SCHEDULE 14A
(Rule 14a-101)
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934
(Amendment No. 3)
Filed by the Registrant |X|
Filed by a Party other than the Registrant |_|
Check the appropriate box:
|X| Preliminary Proxy Statement |_| Confidential, for Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
|_| Definitive Proxy Statement
|_| Definitive Additional Materials
|_| Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
Meridian Healthcare Growth and Income Fund Limited Partnership
(Name of Registrant as Specified In Charter)
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
|_| No fee required.
|X| Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies: N/A
(2) Aggregate number of securities to which transaction applies: N/A
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee
is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction: $ 50,000,000
(5) Total fee paid: $ 10,000
|_| Fee paid previously with preliminary materials: N/A
|_| Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
(1) Amount Previously Paid: N/A
(2) Form, Schedule or Registration Statement No.: N/A
(3) Filing Party: N/A
(4) Date Filed: N/A
MERIDIAN HEALTHCARE GROWTH AND INCOME FUND
LIMITED PARTNERSHIP
300 East Lombard Street
Suite 1200
Baltimore, Maryland 21202
(410) 727-4083
Fax (410) 625-2694
June __, 2005
Dear Investors:
The general partners of Meridian Healthcare Growth and Income Fund
Limited Partnership (the "Fund") are writing to request your consent to three
proposals presented for your consideration.
Proposal One: Sale of the Facilities. You are being asked to approve
the sale of all or substantially all of the real property and other assets owned
by each of the Fund's subsidiary limited partnerships pursuant to an Asset
Purchase Agreement dated as of February 11, 2005 (the "Purchase Agreement"), by
and among each of the limited partnerships and FC Properties VI, LLC and to
grant the general partners the authority to take all other actions necessary or
advisable in connection with or relating to the Purchase Agreement (the "Sale").
If the Sale is approved by Investors and consummated, substantially all of
Fund's assets will consist of the cash proceeds from the Sale.
Proposal Two: Approval of Liquidation. You are also being asked to
approve the liquidation, dissolution and winding up of the Fund pursuant to its
limited partnership agreement following the consummation of the Sale (the
"Liquidation"). If the Liquidation is approved, Investors' interests in the Fund
will be redeemed, the fund will distribute its net assets to Investors and the
Fund will be terminated. If the Fund is terminated, you will not have any
continuing interest in the Fund.
Proposal Three: Amendment of Limited Partnership Agreement. Finally,
you are being asked to approve an amendment to the Fund's limited partnership
agreement to permit the General Partners to sell all or substantially all of the
Fund's assets to unaffiliated third parties without first obtaining the consent
of Investors if, and solely to the extent that, the Sale is not consummated (the
"Amendment").
Although Investor approval is being requested for all three Proposals
the approval of the Amendment is not contingent upon Investor approval of any
other Proposal. The approval of each of the Sale and the Liquidation are,
however, contingent upon Investor approval of both of these Proposals. This
means that neither the Sale nor the Liquidation will occur unless Investors
approve both the Sale and the Liquidation. If Investors do not approve both of
the Sale and the Liquidation, the Fund will not complete the Sale and will not
distribute any cash proceeds to Investors at this time.
Assuming approval by Investors, after consummation of the Sale, the
Fund will, in accordance with its limited partnership agreement, liquidate,
dissolve and distribute its net assets to Investors. The General Partners
presently estimate that the distribution to Investors (after
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establishing a liquidating trust and funding a reserve for certain expenses,
and prior to any reduction due to state or local tax withholding) will equal
approximately $20.00 to $21.00 per Unit, although the actual amount distributed
per Unit will vary depending on various factors, including, but not limited to,
the actual amounts of the reserve, transaction expenses, prorated expenses, and
final terms of the Purchase Agreement. In addition to this distribution, you
will receive your pro rata beneficial interest in the liquidating trust to be
established by the Fund to facilitate post-closing matters among the parties.
Depending upon the availability of funds, Investors may or may not receive
additional distributions from the liquidating trust. The General Partners have
committed to resolicit the consent of Investors in the event that distributions
to Investors will be less than $18.00 per Unit.
We have enclosed a Consent Solicitation Statement dated [June __, 2005]
and a form for indicating whether or not you wish to grant your consent to any
or all of the Proposals.
The record date for determining those Investors entitled to vote on the
Proposals has been set by the Administrative General Partner as June 1, 2005. As
of June 1, 2005, the Fund has 1,540,040 Units issued and outstanding, which are
held by [1,596] Investors. Accordingly, Investors holding more than 50% or
770,021 Units must consent to each of the Proposals in order for it to be
approved by the Investors.
The Consent Solicitation Statement contains a discussion of the
advantages and disadvantages of the Proposals under the heading "GENERAL
PARTNERS' RECOMMENDATION." After carefully weighing the terms and conditions of
the Proposals, as well as alternative courses of action, we have concluded that
the Proposals are advisable and in the best interests of the Fund and its
Investors.
Therefore, we recommend that you approve all of the Proposals by
signing and returning the enclosed consent form in the accompanying postage
prepaid envelope, by overnight courier or by facsimile to the address or
facsimile number below. Your participation is extremely important. Please note
that this solicitation will expire at 5:00 p.m., Eastern Time, on [June __,
2005], unless extended by the General Partners in their sole discretion.
If you have any questions or would like additional copies of the
enclosed materials, please feel free to contact Robert Huether, Asset Manager,
or Yolanda Harris, Investor Services Coordinator, at 300 East Lombard Street,
Suite 1200, Baltimore, Maryland 21202; telephone number (410) 727-4083;
facsimile number (410) 625-2694.
YOUR VOTE IS IMPORTANT
Please Sign, Date and Return the Enclosed Consent Form PRIOR TO [June __, 2005]
Sincerely,
Meridian Healthcare Growth and Income Fund Limited Partnership
By: Brown Healthcare, Inc. By: Meridian Healthcare Investments, Inc.
Administrative General Partner Development General Partner
By: By:
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MERIDIAN HEALTHCARE GROWTH AND INCOME FUND LIMITED PARTNERSHIP
CONSENT SOLICITATION STATEMENT
INTRODUCTION
This Consent Solicitation Statement (this "Solicitation Statement") is
being furnished to the registered holders (the "Investors") of assignee units of
limited partnership interests ("Units") in Meridian Healthcare Growth and Income
Fund Limited Partnership, a Delaware limited partnership (the "Fund"), as of
5:00 P.M. Eastern Time on June 1, 2005 (the "Record Date"), in connection with
the solicitation of consents (the "Solicitation"), upon the terms and subject to
the conditions described in this Solicitation Statement and the accompanying
form of consent (the "Consent Form"), by Brown Healthcare, Inc., a Maryland
corporation, (the "Administrative General Partner"), and Meridian Healthcare
Investments, Inc., a Maryland corporation, (the "Development General Partner"
and together with the Administrative General Partner, the "General Partners"),
on behalf of the Fund. Investors are being asked to consent to the following
three proposals:
1. The sale of the seven skilled nursing facilities (the "Facilities")
owned by the Operating Partnerships (as defined below), all of the real
property on which the Facilities are located and all of the personal
property located at the Facilities and/or used primarily in connection
with the operation of the Facilities, pursuant to the Asset Purchase
Agreement dated as of February 11, 2005 (the "Purchase Agreement"), by
and among FC Properties VI, LLC, a Delaware limited liability company
(the "Purchaser"), and Plainfield Meridian Limited Partnership, Caton
Manor Meridian Limited Partnership, Frederick Meridian Limited
Partnership, Hamilton Meridian Limited Partnership, Randallstown
Meridian Limited Partnership, Mooresville Meridian Limited Partnership,
and Spencer Meridian Limited Partnership, all Maryland limited
partnerships and subsidiaries of the Fund (each an "Operating
Partnership" and, collectively, the "Seller") (the "Sale") and the grant
to the General Partners of the authority to take any and all other
actions necessary or advisable in connection with or relating to the
Sale.
2. The liquidation, dissolution and winding-up of the Fund pursuant to
its agreement of limited partnership following the consummation of
the Sale (the "Liquidation," and together with the Sale, the
"Transaction").
3. The amendment of the Fund's limited partnership agreement to permit
the General Partners to sell all or substantially all of the Fund's
assets (the "Fund Property") to unaffiliated third parties without
first obtaining the consent of Investors if, and solely to the extent
that, the Sale is not consummated for any reason (the "Amendment").
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SUMMARY TERM SHEET
This summary term sheet, together with the preceding introduction,
highlights selected information from this Solicitation Statement and may not
contain all of the information that is important to you. To fully understand the
contemplated transactions, you should carefully read this entire Solicitation
Statement, the Purchase Agreement (excluding the schedules and exhibits thereto)
which is attached as Annex I hereto, the Amendment which is attached as Annex II
hereto, and the other documents to which this Solicitation Statement refers you.
For details on how you can obtain more information about the Fund see "Where You
Can Find Additional Information" on page 41. Each item in this summary term
sheet includes a page reference directing you to a more complete description of
that item.
The Parties (See page 23)
The Fund
Meridian Healthcare Growth and Income Fund Limited Partnership
300 East Lombard Street
Suite 1200
Baltimore, Maryland 21202
(410) 727-4083
The Fund is a limited partnership formed under the laws of Delaware on
December 8, 1987 to acquire 98.99% of the limited partner interests in the seven
Operating Partnerships. The Fund's objectives are to (i) preserve Investors'
capital; (ii) obtain capital appreciation through increases in the value of the
Facilities; and (iii) provide quarterly cash distributions to Investors from
income generated by the Facilities' operating income.
The Administrative General Partner of the Fund is Brown Healthcare,
Inc., a Maryland corporation and the Development General Partner of the Fund is
Meridian Healthcare Investments, Inc., a Maryland corporation. The General
Partners have exclusive authority to conduct the business and affairs of the
Fund in accordance with the Fund's limited partnership agreement and applicable
law.
The Operating Partnerships
Plainfield Meridian Limited Partnership,
Caton Manor Meridian Limited Partnership,
Frederick Meridian Limited Partnership,
Hamilton Meridian Limited Partnership,
Randallstown Meridian Limited Partnership,
Mooresville Meridian Limited Partnership,
Spencer Meridian Limited Partnership
300 East Lombard Street Suite 1200
Baltimore, Maryland 21202
(410) 727-4083
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All of the Operating Partnerships are Maryland limited partnerships and
subsidiaries of the Fund. The Fund owns a 98.99% limited partner interest and
each of the Fund's General Partners owns a .505% general partner interest in
each of the Operating Partnerships. Collectively, the Operating Partnerships are
the Seller under the Purchase Agreement.
The Purchaser
FC Properties VI, LLC
1035 Powers Place
Alpharetta, Georgia 30004
(770) 754-9660
FC Properties VI, LLC is a Delaware limited liability company and an
affiliate of Formation Capital, LLC ("Formation Capital"), a limited liability
company organized under the laws of Pennsylvania. According to SEC filings made
by Mr. Arnold Whitman, the Chief Executive Officer of Formation Capital,
Formation Capital is a finance company focused on the healthcare industry,
providing equity to the senior housing and long-term healthcare industry since
it was founded in 1999. According to these filings with the SEC, Formation
Capital currently manages assets in excess of $650 million in value and over the
last three years, Formation Capital and its partners have acquired an ownership
interest in 152 facilities in 20 states.
The Facilities (See page 12)
Each Operating Partnership owns a single Facility. Genesis Eldercare
Network Services, Inc., an affiliate of the Development General Partner, manages
the Facilities pursuant to management agreements. The Facilities are located in
Maryland, New Jersey and North Carolina.
The Consent Solicitation (See page 8)
Consent Requested; Record Date (See page 8)
The General Partners are requesting the Investors' consent to three
Proposals: (1) the Sale; (2) the Liquidation; and, (3) the Amendment. The Fund
has fixed the close of business on June 1, 2005, as the Record Date for
determining the Investors entitled to notice of and to consent to the Proposals.
Required Consent (See page 8)
The consent of Investors owning more than 50% of the outstanding Units
will be required to approve each of the Proposals, which is not less than the
minimum vote that would be necessary to authorize or take such action at a
meeting at which all Investors entitled to vote thereon were present. Approval
of each of the Sale and the Liquidation are contingent upon approval of both of
these Proposals. Approval of the Amendment is not contingent upon approval of
any other Proposal.
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Solicitation Period (See page 8)
This Solicitation Statement and the enclosed Consent Form are first
being mailed to Investors on or about [June __, 2005]. This Solicitation will
expire on [June _, 2005], unless extended by the General Partners in their sole
discretion. Consent Forms may be revoked at any time until the expiration date,
but may not be revoked thereafter.
No Appraisal Rights (See page 10)
Under the Delaware Revised Uniform Limited Partnership Act and under
the Fund's limited partnership agreement, Investors do not have dissenter's
appraisal rights in connection with the Sale or the Liquidation.
The Sale (See page 13)
The Purchase Agreement is included as Annex I to this Solicitation
Statement. It is the legal document that governs the Sale.
Assets Transferred (See page 23)
Pursuant to the Purchase Agreement, Seller will sell to Purchaser all
of the real property on which the Facilities are located and all the personal
property located at the Facilities and/or used primarily in connection with the
operation of the Facilities. The assets covered by the Purchase Agreement
represent all, or substantially all, of the assets owned by the Operating
Partnerships. The limited partner interests in the Operating Partnerships
represent substantially all of the Fund's assets.
Purchase Price (See page 24)
The purchase price for the assets being sold under the Purchase
Agreement is $50,000,000 plus the payment of the Net Working Capital.
Representations, Warranties and Covenants (See page 26)
The Purchase Agreement contains customary representations and
warranties for a transaction of this type including representations by Seller
that, subject to the consent of Investors, it has the authority to enter into
the Purchase Agreement and that it has good and marketable title to the assets.
The Seller has agreed to allow Purchaser access to the real property
and books and records related to the Facilities during the period prior to the
closing of the Sale to allow Purchaser to inspect the assets.
Indemnification (See page 27)
Seller has agreed to indemnify Purchaser and its affiliates from any
damages incurred by those parties relating to pre-closing liabilities of the
Facilities or any breach of Seller's representations, warranties and covenants
contained in the Purchase Agreement. Seller will not
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be obligated to provide indemnification unless Purchaser's damages exceed
$50,000 and Seller's aggregate obligation for indemnification and any other of
its obligations that survive closing under the Purchase Agreement will not
exceed $500,000. Seller's obligation to provide indemnification will terminate
twelve months after the closing under the Purchase Agreement.
Purchaser has agreed to indemnify Seller and its affiliates from any
damages incurred by those parties relating to post-closing liabilities of the
Facilities or any breach of Purchaser's representations, warranties and
covenants contained in the Purchase Agreement. Purchaser will not be obligated
to provide indemnification unless Seller's damages exceed $50,000 and
Purchaser's aggregate indemnification obligation will not exceed $500,000.
Purchaser's obligation to provide indemnification will terminate twelve months
after the closing under the Purchase Agreement.
