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Registration No. 33-71498
As filed with the Securities and Exchange Commission on January 7, 1994
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
AMENDMENT NO. 3
TO
FORM S-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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FORUM RETIREMENT PARTNERS, L.P.
8900 Keystone Crossing, Suite 200
Indianapolis, Indiana 46240-0498
Telephone: (317) 846-0700
Delaware 35-1686799
(State of Organization) (I.R.S. Employer
Identification No.)
Donald J. McNamara
Chairman of the Board and President
Forum Retirement, Inc.
8900 Keystone Crossing, Suite 200
Indianapolis, Indiana 46240-0498
Telephone: (317) 846-0700
(Agent for Service)
--------------------------
Copies to:
Robert A. Profusek, Esq. Jeffery A. Smisek, Esq.
Jones, Day, Reavis & Pogue Vinson & Elkins L.L.P.
2300 Trammell Crow Center 2500 First City Tower
2001 Ross Avenue 1001 Fannin
Dallas, Texas 75201 Houston, Texas 77002-6760
Telephone: (214) 220-3939 Telephone: (713) 758-2222
--------------------------
Approximate date of commencement of the proposed sale of the securities to
the public: As soon as practicable after this Registration Statement becomes
effective.
None of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933.
The Registrant elects to deliver its latest Annual Report on Form 10-K
pursuant to Item 11(a)(1) of this Form.
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT WILL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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FORUM RETIREMENT PARTNERS, L.P.
CROSS REFERENCE SHEET
Pursuant to Item 501(b) of Regulation S-K
<TABLE>
<CAPTION>
Form S-2 Caption or
Item Number and Heading Location in Prospectus
----------------------- ----------------------
<C> <S> <C>
1. Forepart of Registration
Statement and Outside
Front Cover Page of Prospectus.. Facing Page; Cross Reference Sheet;
Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back
Cover Pages of Prospectus....... Inside Front Cover Page of Prospectus;
Outside Back Cover Page of Prospectus
3. Summary Information, Risk
Factors, and Ratio of
Earnings to Fixed Charges....... "Prospectus Summary"; "Risk Factors"
4. Use of Proceeds.................. "Use of Proceeds"
5. Determination of Offering
Price........................... *
6. Dilution......................... *
7. Selling Security Holders......... *
8. Plan of Distribution............. "Plan of Distribution"
9. Description of Securities to
be Registered................... "Description of Preferred Depositary
Units"
10. Interests of Named Experts
and Counsel..................... "Experts"; "Legal Opinions"
11. Information with Respect to
the Registrant.................. "Information Incorporated by Reference"
12. Incorporation of Certain
Information by Reference........ "Information Incorporated by Reference"
13. Disclosure of Commission
Position on Indemnification
for Securities Act
Liabilities..................... *
</TABLE>
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*Item is omitted because answer is negative or inapplicable.
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Prospectus
FORUM RETIREMENT PARTNERS, L.P.
Up to 5,064,150 Preferred Depositary Units
Representing Preferred Limited Partners' Interests
Forum Retirement Partners, L.P., a Delaware limited partnership (the
"Partnership"), is offering to certain holders of depositary units representing
preferred limited partners' interests ("Preferred Depositary Units") in the
Partnership (such holders being hereinafter referred to as "Unitholders") the
opportunity to subscribe for and purchase additional Preferred Depositary Units.
(Such offering is hereinafter referred to as the "Subscription Offering.") The
Subscription Offering is intended to afford eligible unit holders the
opportunity to acquire additional Preferred Depositary Units on substantially
the same terms under which Preferred Depositary Units were acquired by an
affiliate of the General Partner of the Partnership (the "General Partner")
pursuant to the Recapitalization Agreement described in this Prospectus. See
"The Recapitalization." THE PROCEEDS OF THE SUBSCRIPTION OFFERING WILL NOT
BENEFIT THE PARTNERSHIP BUT WILL BE APPLIED BY THE PARTNERSHIP TO REPURCHASE
FROM SUCH AFFILIATE, AT THE SAME PRICE PER UNIT PAID BY SUCH AFFILIATE, A NUMBER
OF PREFERRED DEPOSITARY UNITS EQUAL TO THE NUMBER OF PREFERRED DEPOSITARY UNITS
ISSUED IN THE SUBSCRIPTION OFFERING. See "Use of Proceeds." The repurchase of
Preferred Depositary Units could be at a price which exceeds then-prevailing
market prices for Preferred Depositary Units. Inasmuch as only such affiliate
advanced the equity capital necessary to prepay a portion of the Partnership's
indebtedness pursuant to the Recapitalization Agreement, no other holders of
Preferred Depositary Units will have the right to have Units repurchased.
