current assets at June 30, 2004, were $68.4 million compared to $56.1 million at December 31, 2003.  At June 30, 2004, we had cash and cash equivalents of $28.9 million.

Our total current liabilities were $51.1 million at June 30, 2004 compared to $58.1 million at December 31, 2003.  This decrease was due primarily to our repayment of amounts outstanding under our revolving credit facility and the payment of amounts due to SLS during the six months ended June 30, 2004.

Currently, we lease 98 communities from Senior Housing under two leases.  Our leases with Senior Housing require us to pay a total of $82.0 million of minimum rent annually.  Percentage rent on the leases begins in 2006.  At August 11, 2004, we believe we were in compliance with the terms of these leases.

In accordance with our leases with Senior Housing, Senior Housing reimburses our expenditures on capital improvements to our leased facilities.  We have expended $4.3 million on capital improvements made to these leased facilities for which Senior Housing reimbursed us in the second quarter of 2004.  When Senior Housing provides such funds to us, our rent payable to Senior Housing increases in accordance with the terms of these leases.

Our primary source of cash to fund operating expenses, including rent and routine capital expenditures, is our revenues from services to residents at our communities. At some of our communities, operating revenues for nursing home services are received from the Medicare and Medicaid programs. Through June 30, 2004, 43% of our total revenues were derived from these programs.  Medicare and Medicaid revenues were earned primarily from the 51 nursing home communities we lease from Senior Housing.  Since 1998, a Medicare prospective payment system has generally lowered Medicare rates paid to senior living communities, including many of those that we operate.  In October 2002, temporary increases in Medicare payment rates expired.  In October 2003, Medicare rates increased by approximately

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6%.  Our Medicare revenues totaled $44.9 million and $40.2 million during the six months ended June 30, 2004 and 2003, respectively.  Our Medicaid revenues totaled $73.9 million and $74.3 million during the six months ended June 30, 2004 and 2003, respectively.  Some of the states in which we operate have not raised rates by amounts sufficient to offset increasing costs or are expected to reduce Medicaid funding.  The magnitude of the potential combined Medicare and Medicaid rate reductions cannot currently be estimated, but it may be material and may affect our future results of operations.  Further Medicare and Medicaid rate declines may have a dramatic negative impact on our revenues and may produce losses.

We expect recent increases in the costs of insurance, especially tort liability insurance, workers compensation and employee health insurance, which are affecting the senior living industry, will continue to have a material adverse impact upon our future results of operations.  As discussed in Note 7 to our financial statements, a failure by IHS or HHS to make payments that we believe are due to us would have a material adverse impact upon our future financial results.  Also, we believe Marriott’s sale of MSLS to Sunrise has had, and may continue to have, an adverse impact on our financial results and increase our working capital requirements.  Also, prior to June 2004, pursuant to existing contract terms, a portion of our management fees paid to SLS were conditional, based on exceeding a threshold of net operating income that was not achieved and therefore was not being paid.  As of July 2004, this portion of the management fee is no longer conditional and we will now be required to pay the full fee.  We expect the annual amount of this additional management fee to be approximately $3.0 million per year.

Our revolving credit facility limits our ability to incur debt as more fully described below in “Debt Instruments and Covenants”. The terms of our leases with Senior Housing contain provisions whereby Senior Housing may cancel our rights under these agreements upon the acquisition of more than 9.8% of our voting stock by any person or group, and upon other change of control events.  These leases also limit our ability to create, incur, assume or guarantee indebtedness.

During 2003, Senior Housing agreed to sell us two nursing homes in Michigan that we leased from Senior Housing.  The purchase price is $10.5 million, the appraised value of the properties.  These two properties are leased from Senior Housing on a combined basis with 65 other properties.  Under the terms of our lease with Senior Housing, upon consummation of the sale, the annual rent payable under the combined lease will be reduced by 10% of the sale prices we pay to Senior Housing.  On April 19, 2004, we purchased one of these properties from Senior Housing for $5.9 million.  We financed this acquisition with proceeds we received from a new HUD insured mortgage and by using cash on hand.  We expect the second purchase to occur later in 2004 and we intend to finance the second sale with proceeds that we receive from a second HUD insured mortgage and with available cash.

On August 9, 2004, we entered into an agreement to acquire an institutional pharmacy located in Nebraska that services 24 communities with approximately 1,450 beds for approximately $3.0 million.

Despite the commitments, contingencies and limitations described above, we believe that a combination of our efforts to increase revenues and contain costs, our ability to borrow on our revolving credit facility, our ability to sell to Senior Housing certain capital improvements made to communities leased from Senior Housing and the possibility of sales or financings of our owned communities will be sufficient to meet our working capital needs, operating expenses, rent payments to Senior Housing, debt service and capital expenditures for the next 12 months and the foreseeable future.

As of June 30, 2004, our contractual obligations were as follows (dollars in thousands):

	Payment due by period
Contractual Obligations	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
Long-Term Debt Obligations (1)	$	4,958	$	51	$	111	$	124	$	4,672
Operating Lease Obligations (2)	1,079,365		81,986		163,973		163,973		669,433
Purchase Obligations (3)	4,600		4,600		—		—		—
Other Long-Term Liabilities Reflected on our Balance Sheet under GAAP (4)	23,905		5,672		9,791		6,965		1,477
Total	$	1,112,828	$	92,309	$	173,875	$	171,062	$	675,582

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(1)This amount represents amounts due under a HUD insured mortgage.

(2)These amounts represent minimum lease payments due to Senior Housing under two leases through 2017 and 2020.

(3)This amount represents our obligation to purchase a property from Senior Housing.  This obligation is contingent upon our receiving HUD insured financing for a significant part of this purchase price.

(4)These amounts include liabilities for continuing care contracts which require residents to make advance payments some of which are refundable and continuously carried as liabilities and some of which or not refundable and are carried as liabilities until they are recognized as revenues over the periods during which we expect to provide the service.  These amounts also include insurance reserves related to workers compensation and professional liability insurance as well as deferred gains related to property sales.