Escrow (See page 28)
At the closing of the Sale, Purchaser will deposit $500,000 of the
purchase price with an escrow agent pursuant to the terms and conditions of an
escrow agreement among Purchaser, Seller and the escrow agent. The $500,000 plus
any interest earned thereon will be held by the escrow agent for approximately
twelve months to secure Seller's indemnification obligations, if any. At the end
of the twelve-month escrow period the escrow agent will distribute the escrow
funds, less the amount of any paid or pending claims for indemnification, to the
Fund. If the Liquidation is approved by Investors, the Fund will assign the
right to receive any remaining escrow funds at the end of the escrow period to
the Liquidating trust, which will distribute such funds pro rata to Investors,
based on the number of Units owned at the effective time of the Liquidation.
Closing Conditions (See page 25)
The Seller and Purchaser will complete the Sale only if they satisfy
or, if the law permits, waive several conditions, including the following:
o Satisfactory completion of due diligence by Purchaser;
o Holders of a majority of the issued and outstanding Units approve the Sale;
o The representations and warranties of each party to the
Purchase Agreement and related documents are true and correct
in all material respects at and as of the closing;
o Each party to the Purchase Agreement has performed and
complied with all covenants required to be performed and
complied with by the Purchase Agreement and related documents;
o None of the Facilities has suffered substantial damage, destruction or loss;
o Purchaser or its designee has obtained approval for the transfer or
replacement of all licenses to operate the Facilities;
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o No injunction, judgment, order, decree, ruling or charge is in
effect under applicable law that would prevent the Sale or
cause the Sale to be rescinded after closing;
o Title to the real property is marketable, and free of liens and
encumbrances except those expressly allowed by the Purchase
Agreement; and
o Genesis Eldercare Network Services, Inc. has waived any rights it might
have to purchase the Facilities.
Prorations (See page 25)
Seller will receive a credit for taxes and other assessments actually
paid by Seller but applicable to the period from and after the closing of the
Sale. Purchaser will receive a credit for any accrued but unpaid taxes and
assessments applicable to any period before the closing of the Sale. Charges for
utilities and all other costs and expenses related to ownership and operation of
the assets will be prorated at the closing of the Sale. All revenues and income
and all Medicare and Medicaid reimbursements will be prorated as of the closing
of the Sale, to the extent not included in the calculation of Net Working
Capital. All prorations are subject to readjustment sixty days after the closing
of the Sale, after which time all prorations will be final.
Regulatory Approvals (See page 27)
We are not aware of any material governmental or regulatory approvals
required for completion of the Transaction other than those associated with:
o Consent to the Transaction by the holders of a majority of the issued and
outstanding Units;
o The liquidation and dissolution of the Fund following consummation of the
Sale, and,
o Any applicable federal, state, or local requirements to
transfer or terminate the licenses and/or provider agreements
to operate the Facilities, certifications to participate in
the Medicare and Medicaid programs, and zoning permits.
Failure to Approve the Sale (See page 29)
Because approval of each of the Sale and the Liquidation are contingent
upon Investor approval of both of these Proposals, if the holders of a majority
of the issued and outstanding Units do not approve the Sale, the Sale and
Liquidation will not occur and the General Partners will continue to conduct the
business and affairs of the Fund in accordance with the Fund's limited
partnership agreement. In such event, you will not receive the distributions
described in this Solicitation Statement.
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The Liquidation (See page 29)
Assuming the approval of Investors, as soon as practicable after the
Sale the General Partners will file a certificate of cancellation of the Fund
and will proceed to liquidate, dissolve and wind-up the Fund and distribute its
net assets to Investors in accordance with its limited partnership agreement and
applicable law.
Net Assets Available for Distribution to Investors (See page 29)
The General Partners presently estimate that the net assets of the Fund
available for distribution to Investors following the Sale will be in a range of
$20.00 to $21.00 per Unit prior to any reduction due to state or local tax
withholding. Investors will also receive a pro rata beneficial interest in the
liquidating trust described below. The General Partners presently estimate that
Investors could receive additional distributions from the liquidating trust in a
range of approximately $0.00 to $0.32 per Unit. The General Partners believe
these estimates are reasonable based on past experience and the information
currently available to them, there can, however, be no assurances that these
amounts will be the actual amounts distributed to Investors because reserves
have not yet been established and the amount of any claims for indemnification
and the expenses of consummating the Transaction are not yet final. The General
Partners have committed to resolicit the consent of Investors in the event that
distributions to investors will be less than $18.00 per Unit.
Reserve (See page 30)
The Fund will reserve and assign to the liquidating trust described
below a portion of the gross proceeds of the Sale for the purpose of satisfying
any Fund obligations and liabilities relating to the business of the Fund and
ownership, management, operation and maintenance of the Facilities prior to the
Sale and the Liquidation.
Liquidating Trust (See page 30)
Prior to the Liquidation, the Fund will establish a liquidating trust
to hold the reserve and several other contingent assets of the Fund including
the right to receive any remaining escrow funds at the end of the escrow period.
The Fund will distribute to Investors on a pro rata basis based upon each
Investor's ownership of Units as of the time of the Liquidation, all of the
beneficial interests in the liquidating trust. As soon as the liquidating trust
has satisfied the obligations for which it is created, which is expected to
occur approximately twelve months after completion of the Transaction, it will
be liquidated and all of its remaining assets will be distributed to the holders
of beneficial interests in the liquidating trust.
Failure to Approve the Liquidation (See page 32)
Because approval of each of the Sale and the Liquidation are contingent
upon Investor approval of both of these Proposals, if the holders of a majority
of the issued and outstanding Units do not approve the Liquidation, the Sale and
Liquidation will not occur and the General Partners will continue to conduct the
business and affairs of the Fund in accordance with the Fund's limited
partnership agreement. In such event, you will not receive the distributions
described in this Solicitation Statement.
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The Amendment (See page 32)
The General Partners intend to consummate the Sale pursuant to the
terms and conditions of the Purchase Agreement if the Investors approve the
Sale. However, the General Partners are also recommending that the Investors
approve the Amendment, to permit the General Partners to sell all or
substantially all of the Fund Property to unaffiliated third party purchasers in
the future without first obtaining the consent of Investors, in the event, and
solely to the extent that, the Sale is not consummated for any reason. In that
event, the General Partners believe that the Amendment may provide the Fund with
greater flexibility in negotiating with subsequent potential purchasers of the
Fund's assets, who may otherwise discount their offers to purchase the
Facilities because of delays, costs, and uncertainties related to the
requirement to seek Investor approval of a sale of all or substantially all of
the Fund's assets.
Failure to Approve Amendment (See page 33)
If Investors do not approve the Amendment, and the closing of the Sale
does not occur, the Fund may not sell the Fund Property in the future without
the consent of the holders of a majority of outstanding Units. The General
Partners believe this could limit the amount the Fund may be able to receive in
any future sale of its assets. If the closing of the Sale occurs the Amendment
will be moot.
Recommendation of the General Partners (See page 33)
After careful consideration, the General Partners have determined that
the Proposals are fair to and in the best interests of the Fund and its
Investors. The General Partners recommend that Investors consent to each of the
Proposals.
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DESCRIPTION OF THE SOLICITATION
Purpose of the Solicitation
In the accompanying Consent Form, the General Partners on behalf of the
Fund are soliciting consents from Investors for the purpose of approving the
proposed Sale, Liquidation and Amendment.
The cost of preparing, assembling, printing and mailing this
Solicitation Statement and the enclosed Consent Form, and the cost of soliciting
Consent Forms, will be borne by the Fund. Solicitation of the Consent Forms will
be made initially by mail. In addition to solicitation by mail, Consent Forms
may also be solicited, on behalf of the Fund, in person, by telephone or by
facsimile by directors, officers or other regular employees of any General
Partner. No additional compensation will be paid to directors, officers or other
regular employees of such General Partner for such services.
Expiration Date; Extension; Amendment
This Solicitation Statement is furnished by the General Partners, on
behalf of the Fund, in connection with the solicitation of Consent Forms. The
Solicitation will expire at 5:00 p.m., Eastern Time, on [June __, 2005] (the
"Expiration Date"), unless extended by the General Partners in their sole
discretion. The Fund expressly reserves the right, in the sole discretion of the
General Partners, (i) to extend the Expiration Date, from time to time, until
the Requisite Consents (as defined below) have been obtained, and (ii) to amend,
at any time or from time to time, before the Requisite Consents are obtained,
any terms of the Solicitation. As promptly as practicable following any such
extension or any material amendment to this Solicitation, notice thereof shall
be given by the Fund to each Investor in writing.
Record Date; Requisite Consents
The Fund has fixed the close of business on June 1, 2005 as the Record
Date for determining the Investors entitled to notice of and to consent to the
Sale, Liquidation and Amendment. Only Investors on the Record Date or their duly
designated proxies may execute and deliver a Consent Form.
As of the Record Date, there were 1,540,040 Units outstanding held by
approximately [1,596] holders of record. Each Investor is entitled to one vote
per Unit. In order to consummate the Sale, Liquidation and Amendment, the
General Partners are seeking the affirmative consent of Investors owning more
than 50% of the issued and outstanding Units or 770,021 Units (the "Requisite
Consents") to each Proposal. For each Proposal abstentions are not counted as
affirmative votes for approval of the particular Proposal and, accordingly, have
the effect of a vote against the particular Proposal. Although Investor approval
is being requested for all three Proposals the approval of the Amendment is not
contingent upon Investor approval of any other Proposal. The approval of the
Sale and the Liquidation are, however, contingent upon Investor approval of both
of these Proposals. This means that the Sale and the Liquidation will not occur
unless Investors approve both the Sale and the Liquidation. If Investors do not
approve both of
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the Sale and the Liquidation, the Fund will not complete the Sale and will not
distribute any cash proceeds to Investors at this time.
Consent Procedures
INVESTORS WHO DESIRE TO CONSENT TO ANY PROPOSAL SHOULD DO SO BY MARKING
THE "CONSENT" BOX FOR EACH OF THE (A) SALE, (B) LIQUIDATION, AND (C) AMENDMENT,
ON THE CONSENT FORM INCLUDED HEREWITH, AND COMPLETING, SIGNING, DATING AND
DELIVERING THE CONSENT FORM TO THE FUND BY MAIL IN THE SELF-ADDRESSED,
POSTAGE-PAID ENVELOPE ENCLOSED FOR THAT PURPOSE, BY OVERNIGHT COURIER OR BY
FACSIMILE AT THE ADDRESS OR FACSIMILE NUMBER SET FORTH ABOVE AND ON THE CONSENT
FORM, ALL IN ACCORDANCE WITH THE INSTRUCTIONS CONTAINED HEREIN AND THEREIN.
All Consent Forms that are properly completed, signed and delivered to
the Fund and not properly revoked prior to the Expiration Date, will be given
effect in accordance with the specifications thereof. IF A CONSENT FORM IS
DELIVERED AND NONE OF THE "CONSENT," "DOES NOT CONSENT" OR "ABSTAIN" BOXES ARE
MARKED WITH RESPECT TO ANY OF THE (A) SALE, (B) LIQUIDATION OR (C) AMENDMENT,
BUT THE CONSENT FORM IS OTHERWISE PROPERLY COMPLETED AND SIGNED, THE UNITHOLDER
WILL BE DEEMED TO HAVE CONSENTED TO THE MATTER TO WHICH SUCH NON-VOTE RELATES.
Consent Forms must be executed in the same manner as the name(s) in
which ownership of the Units is registered. If the Units to which a Consent Form
relates are held by two or more joint holders, all such holders must sign the
Consent Form. If a Consent Form is signed by a trustee, partner, manager,
executor, administrator, guardian, attorney-in-fact, officer of a corporation,
or other person acting in a fiduciary, agency or representative capacity, such
person must so indicate when signing and must submit with the Consent Form
evidence satisfactory to the Fund of authority to execute the Consent Form.
The execution and delivery of a Consent Form will not affect an
Investor's right to sell or transfer the Units (subject to Article VII and other
applicable provisions of the Partnership Agreement and the requirements of
Federal and applicable state securities laws). All Consent Forms received by the
Fund (and not properly revoked) prior to the Expiration Date will be effective
notwithstanding a record transfer of such Units subsequent to the Record Date,
unless the Investor revokes such Consent Form prior to 5:00 p.m., Eastern Time,
on the Expiration Date by following the procedures set forth under the heading
"DESCRIPTION OF THE SOLICITATION -- Revocation of Instructions" below.
All questions as to the validity, form and eligibility (including time
of receipt) of a Consent Form, consent procedures, interpretations of the terms
and conditions of this Solicitation, and any other applicable matter will be
determined by the General Partners in their sole discretion, which determination
will be conclusive and binding on the Investors. The Administrative General
Partner, in its sole discretion, on behalf of the Fund, reserves the right to
reject any or all Consent Forms that are not properly executed, dated or are
otherwise not in
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proper form, and such rejected Consent Forms will not be counted as a vote on
any matter presented to the Investors. The Administrative General Partner, in
its sole discretion, on behalf of the Fund, also reserves the right to waive
any delivery defects or irregularities or conditions as to applicable Consent
Forms and upon such waiver to count such Consent Forms in connection with the
matters presented to a vote of Investors. Unless waived by the Administrative
General Partner, in its sole discretion, the delivery of any Consent Form that
is the subject of a delivery defect or irregularity or failure of a delivery
condition will not be deemed to have been made until and unless all such
defects, irregularities or failed conditions have been cured by the applicable
Investor prior to the Expiration Time, however, none of the General Partners,
any of their respective affiliates or any other persons shall be under any duty
to give any notification of any such defects, irregularities or failed
conditions, or waivers thereof, to the applicable Investor, nor shall any of
them incur any liability for failure to give such notification.
Revocation of Instructions
Any Investor who has delivered a Consent Form to the Fund may revoke
any voting instructions set forth in such Consent Form by delivering to the
Administrative General Partner a written notice of revocation prior to 5:00
p.m., Eastern Time, on the Expiration Date. In order to be effective, a notice
of revocation of any voting instructions set forth in a Consent Form must (a)
contain the name of the Investor who delivered the Consent Form, (b) be in the
form of a subsequent Consent Form with such Investor's voting choice as to each
matter submitted to a vote of Investors clearly marked either as "CONSENT" or
"DOES NOT CONSENT" or "ABSTAIN", as the case may be, (c) be signed by the
Investor thereof in the same manner as such Investor's signature appears on the
records of the Fund, (d) bear a date that is later than the date of the Consent
Form that is being revoked, and (e) be received by the Administrative General
Partner prior to 5:00 p.m. Eastern Time, on the Expiration Date at its address
set forth on the Consent Form. A purported notice of revocation that lacks any
of the required information, is dispatched or delivered to an improper address
or is not received in a timely manner will not be effective to revoke the voting
instructions set forth in a Consent Form previously given. A revocation of the
voting instructions set forth in a Consent Form can only be accomplished in
accordance with the foregoing procedures. NO INVESTOR MAY REVOKE THE VOTING
INSTRUCTIONS SET FORTH IN A CONSENT FORM AFTER 5:00 P.M., EASTERN STANDARD TIME,
ON THE EXPIRATION DATE.