Only Unitholders of record (other than Forum Group, Inc. ("Forum Group") and
its affiliates) as of the close of business on October 18, 1993 (the "Record
Date") (such Unitholders being hereinafter referred to as "Eligible Holders")
will be eligible to purchase Preferred Depositary Units in the Subscription
Offering. Eligible Holders may subscribe for and purchase, on the terms and
subject to the conditions described herein and in the related Notice of Exercise
of Subscription Privilege (the "Notice of Exercise"), 0.7398342 of a Preferred
Depositary Unit for each Preferred Depositary Unit held of record by them on the
Record Date at a purchase price of $2.00 per unit (the "Subscription
Privilege"). No fractional Preferred Depositary Units will be issued. The
number of Preferred Depositary Units for which Eligible Holders may subscribe
will be based on the aggregate number of Preferred Depositary Units held by the
Eligible Holder on the Record Date and will be rounded down to the nearest whole
number. The opportunity to subscribe for and purchase additional Preferred
Depositary Units is not directly or indirectly assignable or transferable and
will not be evidenced by a certificate. The Subscription Offering is subject to
various conditions. See "The Subscription Offering."
The Preferred Depositary Units are listed on the American Stock Exchange (the
"AMEX") under the symbol "FRL." On October 6, 1993, the last full trading day
prior to the public announcement of the recapitalization described below, the
closing sale price of the Preferred Depositary Units on the AMEX was $1.875 per
Unit. On the last trading day prior to the date of this Prospectus, the closing
sale price of the Preferred Depositary Units on the AMEX was $2.1825 per Unit.
Eligible Holders are urged to obtain current market quotations prior to
determining whether to accept the Subscription Privilege, and Eligible Holders
who wish to increase their equity ownership in the Partnership are urged to
consider open-market and privately negotiated purchases as alternatives to the
purchase of Preferred Depositary Units pursuant to the Subscription Offering.
The Subscription Offering will expire at 5:00 p.m., New York City time, on
January 27, 1994, unless extended in the sole discretion of the Partnership to a
time no later than 5:00 p.m., New York City time, on February 15, 1994.
AN INVESTMENT IN PREFERRED DEPOSITARY UNITS INVOLVES A NUMBER OF MATERIAL
RISKS AND OTHER CONSIDERATIONS. SEE "RISK FACTORS."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
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UNDERWRITER'S PROCEEDS TO
SUBSCRIPTION FEES AND PARTNERSHIP
PRICE COMMISSIONS (1)
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<S> <C> <C> <C>
Per Unit................... $2.00 N/A $2.00
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Total (2).................. $10,128,300 N/A $10,128,300
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</TABLE>
(1) Before deduction of estimated expenses of $324,000 payable by the
Partnership.
(2) Assumes all 5,064,150 Preferred Depositary Units are purchased in the
Subscription Offering.
The date of this Prospectus is January 7, 1994.
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INFORMATION FOR NEW YORK INVESTORS
THIS PROSPECTUS HAS NOT BEEN REVIEWED BY THE ATTORNEY GENERAL OF THE
STATE OF NEW YORK PRIOR TO ITS ISSUANCE AND USE. THE ATTORNEY GENERAL OF THE
STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE MERITS OF THIS OFFERING.
ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
AVAILABLE INFORMATION
The Partnership has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-2 (the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities Act"),
and the rules and regulations promulgated thereunder with respect to the
Preferred Depositary Units offered hereby. This Prospectus does not contain all
of the information set forth in the Registration Statement, certain parts of
which are omitted in accordance with the rules and regulations of the
Commission, and to which reference is hereby made. For further information with
respect to the Partnership and the Preferred Depositary Units, reference is made
to the Registration Statement. Statements made in this Prospectus as to the
contents of any contract, agreement or other document referred to are not
necessarily complete. With respect to each such contract, agreement or other
document filed as an exhibit to the Registration Statement, reference is made to
the exhibit for a more complete description of the matter involved, and each
such statement is qualified in its entirety by such reference.
The Partnership is subject to the information and reporting requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in
accordance therewith, files periodic reports and other information with the
Commission. The Registration Statement, as well as such reports and other
information filed by the Partnership with the Commission, may be inspected at
the Public Reference Room maintained by the Commission at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and should also be
available for inspection and copying at the regional offices of the Commission
located at 7 World Trade Center, New York, New York 10048 and Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
material can be obtained from the Public Reference Section of the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. The
Preferred Depositary Units are listed on the AMEX. Reports and other
information concerning the Partnership can also be inspected at the offices of
the AMEX, 86 Trinity Place, New York, New York 10006.