Debt Instruments and Covenants

In October 2002, we entered into a revolving credit facility.  The interest rate on borrowings under this facility is LIBOR plus a premium.  The maximum amount available under this facility is $12.5 million, and borrowings are subject to limitations based upon qualifying collateral.  The facility is available for acquisitions, working capital and general business purposes.  The facility contains covenants and events of default requiring the maintenance of collateral, minimum net worth and certain other financial ratios, among other customary provisions.  In certain circumstances, and subject to available collateral and lender approvals, the maximum amounts that we may draw under this credit agreement may be increased to $25.0 million.  As of June 30, 2004, no amounts were outstanding under the facility.

At August 11, 2004, we believe we were in compliance with all applicable covenants under this revolving credit agreement and no amounts are outstanding.

On April 19, 2004, we purchased a property from Senior Housing for $5.9 million.  We financed this acquisition with $5.0 million in proceeds we received from a new HUD insured mortgage and by using cash on hand.  The interest cost on this debt is 5.6% per year.  Principal and interest is due monthly through April 2039.  This mortgage contains standard HUD mortgage covenants.  At August 11, 2004, we believe we are in compliance with all material covenants of this mortgage.

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 that 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.

Related Party Transactions

On April 19, 2004, we purchased one property from Senior Housing for its appraised value of $5,900 that was previously leased by Senior Housing to us.  The sale of a second property is expected to occur later in 2004 for $4.6 million, its appraised value, but remains contingent upon our obtaining HUD insured financing.

In 2003, Senior Housing evicted a nursing home tenant that had defaulted on its obligations to Senior Housing.  Until May 2004, we managed this nursing home for Senior Housing’s account.  Effective on May 1, 2004, we agreed with Senior Housing to add this nursing home to a multi-property lease from Senior Housing and to increase the annual rent by $180,000.  All other lease terms remained unchanged.

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One of the properties we lease from Senior Housing was subject to a ground lease with an unaffiliated third party.  We have been responsible for paying the ground rent of $307,000 per year.  On June 3, 2004, Senior Housing exercised an option to purchase this land for $3,600,000 and acquired the landlord’s rights and obligations under the ground lease.  We now pay this the ground lease rent to Senior Housing.

During 2004, pursuant to the terms of our leases with Senior Housing, we sold to Senior Housing $4.3 million of improvements we had made to its properties, and our annual rent payable to Senior Housing was increased by 10% of Senior Housing’s purchase price amounts invested, or $432,000.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

We are exposed to risks associated with market changes in interest rates.  We manage our exposure to this market risk through our monitoring of available financing alternatives.  Our strategy to manage exposure to changes in interest rates is unchanged since December 31, 2003.  However, our exposure to fluctuations in interest rates may increase in the future if we incur debt to fund acquisitions or otherwise.  As of August 11, 2004, we have no commercial paper, derivatives, swaps, hedges, joint ventures or partnerships.

Changes in market interest rates also affect the fair value of our debt obligations; increases in market interest rates decrease the fair value of our fixed rate debt, while decreases in market interest rates increase the fair value of our fixed rate debt.   For example, based upon discounted cash flow analysis, if prevailing interest rates were to decline by 10% and other credit market considerations remained unchanged, the market value of our $5.0 million mortgage debt outstanding on June 30, 2004, would increase by approximately  $353,000; and, similarly, if prevailing interest rates were to increase by 10%, the market value of this $5.0 million mortgage debt would decline by approximately $313,000.

Item 4.  Controls and Procedures

As of the end of the period covered by this report, our management carried out an evaluation, under the supervision and with the participation of our President and Chief Executive Officer and our Treasurer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures pursuant to Rules 13a-15 and 15d-15 of the Securities Exchange Act of 1934.  Based upon that evaluation, our President and Chief Executive Officer and our Treasurer and Chief Financial Officer concluded that our disclosure controls and procedures are effective.

There have been no significant changes in our internal controls over financial reporting during the quarter ended June 30, 2004 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, including any corrective actions with regard to significant deficiencies and material weaknesses.

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WARNING CONCERNING FORWARD LOOKING STATEMENTS

THIS QUARTERLY REPORT ON FORM 10-Q AND OUR ANNUAL REPORT ON FORM 10-K, REFERRED TO HEREIN, CONTAIN FORWARD LOOKING STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 AND FEDERAL SECURITIES LAWS.  THESE STATEMENTS REFLECT OUR INTENT, BELIEF OR EXPECTATIONS, OR THE INTENT, BELIEF OR EXPECTATIONS OF OUR DIRECTORS AND OFFICERS, BUT THEY ARE NOT GUARANTEED TO OCCUR.  FOR EXAMPLE:

•INCREASES IN INSURANCE COSTS AND INSURANCE RESERVE CALCULATIONS MAY HAVE A GREATER ADVERSE IMPACT ON OUR BUSINESS THAN WE CURRENTLY ANTICIPATE;

•WE MAY BE UNABLE TO CARRY OUT OUR BUSINESS PLAN TO EXPAND OUR OPERATIONS OF COMMUNITIES WHERE RESIDENTS PAY FOR SERVICES WITH PRIVATE RESOURCES BECAUSE WE ARE UNABLE TO LOCATE SUCH EXPANSION OPPORTUNITIES AT PRICES WE ARE WILLING OR ABLE TO PAY;

•WE MAY BE UNABLE TO COLLECT ACCOUNTS RECEIVABLE WHICH WE BELIEVE ARE DUE FROM IHS OR FROM HHS;

•THE SALE OF MSLS BY MARRIOTT TO SUNRISE SEEMS TO HAVE ADVERSELY AFFECTED THE OPERATIONS OF THE SENIOR LIVING COMMUNITIES WHICH SLS NOW MANAGES FOR OUR ACCOUNT.  THE REVENUES AT THESE COMMUNITIES MAY DECLINE, THE EXPENSES AT THESE COMMUNITIES MAY INCREASE AND OUR INCOME FROM THESE COMMUNITIES MAY DECLINE;

•WE MAY BE UNABLE TO OBTAIN ADDITIONAL FINANCING FROM HUD;

•WE MAY BE UNABLE TO COMPLETE OUR PURCHASE OF THE ADDITONAL FACILITY LOCATED IN MICHIGAN FROM SENIOR HOUSING; AND

•WE MAY BE UNABLE TO COMPLETE OUR PURCHASE OF THE INSTITUTIONAL PHARMACY LOCATED IN NEBRASKA THAT WE AGREED TO ACQUIRE ON AUGUST 9, 2004.