No Dissenting Investors' Rights
Under the Delaware Revised Uniform Limited Partnership Act and under
the Partnership Agreement, Investors do not have dissenter's appraisal rights in
connection with the Sale.
INTERESTS OF CERTAIN PERSONS
In considering the recommendations of the General Partners in favor of
the Proposals you should be aware that Genesis Eldercare Network Services, Inc.
(the "Manager"), an affiliate of the Development General Partner, is currently
the manager of the Facilities pursuant to management agreements with the Fund.
Under the Purchase Agreement, Purchaser acknowledged that Manager and Purchaser
are expected to enter into negotiations regarding a
-10-
contract or contracts pursuant to which Manager would manage the Facilities for
Purchaser or its designee following the Closing.
Pursuant to the management agreements by and between the Fund and
Manager entered into at the inception of the Fund in 1988, Manager has certain
purchase rights regarding the Facilities that effectively require the Fund to
first offer to sell any or all of the Facilities to Manager at a price greater
than or equal to 95% of the Facility's appraised value before such Facilities
may be offered for sale to any third party purchaser. The General Partners
believe that this right of first offer to purchase the Facilities has limited
the Fund's ability to market the Facilities without restriction. The Manager's
waiver of this right of first offer is a condition to Seller's obligation to
close the Sale.
The General Partners believe Purchaser's willingness to negotiate with
Manager regarding management of the Facilities was a factor that influenced
Manager's decision to waive its right of first offer in respect of the Sale. The
fact that Manager and Purchaser or its designee actually enter into a contract
or contracts for the management of the Facilities, and the specific terms and
conditions of any such contract or contracts, are not conditions to any party's
obligation to close the Sale.
In connection with the Sale, Manager and the Fund entered into a letter
agreement dated February 9, 2005 pursuant to which Manager agreed to waive and
release its right of first offer to purchase the Facilities in respect of the
Sale. If Investors do not approve the Sale, or the closing of the Sale otherwise
does not occur, Seller must provide written notice of the termination or
expiration of the Purchase Agreement to Manager's parent, Genesis HealthCare
Corporation ("Genesis"). During a period of 30 days following any such written
notice, Genesis may purchase the Facilities pursuant to a contract that is
identical in all material respects to the Purchase Agreement. If Seller and
Genesis do not enter into a binding contract for the sale of the Facilities
before the expiration of such 30-day period, Seller will have a period of 120
days from the end of the 30-day period in which to enter into a replacement
contract for the purchase and sale of the Facilities. If Seller is successful at
executing a replacement contract within such 120-day period, then Manager's
waiver of its right of first offer will apply with respect to such replacement
contract. If Seller does not enter into a replacement contract, or any such
replacement contract is terminated or expires without closing, Manager's waiver
will be deemed null and void and it will continue to have a right of first offer
with respect to the Facilities. Unless the Amendment is approved by Investors,
any sale of the Facilities to Genesis or pursuant to a replacement contract
would continue to require the consent of the holders of a majority of the issued
and outstanding Units, which would be solicited pursuant to a separate
solicitation statement.
As of the date of this Solicitation Statement Purchaser or its designee
and Manager (and its affiliates) have not entered into management agreements for
the Facilities. However, it is anticipated that they will enter into such
management agreements and that the management fee payable pursuant to such
contracts will be in the range of approximately 4% of the gross revenues of each
Facility plus certain performance incentives, which the General Partners believe
is consistent with that which would be negotiated at arms' length between
unrelated parties.
-11-
If the Transaction is completed and the liquidating trust described
below is created, the Administrative General Partner will administer the
liquidating trust without profit.
DESCRIPTION OF THE FACILITIES
Each of the Operating Partnerships owns a single Facility. The Manager,
an affiliate of the Development General Partner, manages the Facilities pursuant
to management agreements. Summary characteristics of the Facilities are
described below.
o Caton Manor. Caton Manor is owned by Caton Manor Meridian Limited
Partnership and located at 3330 Wilkins Avenue in Baltimore City,
Maryland. Caton Manor is a 168-bed skilled nursing facility
located on 0.92 acres, constructed in 1972, consisting of an "L"
shaped four-story plus basement masonry structure containing a
total of 48,660 square feet. All 168 beds are comprehensive care
beds and are all Medicare-certified. All rooms are semi-private.
o College View. College View is owned by Frederick Meridian Limited
Partnership and located at 700 Toll House Avenue in Frederick,
Maryland. College View is a 137-bed skilled nursing facility
located on 1.13 acres, originally constructed in 1966, consisting
of a two-story plus partial basement masonry structure, the second
floor was added in 1968, containing a total of 52,661 square feet.
All 137 beds are comprehensive care beds and all are
Medicare-certified.
o Hamilton Center. Hamilton Center is owned by Hamilton Meridian
Limited Partnership and located at 6040 Harford Road in Baltimore
City, Maryland. Hamilton Center is a 104-bed skilled nursing
facility located on 1.06 acres, constructed in 1972, consisting of
a "T" shaped two-story plus partial basement masonry structure
containing 22,082 square feet. All 104 beds are comprehensive care
beds and all are Medicare-certified. The facility contains two
private rooms, 15 semi-private rooms, 4 three-person rooms and 15
four-person rooms.
o Mooresville Center. Mooresville Center is owned by Mooresville
Meridian Limited Partnership and located at 550 Glenwood Road in
Mooresville, North Carolina. Mooresville Center is a 160-bed
skilled nursing facility located on 11.38 acres, originally
constructed with 100 beds in 1988 with a 60-bed addition completed
in 1992 consisting of a one-story slab on grade building
containing a total of 47,657 square feet. Mooresville Center
contains 130 beds for skilled care and intermediate care
residents, all of which are Medicare-certified. The facility also
contains 30 beds in the Home for the Aged wing. There are 8
private rooms and 76 semi-private rooms.
o Randallstown Center. Randallstown Center is owned by Randallstown
Meridian Limited Partnership and located at 9109 Liberty Road in
Randallstown, Maryland. Randallstown Center is a 215-bed skilled
nursing facility located on 2.83 acres, constructed in 1971
consisting of a rectangular-shaped two-story plus partial basement
masonry structure containing a total of 72,780 square feet. All
215 beds are comprehensive care beds and all are
Medicare-certified; however, on December 29, 2004, Randallstown
Center requested the temporary de-licensure of 45 comprehensive
care beds for a period of up to 12 months. The facility contains
23 private rooms and 96 semi-private rooms.
-12-
o Salisbury Center. Salisbury Center is owned by Spencer Meridian
Limited Partnership and located at 710 Julian Road in Salisbury,
North Carolina. Salisbury Center is a 180-bed skilled nursing
facility located on 6.02 acres, originally constructed with 120
beds in 1988 with a 60-bed addition completed in 1991 consisting
of a one-story slab on grade building containing a total of 50,500
square feet. Salisbury Center contains 160 beds for skilled care
and intermediate care residents, all of which are
Medicare-certified. The facility also contains 20 beds in the Home
for the Aged wing. There are 16 private rooms and 82 semi-private
rooms.
o The Woodlands. The Woodlands is owned by Plainfield Meridian
Limited Partnership and located at 1400 Woodland Avenue in
Plainfield, New Jersey. The Woodlands is a 140-bed skilled nursing
facility located on 6.52 acres, constructed in 1989 consisting of
a two-story slab on grade building containing a total of 54,000
square feet. The Woodlands contains 120 comprehensive care beds,
all of which are Medicare-certified, and 20 residential care beds.
There are 12 private rooms, 46 semi-private rooms, and 9 four-bed
rooms.
THE SALE
The terms of the Fund's limited partnership agreement require the
General Partners to conduct the affairs of the Fund in the best interests of the
Fund and its Investors, including the ownership and use of all Fund assets for
the benefit of the Fund. The exercise of such fiduciary duties obligates the
General Partners to evaluate, from time to time, whether or not, in the
reasonable judgment of the General Partners, it would be in the best interests
of the Fund and its Investors to effectuate a sale or refinancing of all or a
portion of the Fund Property.
To satisfy their obligations under the Fund's limited partnership
agreement and the investment objectives established at the formation of the
Fund, the General Partners have regularly evaluated different strategies
involving the sale of some or all of the Fund Property with a view towards
maximizing the value of the Units of the Fund. Specifically, the General
Partners have evaluated the options of continuing to own the Facilities, selling
one or more of the Facilities on an individual basis, or selling all of the
Facilities as a portfolio. As discussed below, the General Partners determined
that several factors, including, but not limited to, uncertainty relating to
future Medicare and Medicaid reimbursement rates, the advanced age of the
Facilities, capital improvements likely to be needed, and potentially attractive
sales prices for the Fund Property, weighed against continuing to own the
Facilities and in favor of a sale at this time. In addition, the General
Partners determined that the sale of the seven Facilities, as a portfolio, would
allow the Fund to command a fair sale price for the Facilities, which would,
therefore, produce a fair return to Investors.
Reasons for the Sale
Uncertainty Related to Medicare and Medicaid Reimbursement
-13-
A material portion of the Fund's revenues (84% in fiscal 2004) is
derived from Medicare and Medicaid reimbursements. These programs are highly
regulated by federal, state and local laws, rules and regulations, and subject
to frequent and substantial change. Pursuant to federal legislation, since 1998
the majority of skilled nursing facilities in the United States have been
compensated under a Medicare prospective payment system on a per diem
prospective case-mix adjusted basis for all covered services provided to
Medicare beneficiaries. Medicaid, a state administered program that utilizes
state and federal matching funds, also provides reimbursement for residents who
qualify. Although Medicaid programs vary from state to state, traditionally they
have provided for payments up to established limits, at rates determined in
accordance with each state's regulations. Approximately 59.7% of the revenues
that the Facilities received for fiscal year 2004 related to Medicaid programs.
The healthcare industry is experiencing a strong trend toward cost
containment, as federal and state governments seek to impose lower reimbursement
and resource utilization group rates, limit the scope of covered services and
negotiate reduced payment schedules with providers. These cost containment
measures generally have resulted in a reduced rate of growth in the
reimbursement for the services provided at the Facilities relative to the
increase in the costs to provide such services. In addition, the federal
government did not extend for fiscal year 2005 temporary funding increases for
state Medicaid programs and federal and state governments may reduce the funds
available under those programs in the future or require more stringent
utilization and quality reviews of skilled nursing facilities or other
providers.
The Centers for Medicare and Medicaid Services ("CMS") has commissioned
a study of the skilled nursing payment system in an effort to explore both
short-term and long-term refinements and solutions to its case-mix methodology.
The Fund believes that a report of the findings of the study is in final CMS
review and that its recommendations will be considered as part of the proposed
fiscal year 2006 rules, effective October 1, 2005. Although the Fund is unable
to predict with certainty the extent of the impact of the anticipated refinement
to the resource utilization group classification system on the Fund's operating
results, the General Partners believe it is likely to result in a significant
reduction in its revenues and profitability, which could adversely affect the
Fund's ability to increase or maintain the level of distributions to Investors.
CMS also released a proposed rule in February 2003 that, if
implemented, would limit Medicare reimbursement to certain providers, including
skilled nursing facilities, for bad debt arising from unpaid beneficiary
deductibles and coinsurance amounts. In the proposed rule, CMS indicated that
reimbursement rates would be reduced by 10% each year for three years until
reimbursement rates to skilled nursing facilities for bad debt equal 70% of
reimbursement rates during federal fiscal year 2003. CMS has not issued a final
rule on this issue, and the General Partners cannot predict whether CMS will
implement these proposed policies or when the final rule may be issued. However,
extensive cuts in Medicare payments for bad debt could have a material adverse
affect on the Fund's financial condition and results of operations, which could
adversely affect its ability to increase or maintain the level of distributions
to Investors.
The federal Medicaid statute specifies a variety of requirements that a
state Medicaid plan must meet, including requirements relating to eligibility,
coverage of services, payment and administration. For patients eligible for
Medicaid, the Facilities bill the individual state
-14-
Medicaid program or, in certain circumstances, the state designated managed
care or other similar organizations. The reimbursement rates for pharmacy
services under Medicaid are determined on a state-by-state basis subject to
review by CMS and applicable federal law. Federal regulations and the
regulations of certain states establish "upper limits" for reimbursement for
certain prescription drugs under Medicaid.
The Medicare Prescription Drug, Improvement and Modernization Act of
2003 (the "MMA"), signed into law by the President on December 8, 2003, may have
an adverse impact on skilled nursing facilities. The MMA constitutes a
significant overhaul of the Medicare system, including provisions to provide
subsidies to insurers and managed care organizations and establishes mechanisms
to allow private healthcare coverage plans to compete with Medicare initially on
a pilot basis.
Effective January 1, 2006, under the MMA, Medicaid coverage of
prescription drugs for Medicare beneficiaries who are also eligible for Medicaid
("dual eligible(s)") will be shifted to the Medicare program. This change could
affect a significant percentage of dual eligible residents in the Facilities. As
a result of shifting prescription drug coverage from Medicaid to Medicare
through such private plans, the MMA could affect the ability of long-term care
pharmacies to provide pharmacy service to the Facilities' residents. Currently,
a contractor provides long term pharmacy services required by federal law for
residents of the Facilities and is reimbursed primarily through the Medicaid
program. The final regulations under the MMA specifically require the new
prescription drug plans and Medicare Advantage Plans that offer prescription
drug coverage to provide convenient access to long term care pharmacies and to
offer standard contracts to all long-term care pharmacies within the plans'
service areas that meet performance standards to be specified by CMS. However,
we do not yet know whether payment rates for the prescription drugs provided by
these plans will be sufficient to cover the costs of the pharmacy needs of the
Facilities' residents. Thus, there is a risk that the implementation of the MMA
may disrupt pharmacy services to the Facilities. Any such change or reduction in
long term care pharmacy services could create additional cost for the Fund,
reduce the Fund's ability to meet quality standards and disrupt service delivery
to the Facilities' residents.
Additionally, the MMA covers most prescription drugs, insulin and
certain insulin supplies, and approved vaccines. However, certain drugs are
excluded from coverage under the new Medicare benefit in Part D, including
several drugs that are commonly prescribed for skilled nursing facility and
other long term care residents. As a result, there is a risk that if these
prescription drug costs are not reimbursed under Medicaid or through Medicare,
the Fund will be required to bear the cost of these drugs in order to provide
services to residents.
Any future changes in Medicaid reimbursement programs or in regulations
relating thereto, such as reductions in the allowable reimbursement levels or
the timing of processing of payments, could adversely affect the Facilities. The
annual increase in the federal share could vary from state to state based on a
variety of factors, which, if ultimately signed into law, could further impact
the Facilities. Additionally, effective January 1, 2006, as a result of the MMA,
the Medicaid program will cease covering outpatient prescription drugs for
beneficiaries who are eligible for both Medicare and Medicaid.