The Partnership provides Unitholders an annual report containing financial
statements audited by independent public accountants, as well as quarterly
reports containing unaudited financial information. See "Summary of Partnership
Agreement -- Books and Reports."
INFORMATION INCORPORATED BY REFERENCE
The following documents filed by the Partnership with the Commission pursuant
to Section 13 of the Exchange Act (File No. 1-9302) are incorporated herein by
reference: (i) the Partnership's Annual Report on Form 10-K for its fiscal year
ended December 31, 1992 (the "1992 Form 10-K"); (ii) the Partnership's Current
Report on Form 8-K dated March 30, 1993; (iii) the Partnership's Quarterly
Report on Form 10-Q for the fiscal quarter ended March 31, 1993; (iv) the
Partnership's Current Report on Form 8-K dated June 14, 1993; (v) the
Partnership's Quarterly Report on Form 10-Q for the fiscal quarter ended June
30, 1993; (vi) the Partnership's Current Report on Form 8-K dated October 6,
1993; and (vii) the Partnership's Quarterly Report on Form 10-Q for the fiscal
quarter ended September 30, 1993 (the "1993 Third Quarter Form 10-Q").
Any statement incorporated herein will be deemed to be modified, replaced or
superseded for purposes of this Prospectus to the extent that a statement
contained herein or in any other subsequently filed document which also is or is
deemed to be incorporated by reference herein modifies, replaces or supersedes
such statement. Any statement so modified, replaced or superseded will not be
deemed, except as so modified, replaced or superseded, to constitute a part of
this Prospectus.
The Partnership is delivering to each person to whom this Prospectus is
delivered copies of the 1992 Form 10-K and the 1993 Third Quarter Form 10-Q.
Upon written or oral request, the Partnership will provide, without charge, to
each person to whom this Prospectus is delivered a copy of any and all of the
documents incorporated by reference herein (not including exhibits to the
documents that are incorporated by reference unless the exhibits are
specifically incorporated by reference into the information that this Prospectus
incorporates). Requests should be directed to Forum Retirement, Inc., 8900
Keystone Crossing, Suite 200, Indianapolis, Indiana 46240-0498, telephone (317)
846-0700, Attention: John H. Sharpe, Esq., Secretary.
2
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PROSPECTUS SUMMARY
The following is a summary of certain information contained elsewhere in this
Prospectus. Reference is made to, and this Summary is qualified in its entirety
by, the more detailed information contained elsewhere in this Prospectus, which
should be read in its entirety.
THE PARTNERSHIP
The Partnership is a Delaware limited partnership that was formed in 1986 by
Forum Group to own rental retirement communities ("RCs"). The Partnership owns
nine rental RCs (collectively, the "Properties"). Forum Retirement, Inc., a
wholly owned subsidiary of Forum Group, serves as the general partner of the
Partnership. Forum Group currently manages all of the Properties pursuant to
the Management Agreement (as defined below) entered into in connection with the
formation of the Partnership. See "The Partnership" and "Business and
Properties of the Partnership -- Management Agreement."
The principal executive offices of the Partnership are located at 8900
Keystone Crossing, Suite 200, Indianapolis, Indiana 46240-0498, telephone (317)
846-0700.
RISK FACTORS
The Preferred Depositary Units offered hereby are subject to a number of
material risks and other investment considerations, including the Partnership's
history of losses, the Partnership's failure to make distributions on Preferred
Depositary Units since 1990 and uncertainty as to future distributions, risks
resulting from deferred management fees, the Partnership's high level of
leverage, the qualified opinion of the Partnership's accountants, the dependence
of the Partnership on Forum Group and potential conflicts of interest resulting
therefrom, the risks of RC ownership generally, the risks of government
regulation and third-party payors, federal income tax risks and risks arising
from the issuance of additional units and potential dilution. Eligible Holders
are urged to read and consider carefully the information set forth under the
caption "Risk Factors" below.
BUSINESS STRATEGY AND OUTLOOK
The Partnership has incurred net losses consistently since its formation in
1986, including net losses of $424,000 and $1,791,000, respectively, for the
three and nine months ended September 30, 1993. However, the Partnership's
operating results have improved substantially in 1993 compared to 1992.