ALSO, WHENEVER WE USE WORDS SUCH AS “BELIEVE”, “EXPECT”, “ANTICIPATE”, “INTEND”, “PLAN”, “ESTIMATE”, “PREDICT” OR SIMILAR EXPRESSIONS, WE ARE MAKING FORWARD LOOKING STATEMENTS.  ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE CONTAINED IN OR IMPLIED BY THESE FORWARD LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS.  SUCH FACTORS INCLUDE, WITHOUT LIMITATION THOSE DESCRIBED ABOVE AND:

•CHANGES IN THE ECONOMY AND THE CAPITAL MARKETS (INCLUDING PREVAILING INTEREST RATES);

•COMPLIANCE WITH AND CHANGES TO REGULATIONS AND PAYMENT POLICIES WITHIN THE SENIOR HOUSING AND HEALTHCARE INDUSTRIES;

•CHANGES IN OUR FINANCING TERMS;

•COMPETITION WITHIN THE SENIOR HOUSING AND HEALTHCARE INDUSTRIES; AND

•CHANGES IN FEDERAL, STATE AND LOCAL LEGISLATION.

FORWARD LOOKING STATEMENTS IN THIS QUARTERLY REPORT ON FORM 10-Q AND IN OUR ANNUAL REPORT ON FORM 10-K MAY IMPLY THAT WE EXPECT TO OPERATE PROFITABLY IN THE FUTURE.  HOWEVER, WE MAY BE UNABLE TO OPERATE PROFITABLY FOR THE REASONS SET FORTH ABOVE OR FOR OTHER REASONS.  ALTHOUGH WE BELIEVE OUR LIQUIDITY AND CAPITAL RESOURCES ARE SUFFICIENT TO MEET OUR BUSINESS NEEDS FOR THE NEXT 12 MONTHS, IN FACT THEY MIGHT NOT BE SUFFICIENT FOR US TO CONTINUE IN BUSINESS.  AN INVESTMENT IN OUR SECURITIES INVOLVES A HIGH DEGREE OF RISK OF LOSS, AND INVESTORS SHOULD NOT PLACE UNDUE RELIANCE UPON FORWARD LOOKING STATEMENTS WHICH IMPLY OTHERWISE.

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Part II.Other Information

Item 1. Legal Proceedings

There have been no material developments during the second quarter of 2004 in the proceedings described in our Annual Report on Form 10-K for the year ended December 31, 2003 or in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2004.

Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities

On May 11, 2004, we granted 4,000 shares of common stock valued at $4.04 per share, the closing price of the common shares on the American Stock Exchange on May 11, 2004, to each of our five directors as part of their annual compensation.  We made the grants pursuant to the exemption from registration contained in Section 4(2) of the Securities Act of 1933, as amended.

Item 4.  Submission of Matters to a Vote of Security Holders

At our regular annual meeting of shareholders held on May 11, 2004, Bruce M. Gans, M.D. was re-elected as director (7,575,264 shares voted for and 88,079 shares withheld for Mr. Gans).  The term of Mr. Gans will extend until our annual meeting in 2007.  Barbara D. Gilmore and Barry M. Portnoy will continue to serve as directors with terms expiring in 2005 and Arthur G. Koumantzelis and Gerard M. Martin will continue to serve as directors with terms expiring in 2006.

Item 6.Exhibits and Reports on Form 8-K

(a)Exhibits:

10.1Representative Indemnification Agreement.  (Filed herewith.)

10.2Partial Termination and Amendment of Lease, dated April 19, 2004, by and among certain subsidiaries of Senior Housing, as Landlord, and the Company, as Tenant. (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2004.)

10.3Amended and Restated Purchase and Sale Agreement, dated April 19, 2004, by and between SPT-Michigan Trust and Five Star Quality Care-Howell, LLC.  (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2004.)

10.4Mortgage, dated April 19, 2004, between Five Star Quality Care-Howell, LLC and Love Funding Corporation.  (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2004.)

10.5First Amendment to Amended and Restated Lease Agreement, dated June 23, 2004, by and among certain subsidiaries of Senior Housing, as Landlord, and the Company, as Tenant.  (Filed herewith.)

31.1Certification required by Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended.  (Filed herewith.)

31.2Certification required by Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended.  (Filed herewith.)

32Certification required by 18 U.S.C. Section 1350 (Section 906 of the Sarbanes-Oxley Act of 2002).  (Furnished herewith.)

(b)Reports on Form 8-K:

During the second quarter of 2004, we furnished the following Current Report on Form 8-K:

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Current Report on Form 8-K, dated May 10, 2004, furnishing our press release containing our results of operations and financial condition for the quarter ended March 31, 2004 (Item 12).

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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: August 12, 2004

By: /s/ Bruce J. Mackey Jr.

Bruce J. Mackey Jr.

Treasurer and Chief Financial Officer

Dated: August 12, 2004

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EX-10.1

Exhibit 10.1

INDEMNIFICATION AGREEMENT

THIS INDEMNIFICATION AGREEMENT (this “Agreement”) is made and entered March 10, 2004 (the “Effective Date”), by and between Five Star Quality Care, Inc., a Maryland Corporation (the “Company”), and Evrett W. Benton (“Indemnitee”).