-15-
Accordingly, the Fund cannot be assured that federal reimbursement will
remain at levels comparable to present levels and that such reimbursement will
be sufficient to increase or maintain the level of distributions to Investors.
The Fund also cannot be assured that there will be any future legislation to
increase payment rates for skilled nursing facilities. The Bush Administration's
current fiscal year 2006 budget proposes a $1.5 billion cut in Medicare
financing for fiscal year 2006. It also proposes a substantial decrease in funds
for Medicaid. If payment rates for skilled nursing facilities are not increased
in the future, we may have difficulty increasing or maintaining the level of
distributions to Investors.
The General Partners also believe that these anticipated regulatory
refinements are decreasing current market valuations for skilled nursing
facilities. As a result of the considerable uncertainty regarding Medicare and
Medicaid reimbursement rates the General Partners believe that a sale at this
time is in the best interests of the Fund and its Investors because it will
allow the Fund to command a higher sale price for the Fund Property than it may
be able to command in the future.
Facility Lifespan
The average age of the Facilities is 27 years. The Fund has owned the
Facilities for seventeen years. This hold period is longer than that originally
expected when the Fund was formed in 1988. As older properties, the operating
results for the Facilities in recent years have begun to be adversely affected
by the cost of capital expenditures required to maintain the condition of the
Facilities. Over the next two years the General Partners estimate a minimum of
three to four million dollars will be needed for repairs or improvements for
items such as sprinkler systems, roofs, parking lots, windows, generators,
elevators and other mechanical equipment. Substantial additional capital
expenditures may be required to enable the Facilities to effectively compete
with other skilled nursing facilities in the market, especially newer
facilities. In addition, capital expenditure requirements as a percentage of
revenues are likely to rise in future years as the Facilities continue to age
and such capital expenditure requirements are expected to adversely impact the
Fund's ability to increase or maintain the level of distributions to Investors.
Accordingly, the General Partners believe that a sale of the Fund
Property at this time is in the best interests of the Fund and its Investors
because it is consistent with the goal of maximizing the value that may be
returned to Investors by avoiding such capital expenditures.
Portfolio Sale
The General Partners believed that a sale of the seven Facilities as a
portfolio could attract a national buyer for the Fund Property, as opposed to a
series of sales to individual operators. The General Partners believed that a
national buyer would be more likely to pay a higher purchase price for the
Facilities because it would have the ability to achieve economies of scale,
lower marginal costs, and have the ability to spread any required capital
expenditures across a broader portfolio of facilities. In addition, the General
Partners believed that a national buyer would have greater assurance of
obtaining financing. The General Partners based these determinations on their
past experience as a buyer and seller of properties and a review of news
reports, SEC filings and other information regarding recent mergers,
acquisitions and bankruptcies in the skilled nursing and long term-care
industries.
-16-
Accordingly, the General Partners determined it was in the best
interests of the Fund and its Investors to explore a sale of the seven
Facilities, as a portfolio, believing such a sale could produce fair sales
price, which is consistent with the goal of maximizing the value that may be
returned to Investors.
Negotiations Regarding the Facilities
Representatives of the Development General Partner believe Formation
Capital is a substantial investor, owner and manager of long-term healthcare and
skilled nursing facilities in the United States and has been actively acquiring
interests in skilled nursing facilities in recent years. As a result of
operating in the long-term healthcare and skilled nursing facility market,
representatives of the Development General Partner have had occasion to meet and
speak with representatives of Formation Capital. In addition, affiliates of the
Development General Partner manage facilities for Formation Capital pursuant to
management agreements. Consistent with their interactions with many other owners
and managers of and investors in skilled nursing facilities, such conversations
have included general, non-specific discussions regarding the properties owned
by each party. As a result of the Development General Partner's knowledge of and
general discussions with representatives of Formation Capital, the General
Partners identified Formation Capital as a potential purchaser of the
Facilities. During the first quarter of 2004, in a general, non-binding
expression of interest, representatives of Formation Capital indicated to
representatives of the Development General Partner that it might be interested
in acquiring the Facilities.
Based on the factors considered by the General Partners, including the
uncertainty related to Medicare and Medicaid reimbursement, Facility lifespan,
and desirability of the sale of the Facilities as a portfolio, along with the
expression of interest from representatives of Formation Capital,
representatives of the Administrative General Partner sought the advice of Mr.
Darren Cortese, an independent real estate consultant and principal of
Healthcare Acquisition Network, which is located in Baltimore, Maryland, at a
meeting on March 19, 2004. Mr. Cortese has over 15 years of experience in the
long-term healthcare industry. During his career, Mr. Cortese has been involved
in mergers, acquisitions and divestitures of more than 140 skilled nursing
facilities. The Administrative General Partner selected Mr. Cortese because he
was a local long-term healthcare consultant who the Administrative General
Partner has known since 2000. Nationwide Health Properties, Inc. originally
introduced Mr. Cortese to the Administrative General Partner. The Administrative
General Partner did not pay Mr. Cortese any fees or compensation in connection
with this evaluation. Over the last several years, Mr. Cortese has assisted the
Administrative General Partner in evaluating the operating performance of the
Facilities and has provided an overview of sales and market conditions within
the long-term healthcare industry. The Fund has paid Mr. Cortese and Healthcare
Acquisition Network approximately $3,782 for consulting services since 2002.
During the meeting with Mr. Cortese, representatives of the
Administrative General Partner reviewed information regarding the Facilities and
the Fund's financial results through fiscal 2003. The representatives of the
Administrative General Partner advised Mr. Cortese that they were interested in
exploring possible sale opportunities for the Facilities and wanted to estimate
the market value of the Facilities. The representatives of the Administrative
General Partner did not expressly impose any limits with respect to the scope of
Mr. Cortese's
-17-
investigation. However, the representatives of the Administrative General
Partner did request that Mr. Cortese provide his valuation during the meeting
and based upon the information known to Mr. Cortese or presented during the
meeting. As a result, Mr. Cortese considered a variety of factors including the
information provided by the Administrative General Partner regarding the
Facilities, the 2003 operating data and his knowledge of the skilled nursing
facility market in the Mid Atlantic Region of the United States in reaching a
valuation based upon the totality of the information available to him. Among
other factors, Mr. Cortese gave particular emphasis to the age and location of
the Facilities, specifically including his knowledge of market conditions for
skilled nursing facilities, and access to capital for acquisitions thereof, in
Maryland, North Carolina and New Jersey, as well as the number of patient beds
and occupancy rates in each of the Facilities. Mr. Cortese also considered the
level of deferred capital expenditures with respect to the Facilities,
particularly as compared to similarly situated facilities. Mr. Cortese primarily
considered valuation as a multiple of the Fund's 2003 net operating income and,
secondarily, as a price per patient bed. Mr. Cortese estimated that a sale of
the Facilities for $45,000,000 would represent a multiple in the range of
approximately 6.8 times the Fund's 2003 operating cash flow of approximately
$6,600,000 and a price of approximately $40,760 per patient bed, based upon the
Facilities' 1104 patient beds. This valuation compared favorably to recent sales
prices of other skilled nursing facilities in the region, which, in Mr.
Cortese's opinion, had generally reflected multiples to operating cash flow of
approximately 6.5 and prices per patient bed in Maryland and North Carolina in
the range of approximately $40,000 or less. Accordingly, Mr. Cortese estimated
that the Facilities, as a portfolio, had a value in the range of $45,000,000.
Furthermore, Mr. Cortese indicated that market conditions suggested that a
purchaser would allow the Fund to retain a portion of its working capital. He
advised that the market would allow the Fund to retain working capital in excess
of a ratio of current assets to current liabilities equal to 1.2 to 1. Mr.
Cortese also advised that Formation Capital had recently been very active in
acquiring skilled nursing facilities and had a good track record with respect to
closing such acquisitions.
To minimize the Fund's expenses, the Administrative General Partner did
not request Mr. Cortese to provide any form of written report, opinion or
appraisal at or following the meeting.
On June 25, 2004 the Fund received a written offer from Formation
Capital to purchase the Facilities for $45,000,000. In response to this offer,
over the next several months the Fund provided certain historical financial and
operating data to Formation Capital including the Fund's balance sheet and 2004
operating budget, monthly operating statements and occupancy history for the
Facilities in 2001 - 2003 and 2004 to date, tax bills for 2001 - 2003, insurance
certificates, insurance loss history for 2001 - 2004, material vendor and
service contracts of the Operating Partnerships, Medicare/Medicaid rate letters,
state and federal clinical survey documents for 2002, 2003 and 2004 to date, a
list of capital expenditures and improvements completed over the previous three
years, and a preliminary 2005 budget primarily based upon historical experience
and trends. The 2004 projections provided to Formation Capital were prepared in
November 2004, contained the ten months ended October annualized, and were
materially consistent with the Fund's actual results of operations. The 2004
projections provided to Formation Capital showed total net revenues of
approximately $64,678,000, total expenses of approximately $61,898,000 and net
earnings of approximately $2,781,000, while the Fund's actual results for 2004
were total net revenues of approximately $65,706,000, total expenses of
approximately $62,287,000 and net earnings of approximately $3,419,000. The
difference between projected
-18-
and actual total net revenues was primarily the result of
approximately $727,000 in non-recurring, prior years (that is, pre-2004)
Medicare and Medicaid cost report settlements, which, consistent with past
practice, are not budgeted, but are recognized as revenue when cost report
settlements are finalized. The difference between projected and actual total
expenses was primarily the result of the inclusion of certain Fund general and
administrative expenses in the Fund's audited financial statements that are not
projected or budgeted at the operating level. A summary of the preliminary
budget for 2005 showed total net revenues of approximately $67,890,000, total
expenses of approximately $65,065,000 and net earnings of approximately
$2,825,000. Other than the information contained in the 2004 projections and
preliminary budget for 2005, the Fund did not provide any forecasts or any other
form of projections to Formation Capital.
On July 21, 2004 the Fund made a counter offer, offering to sell the
Facilities for $50,000,000 plus a payment equal to the Fund's net working
capital in excess of a ratio of current assets to current liabilities equal to
1.2 to 1. On August 31, 2004 the Fund received a second offer from Formation
Capital, offering to purchase the Facilities for $48,000,000 plus a payment
equal to the Fund's net working capital in excess of $4,000,000.
In September 2004 Mr. Todd Robinson, an individual and an Investor in
the Fund, advised the Fund that he was interested in acquiring general and
limited partner interests in the Fund. On September 9, 2004 the Fund and Mr.
Robinson entered into a confidentiality agreement and the Fund provided certain
historical financial and operating data to Mr. Robinson. On October 27, 2004 the
Fund received a preliminary term sheet and proposed discussion points from Mr.
Robinson outlining a non-binding proposal pursuant to which Mr. Robinson
indicated an interest in purchasing all of the outstanding general and limited
partner interests in the Fund and the Operating Partnerships for cash. This term
sheet set forth a proposed purchase price of up to $21.50 per Unit based on the
Fund's 2003 audited balance sheet, subject to adjustment to account for any
changes in the balance sheet as of the closing date. Although this proposed term
sheet did not present a proposed aggregate offering price, based on 1,540,040
Units outstanding, the suggested aggregate offering price was $33,110,860. Under
the terms of the proposal, Mr. Robinson would have held back a portion of the
purchase price equal to approximately $2.00 per Unit, subject to release to
Investors following the expiration of certain Medicaid and Medicare audit
periods with no unfavorable adjustments or paybacks. The transaction proposed in
the term sheet was subject to a number of significant conditions, including the
following: Mr. Robinson's satisfactory due diligence review, including
satisfactory title, engineering and environmental reports; that the Fund
guarantee at least 90% of its accounts receivable as of December 31, 2003 and as
of the closing date would be collectable by Mr. Robinson; and, that all
agreements with Manager would be terminable upon no more than 30 days notice and
satisfactory transition of management of the Facilities to Mr. Robinson. The
proposed term sheet was also conditioned upon Mr. Robinson's receipt of lender's
consents to assume the existing indebtedness of the Fund for fees not to exceed
1.5% of the outstanding principal balance thereof.
It has been the General Partners' experience in the purchase and sale
of commercial real estate and real estate-owning entities that preliminary
offers made by potential purchasers prior to the completion of due diligence are
frequently intended to serve as a starting point for negotiations and often are
not reflective of the final purchase price. In the General Partners'
-19-
experience, potential purchasers frequently seek to negotiate a final purchase
price that is lower than such initial offer following the completion of their
due diligence review. Following conversations with Mr. Robinson, the General
Partners were not confident that the ultimate price at which Mr. Robinson would
be willing to acquire general and limited partner interests would be as high as
the price outlined in his preliminary term sheet. Rather, the General Partners
were concerned that Mr. Robinson's preliminary offer represented a relatively
high price designed to draw the Fund into negotiations, but that Mr. Robinson
would likely attempt to negotiate a lower final purchase price following his
completion of due diligence. In addition, the General Partners were concerned
about all of the substantial conditions to Mr. Robinson's offer. The General
Partners were not aware of any similar acquisitions of skilled nursing
facilities completed by Mr. Robinson nor were they confident that he had access
to sufficient capital to complete the transaction as described in the
preliminary term sheet. Finally, the General Partners advised Mr. Robinson that
they did not own any material amount of limited partner interests and,
therefore, any acquisition by Mr. Robinson of all of the limited partner
interests would require a tender offer directly to the Investors of the Fund.
The General Partners are not aware of any tender offer made by Mr. Robinson or
any additional actions taken by Mr. Robinson to acquire limited partner
interests. The General Partners believe that Mr. Robinson subsequently sold his
Units to an affiliate of Formation Capital in a private sale for a purchase
price equal to approximately $21.50 per Unit.
On September 21, 2004 representatives of the Administrative General
Partner met with representatives of LTC Acquisition LLC ("LTC") to determine
whether LTC might have an interest in purchasing the Fund's Facilities. LTC is a
private investment entity organized for healthcare real estate investments.
Following this initial contact, LTC requested information regarding the
Facilities and the financial results of the Fund, which the Fund provided. On
October 22, 2004 the Fund received an offer from LTC to purchase the Facilities
for $48,500,000 plus a payment equal to the Fund's net working capital.
On October 26, 2004 the Fund received an unsolicited offer from Nexion,
Inc. ("Nexion") to purchase the Facilities for $51,000,000. Nexion is a
privately-owned skilled nursing facility operating company. The October 26 offer
from Nexion did not discuss specific transaction terms nor did it discuss, in
any respect, payment of any amount in respect of the Fund's net working capital.
Following receipt of the Nexion offer, representatives of the Administrative
General Partner had a conversation with representatives of Nexion regarding its
offer.