Excluding the effects of the sale of one of the Partnership's RCs in the first
quarter of 1992, the Partnership's operating revenues increased 13% in the
three-month period and 4% in the nine-month period ended September 30, 1993,
respectively, over operating revenues for the comparable periods in 1992 and the
Partnership's net operating income (operating revenues less operating expenses)
for those periods in 1993 was 41% and 40%, respectively, higher than its net
operating income for the comparable periods in 1992. Although the write-off of
deferred financing costs relating to the payment and prepayment of the
Partnership's bank debt due December 31, 1993 ("Bank Debt") and Split Coupon
Notes due 1996 ("Split Coupon Notes") as a result of the refinancing described
in "The Refinancing" (the "Refinancing") and certain other fees and expenses
relating to the Refinancing will result in extraordinary charges in the fourth
quarter of 1993 (presently estimated at $2.9 million), the Partnership presently
expects its operating results for such quarter to be generally consistent with
its improved operating results in the third quarter of 1993.
The improvement in operating revenue was attributable both to improved
occupancy rates for the Partnership's RCs during 1993 and to increases in the
amount of revenue generated per occupied unit. Average occupancy of the
Properties for the first nine months of 1993 was 90.8% as compared to average
occupancy of 85.9% for 1992, and average revenue per occupied unit for the same
periods has improved from $26,057 to $26,364. Because many of the Partnership's
operating expenses are fixed, a substantial portion of incremental revenues
generated by improvements in occupancy are expected to flow-through to increase
the Partnership's
3
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net operating income. In light of the large and growing segment of the U.S.
population which is 75 years of age and older and the low levels of construction
of new RCs and other competitive properties during the 1990's compared to the
high levels of RC and other real estate construction and development in the
1980's, management of the Partnership presently expects the recent increases in
occupancy levels and billing rates and, therefore, in net operating income, to
be sustainable, although there necessarily can be no assurance with respect
thereto.
Management of the Partnership is implementing various systems designed to
control and, in some instances, decrease operating expenses. In addition, as
discussed below, on December 30, 1993, the Partnership refinanced its long-term
indebtedness on terms that reduce the Partnership's overall level of
indebtedness and total required debt service payments during the term of the new
loan. See "The Recapitalization -- The Nomura Loan" and "Pro Forma Financial
Information."
Pursuant to the terms of the Management Agreement, management fees (based on
the Partnership's gross operating revenues) payable to Forum Group for all
periods from the formation of the Partnership in 1986 to December 31, 1993 have
been deferred. Such fees will not be deferred for periods after December 31,
1993. The deferred management fees were expensed in the Partnership's
statements of operations and reflected on a deferred basis in the Partnership's
balance sheets for the relevant periods. Accordingly, except for variations in
management fees payable resulting from variations in revenue levels, the
commencement of the current payment of such fees for periods after January 1,
1994 will not affect the Partnership's operating or net income as compared to
prior periods, although it will affect the Partnership's cash position. See
"Business and Properties of the Partnership -- Management Agreement."
The Partnership has not made any distributions on Preferred Depositary Units
for 1992 and 1991, and no such distributions are expected for 1993. See "Risk
Factors -- History of Losses;" "-- Uncertainty of Future Distributions" and
"-- Risks of RC Ownership Generally." However, with the continued improvements
in the Partnership's operating results and the completion of the Refinancing in
the fourth quarter of 1993, the Partnership presently expects to have positive
cash flow commencing in 1994. There necessarily can be no assurance that
operating results will continue to improve or as to whether or when, or at what
levels, any distributions will be made. See "Cash Distribution Policy" for a
discussion of the Partnership's policy with regard to cash distributions, if
any, in the future.
THE RECAPITALIZATION
To facilitate the refinancing of its long-term debt, including $22.5 million
of Bank Debt that matured December 31, 1993, in October 1993, the Partnership
and Forum Group entered into a Recapitalization Agreement (the "Recapitalization
Agreement"), which provides for, among other things, an immediate infusion of
equity into the Partnership. Pursuant to the Recapitalization Agreement, the
Partnership issued 6,500,000 Preferred Depositary Units to a wholly owned
subsidiary of Forum Group ("Forum A/H"), and Forum A/H made a capital
contribution to the Partnership of $13.0 million in the aggregate, or $2.00 per
unit. Pursuant to the Recapitalization Agreement, the Partnership applied the
$13.0 million of proceeds from the sale of Preferred Depositary Units to Forum
A/H to the partial prepayment of the Bank Debt that matured on December 31,
1993. On December 30, 1993, the Partnership obtained $50.7 million in new
financing (the "Nomura Loan") from Nomura Asset Capital Corporation ("Nomura").