WHEREAS Indemnitee currently serves as an officer of the Company and may, in connection therewith, be subjected to claims, suits or proceedings arising from such service; and

WHEREAS, as an inducement to Indemnitee to continue to serve as such officer, the Company has agreed to indemnify and to advance expenses and costs incurred by Indemnitee in connection with any such claims, suits or proceedings, to the fullest extent permitted by law as hereinafter provided; and

NOW, THEREFORE, in consideration of the premises and the covenants contained herein, the Company and Indemnitee do hereby covenant and agree as follows:

Section 1.Definitions.  For purposes of this Agreement:

(a)“Change in Control” means a change in control of the Company occurring after the Effective Date of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A (or in response to any similar item on any similar schedule or form) promulgated under the Securities Exchange Act of 1934, as amended (the “Act”), whether or not the Company is then subject to such reporting requirement; provided, however, that, without limitation, such a Change in Control shall be deemed to have occurred if after the Effective Date (i) any “person” (as such term is used in Sections 13(d) and 14(d) of the Act) is or becomes the “beneficial owner” (as defined in Rule 13d-3 under the Act), directly or indirectly, of securities of the Company representing 10% or more of the combined voting power in the election of directors of the Company’s then outstanding securities without the prior approval of at least two-thirds of the members of the Board of Directors in office immediately prior to such person attaining such percentage interest; (ii) there occurs a proxy contest, or the Company is a party to a merger, consolidation, sale of assets, plan of liquidation or other reorganization not approved by at least two-thirds of the members of the Board of Directors then in office, as a consequence of which members of the Board of Directors in office immediately prior to such transaction or event constitute less than a majority of the Board of Directors thereafter; or (iii) during any period of two consecutive years, other than as a result of an event described in clause (a)(ii) of this Section 1, individuals who at the beginning of such period constituted the Board of Directors (including for this purpose any new director whose election or nomination for election by the Company’s stockholders was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of such period) cease for any reason to constitute at least a majority of the Board of Directors.

(b)“Corporate Status” means the status of a person who is or was a director, trustee, officer or agent of the Company.

(c)“Disinterested Director” means a director of the Company who is not and was not a party to the Proceeding in respect of which indemnification is sought by Indemnitee.

(d)“Expenses” means all expenses, including, but not limited to, all reasonable attorneys’ fees, retainers, court costs, transcript costs, fees of experts, witness fees, travel expenses, duplicating costs, printing and binding costs, telephone charges, postage, delivery service fees, and all other disbursements or expenses of the types customarily incurred in connection with prosecuting, defending, preparing to prosecute or defend, investigating, or being or preparing to be a witness in a Proceeding.

(e)“Independent Counsel” means a law firm, or a member of a law firm, that is retained by Indemnitee and is not serving as counsel to the Company.

(f)“Proceeding” means any threatened, pending or completed action, suit, arbitration, alternate dispute resolution mechanism, investigation, administrative hearing or any other proceeding, whether civil, criminal, administrative or investigative (including on appeal), except one initiated by an Indemnitee pursuant to Section 9.

Section 2.Indemnification - - General.  The Company shall indemnify, and advance Expenses to, Indemnitee (a) as provided in this Agreement and (b) otherwise to the fullest extent permitted by Maryland law in effect on the date hereof and as amended from time to time; provided, however, that no change in Maryland law shall have the effect of reducing the benefits available to Indemnitee hereunder based on Maryland law as in effect on the date hereof.  The rights of Indemnitee provided in this Section 2 shall include, without limitation, the rights set forth in the other sections of this Agreement, including any additional indemnification permitted by Section 2-418(g) of the Maryland General Corporation Law (“MGCL”).

Section 3.Proceedings Other Than Proceedings by or in the Right of the Company.  Indemnitee shall be entitled to the rights of indemnification provided in this Section 3 if, by reason of his Corporate Status, he is, or is threatened to be, made a party to any threatened, pending, or completed Proceeding, other than a Proceeding by or in the right of the Company.  Pursuant to this Section 3, Indemnitee shall be indemnified against all judgments, penalties, fines and amounts paid in settlement and all Expenses incurred by him or on his behalf in connection with a Proceeding by reason of Indemnitee’s Corporate Status unless it is established that (i) the act or omission of Indemnitee was material to the matter giving rise to the Proceeding and (a) was committed in bad faith or (b) was the result of active and deliberate dishonesty, (ii) Indemnitee actually received an improper personal benefit in money, property or services, or (iii) in the case of any criminal Proceeding, Indemnitee had reasonable cause to believe that his conduct was unlawful.

Section 4.Proceedings by or in the Right of the Company.  Indemnitee shall be entitled to the rights of indemnification provided in this Section 4 if, by reason of his Corporate Status, he is, or is threatened to be, made a party to any threatened, pending or completed Proceeding brought by or in the right of the Company to procure a judgment in its favor.  Pursuant to this Section 4, Indemnitee shall be indemnified against all amounts paid in settlement and all Expenses incurred by him or on his behalf in connection with such Proceeding unless it is established that (i) the act or omission of Indemnitee was material to the matter giving rise to such a Proceeding and (a) was committed in bad faith or (b) was the result of active and

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deliberate dishonesty or (ii) Indemnitee actually received an improper personal benefit in money, property or services.

Section 5.Indemnification for Expenses of a Party Who is Partly Successful.  Without limitation on Section 3 and Section 4, if Indemnitee is not wholly successful in any Proceeding covered by this Agreement, but is successful, on the merits or otherwise, as to one or more but less than all claims, issues or matters in such Proceeding, the Company shall indemnify Indemnitee under this Section 5 for all Expenses incurred by him or on his behalf in connection with each successfully resolved claim, issue or matter, allocated on a reasonable and proportionate basis.  For purposes of this Section and without limitation, the termination of any claim, issue or matter in such a Proceeding by dismissal, with or without prejudice, shall be deemed to be a successful result as to such claim, issue or matter.