On November 12, 2004 the Fund received yet another offer from Formation
Capital to purchase the Facilities for $50,000,000 plus a payment equal to the
Fund's entire net working capital. This offer was not contingent upon Formation
Capital obtaining financing. The General Partners determined that this offer was
superior to both the Nexion and LTC offers due to the offered purchase price,
likelihood of financing and scope of due diligence already conducted by
Formation Capital compared to the lack of due diligence undertaken by Nexion. In
addition, the General Partners expected to be able to obtain a waiver by Manager
of its right of first offer. As a result, on November 26, 2004 the Fund entered
into a letter of intent with Purchaser.
On December 20, 2004 the Fund received a second offer from Nexion to
purchase the Facilities for a purchase price of $51,000,000 plus a payment equal
to the Fund's net working
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capital. Notwithstanding the existence of the letter of intent with
Purchaser, the General Partners evaluated the revised offer from Nexion. Upon
evaluation of the new offer from Nexion and exercise of their reasonable
business judgment, the General Partners determined that it was not in the best
interests of the Fund or its Investors to terminate the letter of intent with
Purchaser and enter into negotiations with Nexion. This judgment by the General
Partners was based upon an evaluation of the differences in terms, including
purchase price, between the two offers and the General Partners' assessment of
the relative abilities of Purchaser and Nexion to finance and consummate the
purchase of the Facilities.
In exercise of their business judgment, the General Partners determined
that a number of factors served to discount the difference between the purchase
prices stated in the two competing offers. Specifically, the General Partners
considered the fact that Purchaser had conducted an extensive and substantial
due diligence review of the Fund, the Operating Partnerships and the Facilities.
As a result, the General Partners believed that Purchaser's offer price was
unlikely to be reduced. In contrast, Nexion had not yet undertaken any
substantial due diligence review of the Fund, the Operating Partnerships or the
Facilities. As described above, it has been the General Partners' experience
that offers made prior to completion of substantial due diligence are frequently
subject to reduction following the completion of such due diligence. The General
Partners anticipated that Nexion was likely to reduce its offer following
completion of its due diligence review. The General Partners were not aware of
specific facts likely to cause Nexion to reduce its offer price, rather the
General Partners determined that the fact that Purchaser had conducted extensive
due diligence while Nexion had not was a factor that weighed in favor of
discounting the relative difference between the two offers. The General Partners
further discounted the difference between the purchase prices of the competing
offers in consideration of the transaction expenses, including outside legal
fees, incurred in connection with negotiations with Formation Capital and the
substantial additional transaction expenses expected to be incurred in
connection with any new negotiations with Nexion.
The General Partners also considered the relative abilities of the two
offerors to finance and close the purchase of the Facilities. In this regard,
the General Partners considered Purchaser's known history of closing
acquisitions of skilled nursing facilities relative to the unknown ability of
Nexion to complete the acquisition. The General Partners also considered the
relative abilities of the parties to secure financing and determined that
Purchaser's financing was relatively certain compared to the relative uncertain
ability of Nexion to secure financing. The General Partners did not make a
determination that Nexion would be unable to secure financing. Rather, the
General Partners determined that Formation Capital's size, history and proven
access to capital together with the fact that Formation Capital was willing to
place a $1,000,000 earnest money deposit in escrow were factors that weighed in
favor of the certainty of its financing. In view of these considerations, and,
specifically, the fact that the General Partners could not determine whether
Nexion's ability to finance the acquisition of the Facilities was equal to
Formation Capital's, the General Partners determined that the relative abilities
of the parties to secure financing was a factor that weighed against abandoning
the letter of intent in order to pursue negotiations with Nexion.
The General Partners considered the fact that they expected that
Manager would agree to waive its right of first offer to purchase the Facilities
in connection with the sale to Purchaser. The General Partners understood that
Manager had an interest in continuing to operate the
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Facilities. As a result, the General Partners could not be certain that Manager
would not exercise its right of first offer to purchase the Facilities with
respect to the Nexion offer or any other offer. The General Partners considered
this a factor that weighed against termination of the letter of intent and
pursuit of negotiations with Nexion.
The General Partners also considered the fact that if the Fund
terminated the letter of intent and entered into discussions with Nexion and
delayed working towards a definitive agreement with Purchaser, there was some
risk that Purchaser would withdraw from the transaction. Ultimately, in
consideration of weight of the totality of the factors described above, the
General Partners concluded that it was not in the best interests of the
Investors to terminate the letter of intent with Purchaser, but that it was in
the best interests of the Investors to proceed under the letter of intent
towards the execution of a definitive agreement with Purchaser.
During the fourth quarter of 2004 and the first quarter of 2005
representatives of the General Partners and representatives of Purchaser
conducted numerous negotiations via telephone regarding the definitive purchase
agreement and exchanged several proposed drafts of such agreement. During
February 2005 representatives of the General Partners, including its legal
advisors, presented the material terms and conditions of the Purchase Agreement
and the contemplated Transaction to the General Partners, and other information
including the 2003 and 2004 financial statements, Mr. Cortese's valuation, the
expected future capital expenditures, information regarding the lifespan of the
facilities, the substantial uncertainty regarding Medicare and Medicaid
reimbursement and the proposed Transaction, all as described herein.
The General Partners also took note of the December 2004 sale by
Mariner Healthcare of its portfolio of nine Maryland skilled nursing facilities,
which the General Partners considered to be comparable to a sale of the
Facilities because it involved a recent sale of a portfolio of skilled nursing
facilities located in the state of Maryland, where four of the Fund's seven
Facilities are located. The purchase price for the Mariner Healthcare sale was
approximately $107 million, which the General Partners estimated represents a
multiple of approximately 6.6 times 2004 operating cash flow, which the General
Partners considered to be evidence of the reasonableness of the Purchase Price.
The General Partners discussed the information presented by its
representatives and advisors, asked questions of those representatives and
advisors and considered the terms of the Purchase Agreement and the fiduciary
duties of the General Partners with respect to the proposed Transaction. The
General Partners considered the fact that Manager had agreed to waive its right
of first offer regarding the Facilities and that neither such waiver nor closing
of the Sale was conditioned upon Purchaser and Manager entering into an
agreement for the management of the Facilities after the closing of the Sale.
Finally, the General Partners considered the fact that the terms and conditions
of the Purchase Agreement allowed the Fund to receive payment for 100% of the
Net Working Capital. The General Partners determined that these factors were
favorable to the Fund and its Investors.
After due consideration, the Board of Directors of the Administrative
General Partner and the Board of Directors of the Development General Partner
unanimously approved the Purchase Agreement and the related ancillary
agreements, recommended that the Transaction be approved by Investors and
directed that the Purchase Agreement and the Proposals be submitted to the
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Investors for approval. On February 11, 2005, Purchaser and Seller finalized
and executed the Purchase Agreement. On February 16, 2005 the General Partners
filed a Form 8-K with the SEC disclosing the execution of the Purchase
Agreement.
DESCRIPTION OF THE TERMS OF THE PURCHASE AGREEMENT
Parties to the Purchase Agreement
The Purchase Agreement has been entered into between Purchaser and each
of the Operating Partnerships (collectively, the "Seller"). The summary
contained in this Solicitation Statement is qualified in its entirety by
reference to the Purchase Agreement, which is attached as Annex I hereto and is
incorporated herein by reference, which Investors should read in its entirety.
The Fund is a Delaware limited partnership with its principal executive
office at 300 East Lombard Street, Suite 1200, Baltimore, Maryland 21202;
Telephone Number (410) 727-4083. For a description of the Fund, see the Fund's
Annual Report on Form 10-K for the fiscal year ended December 31, 2004 (the
"Fund's 10-K"), copies of which are being mailed to Investors together with this
Solicitation Statement and are incorporated herein by reference. The
Administrative General Partner of the Fund is Brown Healthcare, Inc., a Maryland
corporation and the Development General Partner of the Fund is Meridian
Healthcare Investments, Inc., a Maryland corporation. The General Partners have
exclusive authority to conduct the business and affairs of the Fund in
accordance with the Fund's limited partnership agreement and applicable law.
Each of the Operating Partnerships is a Maryland limited partnership
and subsidiary of the Fund with its with its principal executive office at 300
East Lombard Street, Suite 1200, Baltimore, Maryland 21202; Telephone Number
(410) 727-4083. The Fund owns a 98.99% limited partner interest and each of the
Fund's General Partners owns a .505% general partner interest in each Operating
Partnership.
Purchaser is a Delaware limited liability company and an affiliate of
Formation Capital. According to SEC filings made by Mr. Arnold Whitman, the
Chief Executive Officer of Formation Capital, Formation Capital is a finance
company focused on the healthcare industry, providing equity to the senior
housing and long-term healthcare industry since it was founded in 1999.
According to these filings with the SEC, Formation Capital currently manages
assets in excess of $650 million in value and over the last three years,
Formation Capital and its partners have acquired an ownership interest in 152
facilities in 20 states.
Properties and Assets Being Transferred
Pursuant to the Purchase Agreement, Seller has agreed to sell all of
its rights in the real property on which the Facilities are located (the "Real
Property") and all of its interests in or rights to use, if any, the equipment,
furniture, furnishings, fixtures, inventory, vehicles, if any, patient records
and reports, certain contracts, certain trade names, trademarks, software and
other intangible property, all bank accounts, cash, cash equivalents, securities
and accounts receivable (including third party settlements), prepaid accounts,
workers' compensation receivables and dividends, real estate and insurance
escrows, and tangible personal property owned and or/leased
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by Seller and located at the Facilities and/or used primarily in connection with
the operation of the Facilities (with the exception of certain excluded assets
as set forth in the Purchase Agreement) (the "Personal Property") to Purchaser.
The Real Property and Personal Property represent all, or substantially all, of
the assets of the Operating Partnerships.
Purchase Price; Closing Costs
The gross aggregate purchase price for the Facilities pursuant to the
Purchase Agreement is an amount equal to approximately $50,000,000, plus the
payment of the Net Working Capital (as defined below) (collectively the
"Purchase Price"), which will be paid at the closing of the Sale (the
"Closing"). The Net Working Capital will be calculated as follows:
The Sum of:
o Cash and cash equivalents transferred to Purchaser or its designee;
o Accounts receivable transferred to Purchaser or its designee, net of
reserves for bad debt loss in accordance with Seller's historic
methodology;
o Deposits or escrows transferred to Purchaser or its designee;
o Prepaid expenses and other current assets transferred to Purchaser or its
designee if any (e.g., prepaid insurance premiums); and
o Any funds expended after the signing of the Purchase Agreement
for creation of a dialysis unit at the Facility owned by
Randallstown Meridian Limited Partnership, not to exceed Two
Hundred Thousand Dollars ($200,000).
Less the following items:
o Accounts payable transferred to Purchaser's designee;
o As of the Closing Date (as defined below), all employee pay
and benefits, which are vested or accrued based on employment
prior to the Closing, but unpaid as of the Closing, to the
extent relating to employees of Manager and customarily
charged as an expense of the Facilities under Seller's
management agreements with Manager;
o Other accrued by unpaid expenses of liabilities assumed by Purchaser
or Purchaser's designee;
o Prepaid revenues (to the extent not otherwise prorated under the Purchase
Agreement).
The Seller has agreed to pay fifty percent (50%) of any escrow or
closing charges of the title company, other than abstracting costs and the
premiums for the title policy, which shall be paid by Purchaser. Purchaser has
agreed to pay all other costs related to title insurance, surveys and recording
fees, due diligence reports, sales taxes and transfer taxes.
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Assumption of Liabilities and Obligations of the Seller
At the Closing, Purchaser will cause its designee to assume all of
Seller's obligations under certain contracts and leases as set forth in the
Purchase Agreement and the obligation to pay to Seller the Net Working Capital,
as set forth in the Purchase Agreement (the "Assumed Liabilities").
At the Closing, subject to adjustment within sixty (60) days following
the Closing, Seller will provide Purchaser's designee with an accounting of all
funds, if any, belonging to patients at the Facilities which are held by Seller
in a custodial capacity and an accounting of all advance payments received by it
pertaining to patients at the Facilities. At the Closing, subject to adjustment
within sixty (60) days following Closing, Seller will transfer any such funds to
a bank account designated by Purchaser and Purchaser will acknowledge receipt of
such funds and expressly assume all of Seller's financial and custodial
obligations with respect thereto. It is the intent of the parties that as a
result of Purchaser's assumption of such obligations, Seller will be relieved of
all fiduciary and custodial obligations with respect to such funds and that
Purchaser will assume all such obligations and be directly accountable to the
patients with respect thereto. Purchaser and Purchaser's designee will indemnify
and hold Seller harmless from all liabilities, claims, expenses and demands
(including attorney's fees) arising in connection with such funds.
Prorations
Seller will receive a credit for any real and personal property taxes
and assessments actually paid by Seller for the period from and after the
Closing Date (as defined below). Purchaser will receive a credit for any accrued
but unpaid real estate taxes and assessments applicable to any period before the
Closing Date (as defined below), even if such taxes are not yet due and payable.
Such prorations will be based on the tax year of the municipality in which the
Real Property or Personal Property is located. Charges for water, fuel, gas,
oil, heat, electricity and other utilities, operating charges and prepaid
service contracts, and all other costs and expenses related to ownership and
operation of the Real Property and Personal Property shall be prorated at as of
the Closing Date (as defined below). All revenues and income, including but not
limited to patient rentals, as well as all Medicare and Medicaid reimbursements
will be prorated as of the Closing Date (as below), to the extent not included
in the calculation of Net Working Capital, as set forth in the Purchase
Agreement. All prorations are subject to readjustment sixty (60) days after
Closing, after which time all prorations will be final.
Seller will transfer to Purchaser, in connection with the Sale, upon
the Closing, a prorated portion of rents, security deposits and other proratable
items in accordance with the Purchase Agreement.
Closing and Conditions to Closing
The Purchase Agreement provides that the Closing will occur on the date
which is the last day of the calendar month in which Fund receives the Requisite
Consents, but not later than December 31, 2005 (provided that if such date of
receipt of the Requisite Consents is less than 10 business days before the end
of the calendar month, then the Closing shall be on the last day
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of the next calendar month), unless extended by mutual agreement by Seller and
Purchaser (the "Closing Date").
Under the Purchase Agreement, the Closing is subject to the
satisfaction of certain conditions, including that: (i) the representations and
warranties made by the parties in the Purchase Agreement and related documents
are true and correct in all material respects at and as of the Closing, and each
of the parties has performed and complied in all material respects with all
covenants required by the Purchase Agreement and related documents to be
performed and complied with by such party prior to the Closing; (ii) none of the
Facilities has suffered substantial damage, destruction or loss that would,
according to estimates of third party contractors or insurance adjusters, cost
more than 5% of the Purchase Price to repair; (iii) Purchaser or its designee
has obtained approval for the transfer of all licenses (or the issuance of new
licenses in replacement thereof) to operate the Facilities; (iv) no injunction,
judgment, order, decree, ruling or charge is in effect under applicable law that
would prevent the Sale or cause the Sale to be rescinded after Closing, (v)
title to the Real Property is marketable, free of liens, and encumbrances except
those expressly allowed pursuant to the Purchase Agreement, (vi) Seller has
obtained the Requisite Consents; and, (vii) the Manager has, contingent upon the
Closing, waived any rights it might have with respect to purchase of the Real
Property and Personal Property whether arising under management agreements with
Seller or otherwise.