Section 6.Advance of Expenses.  The Company shall advance all Expenses incurred by or on behalf of Indemnitee in connection with any Proceeding to which Indemnitee is, or is threatened to be, made a party or a witness, within ten days after the receipt by the Company of a statement or statements from Indemnitee requesting such advance or advances from time to time, whether prior to or after final disposition of such Proceeding.  Such statement or statements shall reasonably evidence the Expenses incurred by Indemnitee and shall include or be preceded or accompanied by a written affirmation by Indemnitee of Indemnitee’s good faith belief that the standard of conduct necessary for indemnification by the Company as authorized by law and by this Agreement has been met and a written undertaking by or on behalf of Indemnitee, in substantially the form attached hereto as Exhibit A or in such form as may be required under applicable law as in effect at the time of the execution thereof, to reimburse the portion of any Expenses advanced to Indemnitee relating to claims, issues or matters in the Proceeding as to which it shall ultimately be established that the standard of conduct has not been met and which have not been successfully resolved as described in Section 5.  To the extent that Expenses advanced to Indemnitee do not relate to a specific claim, issue or matter in the Proceeding, such Expenses shall be allocated on a reasonable and proportionate basis.  The undertaking required by this Section 6 shall be an unlimited general obligation by or on behalf of Indemnitee and shall be accepted without reference to Indemnitee’s financial ability to repay such advanced Expenses and without any requirement to post security therefor.

Section 7.Procedure for Determination of Entitlement to Indemnification.

(a)To obtain indemnification under this Agreement, Indemnitee shall submit to the Company a written request, including such documentation and information as is reasonably available to Indemnitee and is reasonably necessary to determine whether and to what extent Indemnitee is entitled to indemnification.  The Secretary of the Company shall, promptly upon receipt of such a request for indemnification, advise the Board of Directors in writing that Indemnitee has requested indemnification.

(b)Upon written request by Indemnitee for indemnification pursuant to the first sentence of Section 7(a) hereof, a determination, if required by applicable law, with respect to Indemnitee’s entitlement thereto shall promptly be made in the specific case: (i) if a Change in Control shall have occurred, by Independent Counsel in a written opinion to the Board of

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Directors, a copy of which shall be delivered to Indemnitee; or (ii) if a Change of Control shall not have occurred or if after a Change of Control Indemnitee shall so request, (A) by the Board of Directors (or a duly authorized committee thereof) by a majority vote of a quorum consisting of Disinterested Directors (as herein defined), or (B) if a quorum of the Board of Directors consisting of Disinterested Directors is not obtainable or, even if obtainable, such quorum of Disinterested Directors so directs, by Independent Counsel in a written opinion to the Board of Directors, a copy of which shall be delivered to Indemnitee, or (C) if so directed by a majority of the members of the Board of Directors, by the stockholders of the Company; and, if it is so determined that Indemnitee is entitled to indemnification, payment to Indemnitee shall be made within ten days after such determination.  Indemnitee shall cooperate with the person, persons or entity making such determination with respect to Indemnitee’s entitlement to indemnification, including providing to such person, persons or entity upon reasonable advance request any documentation or information which is not privileged or otherwise protected from disclosure and which is reasonably available to Indemnitee and reasonably necessary to such determination.  Any Expenses incurred by Indemnitee in so cooperating with the person, persons or entity making such determination shall be borne by the Company (irrespective of the determination as to Indemnitee’s entitlement to indemnification) and the Company shall indemnify and hold Indemnitee harmless therefrom.

Section 8.Presumptions and Effect of Certain Proceedings.

(a)In making a determination with respect to entitlement to indemnification hereunder, the person or persons or entity making such determination shall presume that Indemnitee is entitled to indemnification under this Agreement if Indemnitee has submitted a request for indemnification in accordance with Section 7(a) of this Agreement, and the Company shall have the burden of proof to overcome that presumption in connection with the making of any determination contrary to that presumption.

(b)The termination of any Proceeding by judgment, order, settlement, conviction, a plea of nolo contendere or its equivalent, or an entry of an order of probation prior to judgment, does not create a presumption that Indemnitee did not meet the requisite standard of conduct described herein for indemnification.

Section 9.Remedies of Indemnitee.

(a)If (i) a determination is made pursuant to Section 7 that Indemnitee is not entitled to indemnification under this Agreement, (ii) advance of Expenses is not timely made pursuant to Section 6, (iii) no determination of entitlement to indemnification shall have been made pursuant to Section 7(b) within 30 days after receipt by the Company of the request for indemnification, (iv) payment of indemnification is not made pursuant to Section 5 within ten days after receipt by the Company of a written request therefor, or (v) payment of indemnification is not made within ten days after a determination has been made that Indemnitee is entitled to indemnification, Indemnitee shall be entitled to an adjudication in an appropriate court of the State of Maryland, or in any other court of competent jurisdiction, of his entitlement to such indemnification or advance of Expenses.  Alternatively, Indemnitee, at his option, may seek an award in arbitration to be conducted by a single arbitrator pursuant to the commercial

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Arbitration Rules of the American Arbitration Association.  Indemnitee shall commence such proceeding seeking an adjudication or an award in arbitration within 180 days following the date on which Indemnitee first has the right to commence such proceeding pursuant to this Section 9(a); provided, however, that the foregoing clause shall not apply in respect of a proceeding brought by Indemnitee to enforce his rights under Section 5.

(b)In any judicial proceeding or arbitration commenced pursuant to this Section 9, the Company shall have the burden of proving that Indemnitee is not entitled to indemnification or advance of Expenses, as the case may be.

(c)If a determination shall have been made pursuant to Section 7(b) that Indemnitee is entitled to indemnification, the Company shall be bound by such determination in any judicial proceeding or arbitration commenced pursuant to this Section 9, absent a misstatement by Indemnitee of a material fact, or an omission of a material fact necessary to make Indemnitee’s statement not materially misleading, in connection with the request for indemnification.