Representations and Warranties; Covenants; Engineering and Environmental Audit
The Purchase Agreement contains representations and warranties with
respect to Seller and the Facilities which generally are customary in a
transaction of this type including, without limitation, representations by
Seller that, subject to the consent of the Investors, it has the authority to
enter into the Purchase Agreement and that it has all necessary consents to
consummate the Sale (subject to obtaining the Requisite Consents of the
Investors as described herein) and that it has good and marketable title to the
Real Property. The Seller also has covenanted, among other things, to grant to
Purchaser access to the Real Property and all books, records and reports related
to the Facilities (subject to protection of certain proprietary materials)
during the period prior to the Closing and to allow Purchaser to conduct
engineering audits and other inspections and investigations of the Real Property
and Personal Property. Purchaser has agreed to indemnify Seller for all
liabilities, costs, claims, losses and damages imposed upon Seller in connection
with such audits and the entry upon the Facilities by Purchaser's employees,
agents and independent contractors.
The Purchase Agreement may be terminated (a) upon the mutual written
consent of Seller and Purchaser, (b) by either party if the conditions to its
obligations are not satisfied, (c) by either party if it is not then in material
breach of the Purchase Agreement and the other party is then in breach of the
Purchase Agreement, and such breach remains uncured for more than ten (10) days
after such party has received notice specifying in reasonable detail the nature
of such breach from the party seeking to terminate the Purchase Agreement, (d)
or by Purchaser upon timely notice following Seller's failure or refusal to cure
objections to matters of title, survey or environmental reports as set forth in
the Purchase Agreement. In the event of a default by Seller under the Purchase
Agreement, the sole remedies of Purchaser shall be to pursue such remedies for
breach of contract as may be available at law or in equity, subject to the
limitations set forth
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in the Purchase Agreement. In the event of a default by Purchaser, Seller is
released from its obligation to sell the respective Real Property and Personal
Property and is entitled to retain the $1,000,000 earnest money deposit (the
"Deposit") paid by Purchaser at the signing of the Purchase Agreement as
liquidated damages.
Regulatory Requirements
To the best knowledge of the Fund, other than applicable requirements
under the federal securities laws and the Delaware Revised Uniform Limited
Partnership Act, there are no federal or state regulatory requirements which
must be complied with, nor are there any governmental consents or approvals that
must be obtained, in connection with the Transaction, other than requirements
relating to (i) the Requisite Consents, (ii) the liquidation and dissolution of
the Fund following consummation of the Sale, and (iii) any applicable federal,
state, or local requirements to transfer or terminate the licenses and/or
provider agreements to operate as a health care facility, certifications to
participate in the Medicare and Medicaid programs, and zoning permits. The Fund
intends to comply with all requisite regulatory requirements.
Indemnification
Subject to the limitations set forth in the Purchase Agreement, Seller
will, jointly and severally, indemnify, exculpate and hold Purchaser and its
partners, directors, officers, employees and agents (collectively, "Purchaser
Indemnified Parties") harmless from and against any and all losses, damages,
costs, expenses, liabilities, obligations and claims of any kind (including,
without limitation, costs of investigation, reasonable attorneys' fees and other
legal costs and expenses) ("Purchaser Indemnified Losses") which Purchaser
Indemnified Parties may at any time suffer or incur, or become subject to, as a
result of or in connection with: (i) any and all financial obligations of Seller
with respect to the period prior to the Closing Date and relating to the Real
Property, Personal Property, the Facilities or the operation thereof (except as
expressly assumed by Purchaser); (ii) any accidents occurring at the Real
Property or the Facilities prior to the Closing Date; and, (iii) any material
breach or inaccuracy of any of the representations or warranties made by a
Seller in or pursuant to the Purchase Agreement. The aggregate liability of
Seller for Purchaser Indemnified Losses and any other obligations of Seller to
survive Closing pursuant to the Purchase Agreement will not exceed an amount of
Five Hundred Thousand dollars ($500,000) and Seller will only be liable for
indemnification pursuant to the Purchase Agreement if the aggregate Purchaser
Indemnified Losses and other obligations and liabilities exceed Fifty Thousand
Dollars ($50,000). Seller's indemnification obligation will not apply to any
physical damage to, or condition of, the Real Property or Personal Property. The
Seller's indemnification obligations under the Purchase Agreement will terminate
on the first anniversary of the Closing Date.
Subject to the limitations set forth in the Purchase Agreement,
Purchaser will indemnify, exculpate and hold Seller and their respective
stockholders, partners, directors, officers, employees and agents (collectively,
"Seller Indemnified Parties") harmless from and against any and all losses,
damages, costs, expenses, liabilities, obligations and claims of any kind
(including, without limitation, costs of investigation, reasonable attorneys'
fees and other legal costs and expenses) ("Seller Indemnified Losses") which
Seller Indemnified Parties may at any time suffer or incur, or become subject
to, as a result of or in connection with: (i) any and all
-27-
financial obligations relating to the Real Property, the Personal Property, the
Facilities or the operation thereof arising or accruing after the Closing Date;
(ii) any breach or inaccuracy of any of the representations or warranties made
by a Purchaser in or pursuant to the Purchase Agreement, or (iii) any duties,
obligations, liabilities, losses or other expenses (including attorney's fees
and court costs) arising in any connection with the Facilities, the Real
Property, the Personal Property, certain contracts, licenses to operate the
Facilities and/or the residents, patients and other occupants of the Facilities
during or with respect to the period from and after the Closing. The liability
of Purchaser for Seller Indemnified Losses pursuant to the Purchase Agreement
will not exceed an amount of Five Hundred Thousand dollars ($500,000) and
Purchaser will only be liable for indemnification pursuant to the Purchase
Agreement if the aggregate Purchaser Indemnified Losses exceed Fifty Thousand
Dollars ($50,000). Seller's indemnification obligation will not apply to any
physical damage to, or condition of, the Real Property or Personal Property.
Ernest Money Deposit
Under the terms of the Purchase Agreement, Purchaser has deposited
$1,000,000 (the "Deposit") with Lawyer's Title Insurance Corporation as the
escrow agent (the "Deposit Escrow Agent") pursuant to an escrow agreement. The
Deposit Escrow Agent will hold the Deposit in an interest bearing account. If
the closing of the Sale occurs the Deposit will be transferred to Seller and
applied against the Purchase Price. If Purchaser defaults on its obligation to
close the Sale and Seller is not otherwise in default under the Purchase
Agreement, Seller may terminate the Purchase Agreement and will be entitled to
receive the Deposit, plus any interest thereon, as liquidated damages.
Escrow Agreement
Pursuant to the terms of the Purchase Agreement, at the Closing
Purchaser and Seller will enter into an escrow agreement (the "Escrow
Agreement") with the Escrow Agent. At the Closing, Purchaser will deposit
$500,000 of the Purchase Price (the "Escrow Funds") with the Escrow Agent. The
Escrow Funds and any interest earned thereon will be held by the Escrow Agent to
secure Seller's indemnification obligations pursuant to the Purchase Agreement.
Assuming approval of Investors, immediately following the Closing, Seller will
assign all of its rights and obligations under the Escrow Agreement (including
the right to receive the Escrow Funds, less the amount of any claims for
Purchaser Indemnified Losses) to the Liquidating Trust (as defined below) and
the Liquidating Trust (as defined below) will assume any obligations of Seller
under the Escrow Agreement.
Seller (or, assuming approval of Investors and assignment by Seller,
the Liquidating Trust (as defined below)) will have the right to receive the
Escrow Funds (less the amount of any pending claims for indemnification for
Purchaser Indemnified Losses and claims for indemnification for Purchaser
Indemnified Losses previously paid to Purchaser), if any, from the Escrow Agent
within ten (10) business days after the first anniversary of the Closing Date,
or, if later, upon the final resolution of any claims for indemnification for
Purchaser Indemnified Losses pending as of the first anniversary of the Closing
Date.
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Failure to Approve the Sale
Because approval of each of the Sale and the Liquidation are contingent
upon Investor approval of both of these Proposals, if the holders of a majority
of the issued and outstanding Units do not approve the Sale, the Sale and
Liquidation will not occur and the General Partners will continue to conduct the
business and affairs of the Fund in accordance with the Fund's limited
partnership agreement. In such event, you will not receive the distributions
described in this Solicitation Statement.
THE LIQUIDATION
Assuming the approval of Investors, as soon as practicable after the
Closing the General Partners will file a certificate of cancellation on behalf
of the Fund under the Delaware Revised Uniform Limited Partnership Act and will
proceed to liquidate, dissolve and wind-up the Fund and distribute its net
assets to Investors in accordance with its limited partnership agreement and
applicable law. Section 4.4 of the Fund's limited partnership agreement provides
that net remaining cash proceeds will be distributed in proportion to the
capital accounts of the General Partners and the Investors after the allocations
for profits and loss from the Sale as provided in Sections 4.1A and B of the
agreement have been made. Section 4.4C of the limited partnership agreement
requires such distributions to be made by the end of the taxable year of
liquidation of the Fund or, within 90 days of the date of liquidation, whichever
is later. If the Fund is liquidated Investors will receive liquidating
distributions from the Fund, and thereafter will not have any continuing
interest in the Fund.
Substantially all of the Fund's assets are comprised of the limited
partner interests in each of the Operating Partnerships owned by the Fund. The
fund has substantially no business or operations other than its ownership of the
limited partner interests. The Fund has no subsidiaries other than the Operating
Partnerships. The financial statements of the Fund and the Operating
Partnerships are prepared on a consolidated basis.
Assuming the approval of Investors, following the Sale, the Fund will
cause each of the Operating Partnerships to liquidate and distribute its net
assets, which will be substantially comprised of the net cash proceeds of the
Sale, to the Fund. The Fund will then liquidate and distribute its net assets to
Investors. Accordingly, the General Partners do not expect that any material
amount other than the net cash proceeds of the Sale will be available for
distribution to Investors upon the Liquidation.
Net Assets Available for Distribution
Based on the working capital of the Fund at December 31, 2004, the
General Partners presently estimate that the net cash proceeds to the Fund from
the Sale will be approximately $31,000,000 to $32,300,000, which means that
approximately $20.00 to $21.00 per Unit prior to any reduction due to state or
local tax withholding would be available for distribution to Investors. This
amount is net of the Escrow Funds and the reserve described below. The final net
cash proceeds of the Sale could vary, among other reasons, to the extent the
final Net Working Capital is different from the working capital at December 31,
2004.
-29-
An additional amount, which the General Partners presently estimate to
be in the range of $0.00 to $0.32 per Unit in the aggregate, could be available
for distribution to Investors from time to time through the liquidating trust
described below depending upon the amount of any claims for indemnification
deducted from the Escrow Funds and the amount of the final expenses of the Fund
and any expenses payable to the Escrow Agent or in connection with the
administration of the liquidating trust.
The estimated $20.00 to $21.00 per Unit expected to be available for
distribution to Investors does not reflect any additional quarterly
distributions to Investors after the date of this Solicitation Statement.
Consistent with past practice, the Fund may make an additional operating
distribution to Investors in late August of approximately $0.375 per Unit from
revenues generated by second quarter operations. The General Partners expect
that any such distribution would be made prior to the Liquidation, but to the
extent not distributed prior to the Liquidation any distributable but not
distributed funds could increase the Net Working Capital and would be
distributed to Investors as part of the Liquidation.
To date, based on the first admission date, the Fund has distributed
approximately $34.45 per Unit from operations, cash reserves and refinancing
proceeds. Consequently, the General Partners believe that, from inception of the
investment to the Closing, an Investor who originally invested $25.00 per Unit
should receive total cash distributions of approximately $54.45 to $55.45 per
Unit.
The General Partners believe the foregoing estimates are reasonable
based on past experience and the information currently available to them, there
can, however, be no assurances that the amounts described herein will be the
actual amounts distributed to Investors because reserves have not yet been
established and the amount of any claims for indemnification and the expenses of
consummating the Transaction are not final. The General Partners have committed
to resolicit the consent of Investors in the event that distributions to
Investors will be less than $18.00 per Unit.
Reserve
The Fund will reserve and assign to the liquidating trust described
below a portion of the gross proceeds of the Sale for the purpose of satisfying
any Fund obligations and liabilities relating to the business of the Fund and
ownership, management, operation and maintenance of the Facilities prior to the
Closing and the Liquidation. The actual amount of such reserve will be
determined by the General Partners at or after the Closing. To the extent any
portion of the reserve is not, in the opinion of the Administrative General
Partner pursuant to the terms and conditions of the liquidating trust described
below, necessary to satisfy any obligations and liabilities of the Fund, it may
be distributed to Investors by the liquidating trust.
Establishment of the Liquidating Trust
Prior to the Liquidation, the Fund will establish a liquidating trust,
which will be a statutory business trust organized under the laws of Delaware
(the "Liquidating Trust"), to hold the reserve and several contingent assets of
the Fund including the right to receive any remaining Escrow Funds following the
termination of the escrow. The Liquidating Trust also will assume
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the Fund's obligations and will be responsible for the following, which may be
satisfied from the reserve described above:
o any outstanding obligations and liabilities relating to the
business of the Fund and ownership, management, operation and
maintenance of the Facilities prior to the Closing and the
Liquidation;
o any other obligations of the Fund under the Purchase Agreement.
Promptly after the establishment of the Liquidating Trust, the Fund
will assign to the Liquidating Trust all of the Fund's interest in the
contingent assets described below and all of the Fund's rights, duties and
obligations under the Escrow Agreement and the Purchase Agreement. Immediately
prior to the Liquidation, the Fund will distribute to Investors, effective upon
the Liquidation and on a pro rata basis based upon each Investor's ownership of
Units as of the time of such distribution, all of the beneficial interests in
the Liquidating Trust.
The Liquidating Trust will not engage in any ongoing trade or business
and its activities will be specifically limited to conserving and protecting any
assets transferred to it and paying or distributing such assets, including
holding such assets for the benefit of the holders of beneficial interests in
the Liquidating Trust, enforcing the rights of the beneficiaries to such assets,
satisfying any obligations under the Purchase Agreement and Escrow Agreement,
pursuing any claims and demands that have been transferred to it by the Fund,
making liquidating distributions to the holders of beneficial interests in the
Liquidating Trust and taking such other actions as may be necessary to conserve
and protect the Liquidating Trust corpus and provide for the orderly liquidation
thereof. The Administrative General Partner will administer the Liquidating
Trust without profit together with a trustee who is licensed to act as a trustee
under Delaware law. Beneficial interests in the Liquidating Trust will not be
certificated but will be maintained in book-entry format by the Liquidating
Trust. Beneficial interests in the Liquidating Trust will not have voting or
dividend rights and will not bear a stated rate of interest. In addition, the
beneficial interests in the Liquidating Trust will not be transferable, except
by will, intestate succession or by operation of law.