(d)In the event that Indemnitee, pursuant to this Section 9, seeks a judicial adjudication of or an award in arbitration to enforce his rights under, or to recover damages for breach of, this Agreement, Indemnitee shall be entitled to recover from the Company, and shall be indemnified by the Company for, any and all Expenses incurred by him in such judicial adjudication or arbitration.  If it shall be determined in such judicial adjudication or arbitration that Indemnitee is entitled to receive part but not all of the indemnification or advance of Expenses sought, the Expenses incurred by Indemnitee in connection with such judicial adjudication or arbitration shall be appropriately prorated.

Section 10.Defense of the Underlying Proceeding.

(a)Indemnitee shall notify the Company promptly upon being served with or receiving any summons, citation, subpoena, complaint, indictment, information, notice, request or other document relating to any Proceeding which may result in the right to indemnification or the advance of Expenses hereunder; provided, however, that the failure to give any such notice shall not disqualify Indemnitee from the right, or otherwise affect in any manner any right of Indemnitee, to indemnification or the advance of Expenses under this Agreement unless the Company’s ability to defend in such Proceeding or to obtain proceeds under any insurance policy is materially and adversely prejudiced thereby, and then only to the extent the Company is thereby actually so prejudiced.

(b)Subject to the provisions of the last sentence of this Section 10(b) and of Section 10(c) below, the Company shall have the right to defend Indemnitee in any Proceeding which may give rise to indemnification hereunder; provided, however, that the Company shall notify Indemnitee of any such decision to defend within 15 calendar days following receipt of notice of any such Proceeding under Section 10(a) above.  The Company shall not, without the prior written consent of Indemnitee, which shall not be unreasonably withheld or delayed, consent to the entry of any judgment against Indemnitee or enter into any settlement or compromise which (i) includes an admission of fault of Indemnitee or (ii) does not include, as an unconditional term thereof, the full release of Indemnitee from all liability in respect of such Proceeding, which

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release shall be in form and substance reasonably satisfactory to Indemnitee.  This Section 10(b) shall not apply to a Proceeding brought by Indemnitee under Section 9 above or Section 14.

(c)Notwithstanding the provisions of Section 10(b), if in a Proceeding to which Indemnitee is a party by reason of Indemnitee’s Corporate Status, (i) Indemnitee reasonably concludes, based upon an opinion of counsel approved by the Company, which approval shall not be unreasonably withheld, that he may have separate defenses or counterclaims to assert with respect to any issue which may not be consistent with other defendants in such Proceeding, (ii) Indemnitee reasonably concludes, based upon an opinion of counsel approved by the Company, which approval shall not be unreasonably withheld, that an actual or apparent conflict of interest or potential conflict of interest exists between Indemnitee and the Company, or (iii) the Company fails to assume the defense of such Proceeding in a timely manner, Indemnitee shall be entitled to be represented by separate legal counsel of Indemnitee’s choice, subject to the prior approval of the Company, which shall not be unreasonably withheld, at the expense of the Company.  In addition, if the Company fails to comply with any of its obligations under this Agreement or in the event that the Company or any other person takes any action to declare this Agreement void or unenforceable, or institutes any Proceeding to deny or to recover from Indemnitee the benefits intended to be provided to Indemnitee hereunder, Indemnitee shall have the right to retain counsel of Indemnitee’s choice, subject to the prior approval of the Company, which shall not be unreasonably withheld, at the expense of the Company (subject to Section 9(d)), to represent Indemnitee in connection with any such matter.

Section 11.Non-Exclusivity; Survival of Rights.

(a)The rights of indemnification and advance of Expenses as provided by this Agreement shall not be deemed exclusive of any other rights to which Indemnitee may at any time be entitled under applicable law, the Articles of Incorporation or Bylaws of the Company, any agreement or a resolution of the stockholders entitled to vote generally in the election of directors or of the Board of Directors, or otherwise.  No amendment, alteration or repeal of this Agreement or of any provision hereof shall limit or restrict any right of Indemnitee under this Agreement in respect of any action taken or omitted by such Indemnitee in his Corporate Status prior to such amendment, alteration or repeal.

(b)In the event of any payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all papers required and take all action necessary to secure such rights, including execution of such documents as are necessary to enable the Company to bring suit to enforce such rights.

(c)The Company shall not be liable under this Agreement to make any payment of amounts otherwise indemnifiable hereunder if and to the extent that Indemnitee has otherwise actually received such payment under any insurance policy, contract, agreement or otherwise.

Section 12.Duration of Agreement; Binding Effect.

(a)This Agreement shall continue until and terminate ten years after the date that Indemnitee shall have ceased to serve as a director, trustee, officer, employee, or agent of the

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Company or of any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise which Indemnitee served at the request of the Company; provided, however, that the rights of Indemnitee hereunder shall continue until the final termination of any Proceeding then pending in respect of which Indemnitee is granted rights of indemnification or advance of Expenses hereunder and of any proceeding commenced by Indemnitee pursuant to Section 9 relating thereto.

(b)The indemnification and advance of Expenses provided by, or granted pursuant to, this Agreement shall be binding upon and be enforceable by the parties hereto and their respective successors and assigns (including any direct or indirect successor by purchase, merger, consolidation or otherwise to all or substantially all of the business or assets of the Company), shall continue as to an Indemnitee who has ceased to be a director, trustee, officer, employee or agent of the Company or of any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise which such person is or was serving at the written request of the Company, and shall inure to the benefit of Indemnitee and his or her spouse, assigns, heirs, devisees, executors and administrators and other legal representatives.

(c)The Company shall require and cause any successor (whether direct or indirect by purchase, merger, consolidation or otherwise) to all, substantially all or a substantial part, of the business and/or assets of the Company, by written agreement in form and substance satisfactory to Indemnitee, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such succession had taken place.