Contingent Assets
The contingent assets of the Fund to be transferred to the Liquidating
Trust include the rights to:
o all claims or demands of any nature which have been or may be
asserted by or on behalf of the Fund or Seller and which arise out
of events occurring prior to the Closing with respect to Seller;
and
o receive the Escrow Funds (less the amount of any pending claims
for indemnification and claims for indemnification previously paid
to Purchaser or its affiliates), if any, from the Escrow Agent
within ten (10) business days after the first anniversary of the
Closing Date, or, if later, upon the final resolution of any
claims for indemnification for pending as of the first anniversary
of the Closing Date.
-31-
The Administrative General Partner, as the administrator of the
Liquidating Trust, will evaluate any claims that are assigned to the Liquidating
Trust and determine if it would be in the best interests of the Investors, as
the beneficiaries of the Liquidating Trust, to pursue such claims.
Distributions by the Liquidating Trust
Pursuant to the terms and conditions of the Liquidating Trust, the
Administrative General Partner, as the administrator of the Liquidating Trust,
may only permit the Liquidating Trust to use its funds for the obligations for
which it is established. The Administrative General Partner does not intend to
cause the Liquidating Trust to make any distribution until all of the
Liquidating Trust's obligations are satisfied; provided, however, that interim
distributions of cash may be made so long as such distributions may be made
without detriment to the conservation and protection of the Liquidating Trust
corpus. As soon as the Liquidating Trust has satisfied the obligations for which
it is created, which is expected to occur approximately twelve months after the
completion of the Transaction, it will be liquidated and all of its remaining
assets will be distributed to the holders of beneficial interests in the
Liquidating Trust.
Failure to Approve the Liquidation
Because approval of each of the Sale and the Liquidation are contingent
upon Investor approval of both of these Proposals, if the holders of a majority
of the issued and outstanding Units do not approve the Liquidation, the Sale and
Liquidation will not occur and the General Partners will continue to conduct the
business and affairs of the Fund in accordance with the Fund's limited
partnership agreement. In such event, you will not receive the distributions
described in this Solicitation Statement.
THE AMENDMENT
The Agreement of Limited Partnership of the Fund dated as of December
8, 1987 (as amended, supplemented or otherwise modified from time to time, the
"Partnership Agreement") requires that Investors holding more than 50% of the
outstanding Units consent to any amendment thereof. Currently, Section 5.4 of
the Partnership Agreement prohibits the General Partners from selling all, or
substantially all, of the Fund Property without the consent of the Investors.
Assuming Investor approval, the General Partners intend to complete the
Sale and proceed with the Liquidation. However, if the Sale were not consummated
for any reason the General Partners believe the value that could be realized in
a future sale of the Fund Property to an unaffiliated third party would be
substantially increased if the requirement to obtain Investor consent to any
such sale were eliminated.
The General Partners believe that potential unaffiliated purchasers of
assets owned by similarly situated partnerships of which the General Partners
have been partners have declined to bid, discontinued negotiations, or
discounted offer prices as a direct result of the potential delays, risks and
uncertainties associated with soliciting the consent of limited partners to any
proposed sale. In order to facilitate any future negotiation and sale of any
Fund Property to unaffiliated third parties in the event, and solely to the
extent, that Investors do not consent to the Sale or if
-32-
the Sale is otherwise not consummated for any reason, the General Partners deem
it advisable to amend the Partnership Agreement to allow them to sell the Fund
Property to unaffiliated third parties without first obtaining Investor Consent.
The amendment would allow the General Partners to sell the Fund
Property only to a purchaser that is not an affiliate of the Fund or either
General Partner in an arms length transaction and the General Partners would
remain under a fiduciary obligation to act in the best interests of Investors in
connection with any such sale.
If consent of the Investors is obtained pursuant to this Solicitation
Statement, the General Partners further reserve the right to amend the
Partnership Agreement to the extent necessary to consummate the Sale, provided
that substantially the same legal and economic effect to the Investors of the
Sale is achieved.
Failure to Approve the Amendment
If Investors approve both the Sale and the Liquidation and the Closing
occurs the Amendment will be moot. In such case, the General Partners will
complete the Sale and Liquidation, resulting in the termination of the
Partnership Agreement. If, however, the Sale is not approved by Investors or the
Closing does not occur for any reason and Investors do not approve the
Amendment, the General Partners may not sell the Fund Property in the future
without the consent of the holders of a majority of Units, which the General
Partners believe could limit the amount the Fund may be able to recognize in any
future sale of the Fund Property.
GENERAL PARTNERS' RECOMMENDATION
The Board of Directors of each of the Development General Partner and
the Administrative General Partner have unanimously approved the Transaction,
and directed that the Sale, Liquidation and Amendment be submitted to the Fund's
Investors for consent with the recommendation that Investors consent to all
aspects of the Proposals.
After careful consideration, the General Partners have determined that
the Sale, Liquidation and Amendment are fair to and in the best interest of the
Fund and the Investors. The General Partners recommend that Investors vote to
"Consent" to approval of the Proposals.
In making the determination that the Sale, Liquidation and Amendment
are fair to and in the best interests of the Investors, and the decision to
approve the Purchase Agreement and to recommend to the Investors that they vote
their Units in favor of adoption of the Proposals, the General Partners
reviewed, among other things, the following information:
o Financial information such as the results of operations and financial
statements of the Fund;
o Certain other information, including financial forecasts, relating
to the business, earnings, cash flow, assets, liabilities and
prospects of the Fund, specifically with respect to Medicare and
Medicaid reimbursement, Facility lifespan and expected capital
requirements;
-33-
o Conducted discussions with members of management of the Fund and
the Operating Partnerships concerning the matters described above,
and the terms and conditions of the Purchase Agreement;
o Considered the factors described above including the 2003 and 2004
financial statements, Mr. Cortese's valuation, the expected future
capital expenditures, information regarding the lifespan of the
facilities, the substantial uncertainty regarding Medicare and
Medicaid reimbursement, all as described above, and other analyses
that they deemed relevant, including review of certain comparable
sales such as the December 2004 sale of Mariner Health Care's nine
Maryland skilled nursing facilities, consisting of approximately
1400 beds, for approximately $107 million, which the General
Partners estimate represents a multiple of approximately 6.6 times
2004 operating cash flow, and analysis of the historical secondary
market transfer prices for the Units as disclosed herein;
o Reviewed other financial studies and analyses prepared by the
staff of the General Partners and took into account other matters
that they deemed necessary, including their assessment of general
economic, market and monetary conditions and specific economic and
market conditions affecting the domestic skilled nursing industry.
The General Partners identified and considered a number of factors
which weighed in favor of the approval of the Proposals and the adoption of the
Purchase Agreement, including the following:
o The fact that the timing of the Sale is advantageous to Investors
in light of the considerable uncertainty regarding the level of
Medicare and Medicaid reimbursement in the future and the capital
expenditures that may be required in the future to maintain the
Facilities;
o The General Partners' belief that the aggregate gross purchase
price for the Fund's Facilities of $50,000,000 plus a payment
equal to all of the Fund's Net Working Capital, represents a
favorable multiple of the Fund's net operating income and an
attractive sales price for the Facilities;
o The Purchaser's reputation for completing acquisitions of skilled
nursing facilities and the General Partners' belief that the
financial condition of Purchaser is strong, including its access
to financing to complete the Sale;
o The terms and conditions of the Purchase Agreement, specifically
the amount of the Purchase Price and the fact that the Purchase
Price includes the payment of all of the Fund's Net Working
Capital;
o The fact that, although Purchaser and Manager are expected to
enter into negotiations regarding a contract or contracts pursuant
to which Manager would manage the Facilities for Purchaser or its
designee following the Closing in exchange for management fees and
a potential conflict of interest exists as a result of Manager's
desire to continue managing the Facilities, any continued
management of the
-34-
Facilities by an affiliate or affiliates of the Development General Partner
is not a condition to the Sale. Any management agreements will be
the subject of arm's length negotiations between Purchaser and
Manager and its affiliates. Following such negotiations, if
Purchaser and Manager or any of its affiliates cannot agree on
terms and conditions of management of the Facilities, the Sale
will still occur and Purchaser will be free to enter into
management agreements with another manager. In addition, Manager
has waived its right of first offer with respect to the Sale and
such waiver is not conditioned on the results of any negotiations
with respect to future management of the Facilities;
o Information with respect to the financial condition, results of
operations, business and prospects of the Fund, particularly in
light of the current economic and regulatory environments;
o The fact that the Sale will not occur without the consent of Investors
holding at least a majority of the Units;
o The fact that although there is no established trading market for
the Units, the per Unit consideration as a result of the
Transaction exceeds the prices that have been paid in the limited
secondary market during the past two years, with the exception of
one transaction at a price of $21.50 per Unit involving an
affiliate of Formation Capital, as described on page 20 hereof;
and
o The fact that the General Partners have committed to resolicit the
consent of Investors in the event that distributions to Investors
will be less than $18.00 per Unit, an amount which is equal to (1)
approximately 90% of the expected per Unit consideration as a
result of the Transaction, and (2) approximately 90% of the
highest outstanding offer to purchase Units of which the General
Partners are presently aware.
The General Partners also considered the following potentially negative
factors in their deliberations concerning the Sale:
o The fact that because Investors would receive only cash as a
result of the Transaction, and not a continuing interest in the
Fund, Investors would not have the opportunity to participate in
any future growth prospects with respect to the Facilities; and
o It is not possible to quantify the effect of potential
legislative, regulatory or governmental initiatives on the
Facilities. Accordingly, there can be assurance that the impact of
these changes or any future healthcare legislation will not
positively affect the financial results or market value of the
Facilities.
After due consideration, the General Partners concluded that the
benefits to the Investors of the Sale outweighed the potentially negative
factors.
In view of the variety of factors considered with their evaluation of
the Sale and the Transaction, the General Partners did not quantify or otherwise
assign relative weights to the
-35-
various factors that it considered or determine that any factor was of
particular importance in reaching its determination that the Sale is fair to and
in the best interests of the Investors. Rather, the General Partners made their
determination based on the totality of the information they considered.
FOR THE FOREGOING REASONS, THE GENERAL PARTNERS HAVE DETERMINED THAT
THE SALE, LIQUDATION AND AMENDMENT ARE IN THE BEST INTERESTS OF INVESTORS AND
RECOMMEND THAT INVESTORS PLEASE SIGN AND RETURN THE ENCLOSED CONSENT FORM
INDICATING CONSENT TO THE SALE, LIQUIDATION AND AMENDMENT.
ACCOUNTING TREATMENT
The Sale will be accounted for as a sale of assets. The Fund estimates
that the Sale of the Facilities will result in a taxable gain of approximately
$15,000,000 to the Fund or approximately $10.00 per Unit.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion is generally applicable to United States
individuals and does not address all of the tax consequences that may be
relevant to other classes of Investors, including corporations, foreign
individuals and entities, and entities that are subject to special treatment
under the Internal Revenue Code of 1986, as amended (the "Tax Code"), including,
but not limited to, regulated investment companies, financial institutions, life
insurance companies, and tax-exempt organizations. INVESTORS SHOULD CONSULT WITH
THEIR OWN TAX ADVISORS TO DETERMINE THE TAX CONSEQUENCES OF THE TRANSACTION IN
LIGHT OF THEIR PARTICULAR CIRCUMSTANCES.
Material Federal Income Tax Considerations of the Sale and Liquidation
The Sale will be a taxable transaction to the Investors. Each of the
seven Operating Partnerships will recognize gain or loss on the Sale equal to
the difference between the amount realized by such Operating Partnership on the
Sale (generally, the cash received plus any liabilities of the Operating
Partnership assumed by Purchaser) over its adjusted tax basis in the Facilities.
Such gain or loss will be allocated to the Fund in the manner provided by the
profit and loss allocation provisions of the Operating Partnership's partnership
agreement and as required by Sections 704(b) and 704(c) of the Code and the
Treasury Regulations thereunder. Gain on the Sale should generally be treated as
capital gain or depreciation recapture income, unless the Facilities have been
held primarily for sale to customers in the ordinary course of business (i.e.,
as "dealer" property). In addition, a portion of the gain on the Sale may be
taxable as ordinary income to the extent the Investor's share of "unrealized
receivables" is in excess of the Investor's share of the basis attributable to
those assets. Any loss on the Sale should be deductible as an ordinary loss.
Because the Facilities have been held for more than one year, any
capital gain would generally be taxed to an individual Investor at a maximum
rate of 15%. However, the Fund anticipates that most of such gain will be
attributable to prior depreciation deductions that are not
-36-
otherwise required to be taxed as ordinary depreciation recapture income and,
thus, will be taxed at a maximum rate of 25%.
The Fund's distributive share of each Operating Partnership's gain or
loss on the Sale will be allocated to Investors in the manner provided by the
profit and loss allocation provisions of the Partnership Agreement and as
required by Sections 704(b) and 704(c) of the Code and the Treasury Regulations
thereunder. Such gain or loss will correspondingly increase or decrease each
Investor's tax basis in his interest in the Fund. Such basis will also be
decreased by a constructive distribution of money equal to the reduction in the
Investor's share of the liabilities (if any) of the Fund as a result of the
Sale. Upon distribution of the proceeds of the Sale to the Investors, an
Investor will recognize gain to the extent that the Investor's share of the
proceeds (as determined under the Partnership Agreement) is greater than the
Investor's tax basis in his interest in the Fund (as adjusted for the Investor's
allocable share of gain or loss on the Sale). To the extent an Investor has any
unused passive activity losses under Section 469 of the Code that are
attributable to the Facilities (i.e., passive activity losses not previously
deducted against passive activity or other taxable income of such Investor),
such losses would be deductible in full as a result of the Sale if the Investor
is deemed to have made a complete disposition of his interest in such passive
activity. In addition, gain resulting from the Sale would be passive activity
income for such an Investor, so that any unused passive activity losses would be
available to offset such Investor's allocable share of such gain.
Upon liquidation of the Operating Partnerships and the Fund, the
Investor will recognize a gain to the extent that the basis of his interest in
the Fund is less than the amounts distributed to him in liquidation (assuming
such Investor is distributed only cash in such liquidation), and will recognize
a loss to the extent the basis of his interest in the Fund exceeds the amounts
distributed. Such gain or loss will be capital gain or loss, assuming the
Investor held his interest as a capital asset. The applicable tax rate for such
capital gain or loss will depend on the Investor's holding period in his or her
interest, but generally will be taxed at a maximum rate of 15% if the Investor
held his or her interest in the Fund for more than one year.
Any gain recognized by an Investor may also be subject to state and
local income taxes. Because the Facilities are located in North Carolina,
Maryland, and New Jersey, an Investor will be subject to income tax in those
states on the Investor's allocable share of the net income and gain from the
Sale of the Facilities. The Fund generally will be required to withhold and pay
over to these states a portion of the proceeds of the Sale otherwise payable to
certain non-resident Investors in order to satisfy state withholding obligations
imposed on the Fund. In general, the non-resident withholding tax rates range
from 4.85% (Maryland) to 9% (New Jersey rate for non-individual investors). The
rate for North Carolina depends on the amount of income and ranges from 6% to
8.25%.
Material Federal Income Tax Considerations of the Receipt of
Interests in the Liquidating Trust.
The Fund has organized the Liquidating Trust in a manner that it
believes will permit the Liquidating Trust to be classified as a "liquidating
trust" under the Treasury Regulations and a grantor trust under the Tax Code.
For federal income tax purposes, the transfer of assets by the Fund to the
Liquidating Trust, followed by the issuance to the Investors of beneficial
interests in
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the Liquidating Trust, will be treated as though the Fund had distributed the
transferred assets (including the amount contributed to the Escrow) to the
Investors on a pro rata basis and the Investors had then contributed such assets
to the Liquidating Trust. The characterization of such deemed distribution will
be determined in accordance with the rules described above in "Material Federal
Income Tax Considerations of the Sale and Liquidation." An Investor will not
recognize gain or loss on the deemed contribution of the assets to the
Liquidating Trust.
In general, an Investor will have an initial basis in the assets deemed
distributed to him equal to the lesser of the Fund's basis, immediately prior to
the distribution, in such assets deemed distributed to him or his basis in his
Units immediately prior to the deemed distribution, increased to reflect any
gain required to be recognized in connection with the deemed distribution. Upon
the deemed contribution of the assets to the Liquidating Trust, the Liquidating
Trust will have the same adjusted basis in its assets as the Investors had in
those assets prior to the transfer to the Liquidating Trust.
The Liquidating Trust generally will not be subject to tax. Instead,
each Investor, as a beneficiary of the Liquidating Trust, will be required to
report on his income tax return his pro rata share of the income, deductions and
credits of the Liquidating Trust (including for purposes of the alternative
minimum tax) regardless of whether the Liquidating Trust makes any distributions
to the Investor. In addition, an Investor may be subject to state or local tax
in jurisdictions where an Investor resides and in each state or local
jurisdiction in which the Liquidating Trust has assets. Distributions by the
Liquidating Trust to an Investor, whether made currently or in connection with
the dissolution of the Liquidating Trust, will not be taxable to such Investor
for federal income tax purposes.
Any loss recognized by an Investor as a result of the Investor's
beneficial interest in the Liquidating Trust will generally be treated as a
capital loss. An individual may deduct capital losses not offset by capital
gains against his ordinary income only up to a maximum annual amount of $3,000.
Because the Liquidating Trust will not conduct any business, it does not appear
that losses incurred as a result of the Investor's beneficial interest in the
Liquidating Trust would be subject to limitation under the "passive loss" or "at
risk" rules. However, each Investor should consult with his tax advisor
regarding the application of the at risk and passive loss rules (including
whether and to what extent the ownership of beneficial interests in the
Liquidating Trust constitutes a passive activity) in light of his particular tax
situation.
-38-
SELECTED FINANCIAL DATA
Revenues and net earnings (loss) information for the Fund furnished
below is for the years ended December 31:
Years Ended December 31,
2004 2003 2002 2001 2000
-------------- -------------- -------------- -------------- --------------
Statement of Earnings Data
Net revenue $65,706 $63,849 $61,920 $59,933 $55,764
Net earnings 3,419 2,326 2,384 2,191 2,282
Net earnings per assignee Unit-basic $ 2.20 $ 1.50 $ 1.53 $ 1.41 $ 1.47
Operating Data
Payor mix (as a percent of revenue):
Medicaid and Medicare 84% 85% 84% 83% 80%
Private 16% 15% 16% 17% 20%
Occupancy percentage 85.5% 88.2% 89.9% 90.0% 86.2%
Patient Days Available 403,000 403,000 403,000 406,000 430,000
Balance Sheet Data
Total assets $44,474 $45,323 $45,839 $48,777 $49,398
Property and equipment, net of
accumulated depreciation 30,359 31,207 31,231 31,927 32,934
Debt, including loan payable to
Development General Partner 23,138 23,786 24,169 24,588 24,964
Partners' capital 16,536 15,450 15,311 16,233 17,348
Revenues and net earnings (loss) information for the Fund furnished below is for
the interim period ended March 31, 2005:
3 months ended
March 31, 2005
Net revenue $16,973
Net earnings 359
Net earnings per assignee Unit-basic $ .23
Operating Data
Payor mix (as a percent of revenue):
Medicaid and Medicare 84%
Private 16%
Occupancy percentage
87.40%
Patient Days Available
95,310
Balance Sheet Data
Total assets $44,321
Property and equipment, net of
accumulated depreciation 30,057
Debt, including loan payable to
Development General Partner 23,027
Partners' capital 16,312
The above selected financial data should be read in conjunction with the Fund's
financial statements and accompanying notes in the Fund's Form 10-K and the
Fund's Form 10-Q incorporated by reference in this Solicitation Statement.
-39-
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
Outstanding Voting Securities; Record Date
As of the Record Date, there were 1,540,040 Units outstanding, which
represent all of the voting securities of the Fund. Each Unit is entitled to one
vote. Only Investors of record as of the Record Date will be entitled to notice
of and to execute and deliver a Consent Form.
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of the Record Date, the beneficial
ownership of Units of the Fund by persons or entities beneficially owning more
than 5% of the Units, the individual directors and officers of the
Administrative General Partner, the individual directors and officers of the
Development General Partner and all of the directors and officers of each of the
Administrative General Partner and the Development General Partner as a group.
Name Title of Class Amount of Units Percent of
Beneficially Owned Class
Brown Healthcare Holding Co., Inc. Units of Limited 40 .0026%
300 East Lombard Street Partnership Interests
Suite 1200
Baltimore, Maryland 21202
Meridian Healthcare Investments, Inc. General Partner N/A 50%
515 Fairmount Avenue Interest
Towson, Maryland 21286
Brown Healthcare, Inc. General Partner N/A 50%
300 East Lombard Street Interest
Suite 1200
Baltimore, Maryland 21202
Directors and Officers of
Administrative General Partner as
a Group*
Directors and Officers of
Development General Partner as
a Group*
* - Less than 1%
-40-
MARKET FOR UNITS; DISTRIBUTIONS
There is no established public trading market for the Units. Some
individuals and groups have made a business of acquiring illiquid partnership
units on secondary markets or from investors by direct solicitation. To the best
of the General Partners' knowledge between January 1, 2004 and March 31, 2005
Units have traded in the range of $10.00 to $21.50 per Unit. The General
Partners believe there are presently offers outstanding to purchase Units that
range from $16.50 to $20.00.
The Fund declared quarterly cash distributions to Investors for 1999
through the first quarter of 2005 as set forth in the following table:
Quarter 2005 2004 2003 2002 2001 2000 1999
1st 0.3750 0.3750 0.3750 0.5313 0.5313 0.5313 0.5313
2nd - 0.3750 0.3750 0.5313 0.5313 0.5313 0.5313
3rd - 0.3750 0.3750 0.5313 0.5313 0.5313 0.5313
4th - 0.3750 0.3750 0.2813 0.5313 0.5313 0.5313
Totals 0.3750 1.5000 1.5000 1.8750 2.1251 2.1251 2.1250
OTHER MATTERS
There are no matters other than as set forth in this Statement for
which Consent Forms are being solicited.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
Questions and requests for assistance or additional copies of the
Solicitation documents may be directed to the Administrative General Partner at
the Fund's principal executive office at 300 East Lombard Street, Suite 1200,
Baltimore, Maryland 21202, Attention: Robert Huether, Asset Manager or Yolanda
Harris; Investor Services Coordinator, Telephone Number: (410) 727-4083;
Facsimile Number: (410) 625-2694.
INCORPORATION BY REFERENCE
The following documents, which have been previously filed by the Fund
with the Securities and Exchange Commission, are hereby incorporated herein by
reference:
(1) The Fund's Form 10-K for the fiscal year ended December 31, 2004;
(2) The Fund's Form 10-Q for the interim period ended March 31, 2005;
and
-41-
(3) All other reports filed pursuant to Sections 13(a) or 15(d) of the
Securities Exchange Act of 1934, as amended, since the end of the fiscal year
covered by the Annual Report referred to in (1) above.
Pursuant to the regulations of the Securities and Exchange Commission,
the Fund will provide to each Investor of record on the Record Date, without
charge and upon written or oral request of such person, copies of all reports
(excluding exhibits) filed pursuant to Sections 13(a) or 15(d) of the Securities
Exchange Act of 1934, as amended, since the end of the fiscal year covered by
the Annual Report in (1) above.
A copy of the Fund's Form 10-K for the fiscal year ended December 31,
2004 and the Fund's Form 10-Q for the interim period ended March 31, 2005 are
being sent to Investors concurrently with this Solicitation Statement.
Meridian Healthcare Growth and Income Fund Limited Partnership
By: Brown Healthcare, Inc. By: Meridian Healthcare Investments, Inc.
Administrative General Partner Development General Partner
By: By:
-42-
MERIDIAN HEALTHCARE GROWTH AND INCOME FUND
LIMITED PARTNERSHIP
CONSENT FORM
The undersigned, a holder of the number of assignee units of ownership
interests ("Units") in Meridian Healthcare Growth and Income Fund Limited
Partnership (the "Fund") listed below, with respect to all of such Units, does
hereby
1. The sale of all of the rights in the real property on which each of the
Facilities owned and operated by the Operating Partnerships of the Fund are
located and all of the interests in or rights to use, if any, certain personal
property located at the Facilities and/or used primarily in connection with the
operation of the Facilities, pursuant to the Asset Purchase Agreement dated as
of February 11, 2005 by and among FC Properties VI, LLC, a Delaware limited
liability company and Plainfield Meridian Limited Partnership, Caton Manor
Meridian Limited Partnership, Frederick Meridian Limited Partnership, Hamilton
Meridian Limited Partnership, Randallstown Meridian Limited Partnership,
Mooresville Meridian Limited Partnership, and Spencer Meridian Limited
Partnership each Maryland limited partnerships and subsidiaries of the Fund
(each an "Operating Partnership" and, collectively, the "Seller") (the "Sale")
and the grant to the General Partners, or any one of them, through their
officers, employees, and agents, of the authority to negotiate, execute, and
deliver all documents, agreements, instruments, and certificates, and pay all
fees, expenses and disbursements (including, but not limited to, real estate
broker commissions), and take any and all other actions as they or any one of
them may deem necessary or advisable in connection with or relating to the Sale.
|_| CONSENT |_| DOES NOT CONSENT |_| ABSTAINS
2. To the liquidation, dissolution and winding-up of the Fund pursuant to
Article 8 of the Partnership Agreement following the consummation of the Sale
(the "Liquidation").
|_| CONSENT |_| DOES NOT CONSENT |_| ABSTAINS
3. To the Amendment to the Agreement of Limited Partnership of the Fund, dated
as of December 8, 1987 (as amended, supplemented or otherwise modified from time
to time) (the "Partnership Agreement") to permit the General Partners to sell
all or substantially all of the assets of the Fund to unaffiliated third parties
without first obtaining Investor consent(the "Amendment").
|_| CONSENT |_| DOES NOT CONSENT |_| ABSTAINS
The Units represented by this Consent will be deemed to have been voted
in accordance with the election specified by the holder named below. IF NO
ELECTION IS SPECIFIED, ANY OTHERWISE PROPERLY COMPLETED AND SIGNED CONSENT FORM
WILL BE DEEMED TO BE A CONSENT TO EACH OF THE SALE, THE AMENDMENT AND THE
ANCILLARY TRANSACTIONS, AS APPLICABLE. BY EXECUTION HEREOF, THE UNDERSIGNED
ACKNOWLEDGES RECEIPT OF THE CONSENT SOLICITATION STATEMENT.
THIS CONSENT IS SOLICITED BY THE GENERAL PARTNERS ON BEHALF OF THE FUND.
The Fund reserves the right to waive any conditions to, or modify the
terms of, the Solicitation (as defined in the Solicitation Statement).
Capitalized terms not defined in this Consent Form will have the meanings
ascribed to them in the Consent Solicitation Statement.
THE GENERAL PARTNERS RESERVE THE RIGHT TO CONTINUE TO NEGOTIATE THE
TERMS OF THE SALE AND TO ABANDON THE SALE IF THE PARTIES DO NOT FINALIZE
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MUTUALLY AGREEABLE TERMS, OR ANY CONDITIONS TO CONSUMMATION OF THE SALE DO NOT
OCCUR, EXPIRE OR TERMINATE.
A Consent Form given, if effective, will be binding upon the holder of
the Units who gives such Consent Form and upon any subsequent transferees of
such Units, subject only to revocation by the delivery of a written notice of
revocation by the Investor, executed and filed in the manner and within the time
period described in the Consent Solicitation Statement.
IN ORDER TO COUNT, THIS CONSENT FORM MUST BE RECEIVED BY THE FUND PRIOR
TO 5:00 P.M., EASTERN TIME, ON [______], 2005, UNLESS EXTENDED BY THE GENERAL
PARTNERS IN THEIR SOLE DISCRETION.
This fully completed and executed Consent Form should be sent by mail
in the self-addressed, postage-paid envelope enclosed for that purpose, or by
overnight courier, or by facsimile, to the Fund, as follows:
If delivered by mail or by courier, to: If delivered by facsimile, to:
Brown Healthcare, Inc. Brown Healthcare, Inc.
Attn: Robert Huether Attn: Robert Huether
300 East Lombard Street, Suite 1200 Facsimile Number: (410) 625-2694
Baltimore, Maryland 21202 Telephone Number: (410) 727-4083
THIS CONSENT FORM CONTINUES AND MUST BE SIGNED ON THE NEXT
PAGE
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MERIDIAN HEALTHCARE GROWTH AND INCOME FUND LIMITED
PARTNERSHIP
Please sign your name(s) below in the same manner as the name(s) in
which ownership of the Units is registered. When Units are held by two or more
joint holders, all such holders must sign. When signing as attorney-in-fact,
executor, administrator, trustee or guardian, please give full title as such. If
a corporation, please sign in full corporate name by the President or other
authorized officer. If a partnership, please sign in partnership name by an
authorized partner. If a limited liability company, please sign in the limited
liability company name by the members or the duly authorized manager.
Units Owned: ______________
Date: ____________________, 2005
Signature: __________________________________
Name: _________________________
(Please Print)
Street Address: _______________________________
Signature if held jointly: ________________________________
Name: _________________________
(Please Print)
Street Address: _______________________________
IF YOU HAVE ANY QUESTIONS REGARDING THE PROPER NAME OF THE OWNER, THE NUMBER OF
UNITS OR METHOD OF EXECUTION, PLEASE CONTACT ROBERT HUETHER OR YOLANDA HARRIS AT
(410) 727-4083.
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