Section 13.Severability.  If any provision or provisions of this Agreement shall be held to be invalid, illegal or unenforceable for any reason whatsoever: (a) the validity, legality and enforceability of the remaining provisions of this Agreement (including, without limitation, each portion of any section of this Agreement containing any such provision held to be invalid, illegal or unenforceable that is not itself invalid, illegal or unenforceable) shall not in any way be affected or impaired thereby; and (b) to the fullest extent possible, the provisions of this Agreement (including, without limitation, each portion of any section of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that is not itself invalid, illegal or unenforceable) shall be construed so as to give effect to the intent manifested thereby.

Section 14.Limitation and Exception to Right of Indemnification or Advance of Expenses.  Notwithstanding any other provision of this Agreement, (a) any indemnification or advance of Expenses to which Indemnitee is otherwise entitled under the terms of this Agreement shall be made only to the extent such indemnification or advance of Expenses does not conflict with applicable Maryland law and (b) Indemnitee shall not be entitled to indemnification or advance of Expenses under this Agreement with respect to any Proceeding brought by Indemnitee, unless (i) the Proceeding is brought to enforce indemnification under this Agreement or otherwise or (ii) the Company’s Bylaws, as amended, the Articles of Incorporation, a resolution of the stockholders entitled to vote generally in the election of directors or of the Board of Directors or an agreement approved by the Board of Directors to which the Company is a party expressly provide otherwise.

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Section 15.Counterparts.  This Agreement may be executed in one or more counterparts, each of which shall for all purposes be deemed to be an original but all of which together shall constitute one and the same Agreement.  One such counterpart signed by the party against whom enforceability is sought shall be sufficient to evidence the existence of this Agreement.

Section 16.Headings.  The headings of the paragraphs of this Agreement are inserted for convenience only and shall not be deemed to constitute part of this Agreement or to affect the construction thereof.

Section 17.Modification and Waiver.  No supplement, modification or amendment of this Agreement shall be binding unless executed in writing by both of the parties hereto.  No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions hereof (whether or not similar) nor shall such waiver constitute a continuing waiver.

Section 18.Notices.  Any notice, report or other communication required or permitted to be given hereunder shall be in writing unless some other method of giving such notice, report or other communication is accepted by the party to whom it is given, and shall be given by being delivered at the following addresses to the parties hereto:

(a)If to Indemnitee, to:  The address set forth on the signature page hereto.

(b)If to the Company to:

Five Star Quality Care, Inc.

400 Centre Street

Newton, Massachusetts 02458

Attn:  Secretary

or to such other address as may have been furnished to Indemnitee by the Company or to the Company by Indemnitee, as the case may be.

Section 19.Governing Law.  The parties agree that this Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of Maryland, without regard to its conflicts of laws rules.

[SIGNATURE PAGE FOLLOWS]

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IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the day and year first above written.

ATTEST:	FIVE STAR QUALITY CARE, INC.
/s/ Jennifer B. Clark	By:	/s/ Bruce J. Mackey Jr.	(SEAL)
	Name:	Bruce J. Mackey Jr.
	Title:	Treasurer, Chief Financial Officer and
		Assistant Secretary
WITNESS:	INDEMNITEE
/s/ Judith A. Stapleton	/s/ Evrett W. Benton
	Name:  Evrett W. Benton
	Address: [address omitted]

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EXHIBIT A

FORM OF UNDERTAKING TO REPAY EXPENSES ADVANCED

The Board of Directors of Five Star Quality Care, Inc.

Re:  Undertaking to Repay Expenses Advanced

Ladies and Gentlemen:

This undertaking is being provided pursuant to that certain Indemnification Agreement dated                           , 2004, by and between Five Star Quality Care, Inc. (the “Company”) and the undersigned Indemnitee (the “Indemnification Agreement”), pursuant to which I am entitled to advance of expenses in connection with [Description of Proceeding] (the “Proceeding”).

Terms used herein and not otherwise defined shall have the meanings specified in the Indemnification Agreement.

I am subject to the Proceeding by reason of my Corporate Status or by reason of alleged actions or omissions by me in such capacity.  I hereby affirm that at all times, insofar as I was involved as [a director] [an officer] of the Company, in any of the facts or events giving rise to the Proceeding, I (1) acted in good faith and honestly, (2) did not receive any improper personal benefit in money, property or services and (3) in the case of any criminal proceeding, had no reasonable cause to believe that any act or omission by me was unlawful.

In consideration of the advance of expenses by the Company for reasonable attorney’s fees and related expenses incurred by me in connection with the Proceeding (the “Advanced Expenses”), I hereby agree that if, in connection with the Proceeding, it is established that (1) an act or omission by me was material to the matter giving rise to the Proceeding and (a) was committed in bad faith or (b) was the result of active and deliberate dishonesty or (2) I actually received an improper personal benefit in money, property or services or (3) in the case of any criminal proceeding, I had reasonable cause to believe that the act or omission was unlawful, then I shall promptly reimburse the portion of the Advanced Expenses relating to the claims, issues or matters in the Proceeding as to which the foregoing findings have been established and which have not been successfully resolved as described in Section 5 of the Indemnification Agreement.  To the extent that Advanced Expenses do not relate to a specific claim, issue or matter in the Proceeding, I agree that such Expenses shall be allocated on a reasonable and proportionate basis.

IN WITNESS WHEREOF, I have executed this Affirmation and Undertaking on this         day of                                         , 200    .

WITNESS:

(SEAL)

Schedule to Exhibit 10.1

The following individuals are parties to Indemnification Agreements with the Company which are substantially identical in all material respects to the representative Indemnification Agreement filed herewith and are dated as of the respective dates listed below.  The other Indemnification Agreements are omitted pursuant to Instruction 2 to Item 601 of Regulation S-K.

Name of Signatory	Date
Evrett W. Benton	March 10, 2004
Rosemary Esposito, R.N.	March 10, 2004
Bruce M. Gans, M.D.	March 10, 2004
Barbara D. Gilmore	March 10, 2004
Maryann Hughes	March 10, 2004
Arthur G. Koumantzelis	March 10, 2004
Bruce J. Mackey Jr.	March 10, 2004
Gerard M. Martin	March 10, 2004
Barry M. Portnoy	March 10, 2004
William J. Sheehan	May 7, 2004

EX-10.5

Exhibit 10.5

FIRST AMENDMENT TO AMENDED AND RESTATED LEASE AGREEMENT

THIS FIRST AMENDMENT TO AMENDED AND RESTATED LEASE AGREEMENT (this “Amendment”) is made and entered into as of June 23, 2004 by and among each of the parties identified on the signature page hereof as landlord, as landlord (collectively, “Landlord”), and FIVE STAR QUALITY CARE TRUST, a Maryland business trust, as tenant (“Tenant”).

W I T N E S S E T H:

WHEREAS, pursuant to the terms of that certain Amended and Restated Lease Agreement, dated as of March 1, 2004, as amended by that certain Partial Termination and Amendment of Lease Agreement, dated as of April 19, 2004 (as so amended, the “Consolidated Lease”), Landlord leases to Tenant, and Tenant leases from Landlord, the Property (this and other capitalized terms used but not otherwise defined herein having the meanings given such terms in the Consolidated Lease), all as more particularly described in the Consolidated Lease; and

WHEREAS, SPTIHS Properties Trust has acquired certain real property and related improvements in St. Joseph, Missouri known as Beverly Manor and located on the land which is more particularly described on Exhibit A attached hereto (the “Additional Property”); and

WHEREAS, SPTIHS Properties Trust, the other entities comprising Landlord and Tenant wish to further amend the Consolidated Lease to include the Additional Property;

NOW, THEREFORE, in consideration of the mutual covenants herein contained and other good and valuable consideration, the mutual receipt and legal sufficiency of which are hereby acknowledged, Landlord and Tenant hereby agree as follows:

1.             Effective as of the date hereof, Exhibit A-31 of the Consolidated Lease is hereby deleted in its entirety and replaced with Exhibit A attached hereto.

2.             Effective as of May 1, 2004, the definition of “Minimum Rent” set forth in Section 1.67 of the Consolidated Lease is hereby amended by deleting the existing definition and replacing it with the following definition:

“Minimum Rent” shall mean Seventeen Million Eight Hundred Eighty Thousand Two Hundred Sixty-Nine Dollars ($17,880,269) per annum.

3.             Effective as of May 1, 2004, Tenant shall pay all Additional Rent and Additional Charges related to the Property described on Exhibit A attached hereto as if such Property had been included as part of the Leased Property as of May 1, 2004.

4.             Provided that no Event of Default shall have occurred and be continuing under the Consolidated Lease and Tenant shall otherwise comply with the applicable provisions of Article 6 of the Consolidated Lease, Landlord agrees to provide Tenant with an allowance of up to $200,000 (the “Allowance”) to pay for capital repairs and improvements to the Additional Property.  Tenant shall provide Landlord with appropriate invoices and such other documentation and information as Landlord shall reasonably request each time Tenant requests a disbursement of all or any portion of the Allowance.  There shall be no adjustment of Minimum Rent in connection with any such disbursement of the Allowance to Tenant.  If Tenant incurs any amounts in excess of $200,000 in connection with any capital repairs or improvements to the Additional Property, Tenant shall pay for all such amounts in excess of $200,000 at Tenant’s sole cost and expense; provided, however, that nothing contained in this paragraph shall impair or otherwise limit Tenant’s right to require Landlord to disburse such amounts subject to an adjustment in Minimum Rent, all as further described in the Consolidated Lease.

5.             As amended hereby, the Consolidated Lease is hereby ratified and confirmed.

[Signatures on following page.]

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IN WITNESS WHEREOF, Landlord and Tenant have caused this Amendment to be duly executed, as a sealed instrument, as of the date first set forth above.

LANDLORD:
ELLICOTT CITY LAND I LLC, ELLICOTT CITY LAND II LLC, HRES2 PROPERTIES TRUST, SNH CHS PROPERTIES TRUST, SPTIHS PROPERTIES TRUST, SPT-MICHIGAN TRUST, and SPTMNR PROPERTIES TRUST
By:	/s/ John R. Hoadley
	John R. Hoadley
	Treasurer of each of the foregoing entities
TENANT:
FIVE STAR QUALITY CARE TRUST
By:	/s/ Bruce J. Mackey Jr.
	Bruce J. Mackey Jr.
	Treasurer

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EXHIBIT A

THE ADDITIONAL LAND

[See attached legal description]

The following exhibit to the Amendment has been omitted:

Exhibit	Exhibit Title
A	The Additional Land

The Registrant agrees to furnish supplementally a copy of the foregoing omitted exhibit to the Securities and Exchange Commission upon request.

EX-31.1

Exhibit 31.1

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 report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b.Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c.Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:August 12, 2004	/s/ Evrett W. Benton
	Evrett W. Benton
	President and Chief Executive Officer

EX-31.2

Exhibit 31.2

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 report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b.Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c.Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:August 12, 2004	/s/ Bruce J. Mackey Jr.
	Bruce J. Mackey Jr.
	Treasurer and Chief Financial Officer

EX-32.

Exhibit 32

Certification Pursuant to 18 U.S.C. Sec. 1350

(Section 906 of the Sarbanes – Oxley Act of 2002)

In connection with the filing by Five Star Quality Care, Inc. (the “Company”) of the Quarterly Report on Form 10-Q for the quarter ended June 30, 2004 (the “Report”), each of the undersigned hereby certifies, to the best of his knowledge:

1.The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2.The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ 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

A signed original of this written statement required by Section 906 has been provided to Five Star Quality Care, Inc., and will be retained by Five Star Quality Care, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.