As contemplated by the Recapitalization Agreement, the proceeds of the Nomura
Loan were used to prepay the approximately $9.5 million remaining principal
balance of the Bank Debt, and approximately $34.1 million aggregate principal
amount of the the Partnership's Split Coupon Notes, and to pay related fees and
expenses. See "The Recapitalization -- The Nomura Loan."
A committee of Independent Directors (as defined below) of the Board of
Directors of the General Partner, after consultation with independent legal
counsel and financial advisors retained by such committee, determined to approve
the Recapitalization Agreement and the Nomura Loan. The $2.00 per unit purchase
price paid for the Preferred Depositary Units purchased by Forum A/H pursuant to
the Recapitalization Agreement was determined by the committee of Independent
Directors in accordance with the minimum price requirements contained in the
Partnership Agreement (as defined below), after consultation with its financial
advisor. See
4
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"Summary of Partnership Agreement -- Purposes, Business and Management." The
Independent Directors also determined that the terms of the Nomura Loan were
attractive in light of then-prevailing market conditions and the Partnership's
debt service requirements. The General Partner has been informed by Forum
Group, its parent corporation, that Forum Group believes that the acquisition of
additional Preferred Depositary Units at $2.00 per unit represented an
attractive investment by Forum Group (regardless of its other interests in
respect of the Partnership, including its rights under the Management
Agreement).
The General Partner undertook the Recapitalization for the following reasons,
among others:
. The Recapitalization provided for repayment of the Bank Debt which matured
December 31, 1993. Absent the Recapitalization, the Partnership would have
had insufficient cash to repay the Bank Debt. The General Partner was
informed by the bank lender that the bank lender was unwilling to extend
the maturity thereof on terms attractive to the Partnership. Following the
completion of the recapitalization of Forum Group in June 1993, the General
Partner began pursuing the possibility of refinancing the Bank Debt. After
discussions with several potential lending sources, the General Partner
determined that any such financing would likely require the Partnership
either to provide a lender with a significant participating interest in the
profits of the Partnership in return for providing financing or reduce the
amount of debt being sought by obtaining an equity infusion. Pursuant to
the Recapitalization Agreement, Forum Group provided the assurance that
such additional equity capital would be available to the Partnership.
. The Recapitalization provided for the refinancing of the Partnership's
Split Coupon Notes. The General Partner considered the opportunity to
refinance the Split Coupon Notes as contemplated by the Nomura Commitment
attractive for several reasons.
. Based on operating cash flow levels of the Partnership during the first
nine months of 1993, the effective annualized interest rate paid or
accrued on the Split Coupon Notes ranged from 11.0% to 11.93% per annum,
a rate higher than the 9.93% interest rate under the Nomura Loan
(assuming a loan servicing cost of 0.2% per annum (see "The
Recapitalization -- The Nomura Loan")).
. The prohibition of distributions to Unitholders so long as the Split
Coupon Notes are outstanding was eliminated under the terms of the Nomura
Loan (which, in general, permit distributions to Unitholders, subject to
certain financial tests and other limitations described below). See "The
Recapitalization -- The Nomura Loan." There can be no assurance as to
the levels of distributions, if any, the Partnership may make in the
future. See "Risk Factors -- Uncertainty as to Future Cash
Distributions" and "Cash Distribution Policy."
. The risk of being unable to refinance the Split Coupon Notes at their
maturity in 1996 was eliminated when the Nomura Loan closed. The General
Partner believes that there was a significant risk that, absent the
Recapitalization, the Split Coupon Notes may have been difficult to
refinance at maturity. The General Partner believes that the debt
service coverage ratio on the Split Coupon Notes was not sufficiently
strong to support a new financing at the time of the Nomura Loan, without
either giving up a profit participation to the lender or the making of an
additional equity investment to reduce the amount of the debt sought (as
was done pursuant to the Recapitalization Agreement). The General
Partner further believes that, without an equity infusion, the loan-to-
value ratio resulting from a refinancing of a size sufficient to prepay
the Split Coupon Notes would have likely exceeded a level deemed prudent
by many lenders. Finally, the General Partner believes that the
potential impact of certain partnership tax legislation on the
Partnership in 1998 (see "Risk Factors -- Federal Income Tax Risks")
could have influenced lenders' willingness to lend.
5
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. The total debt service requirements for the Partnership were reduced as a
result of the Recapitalization. The General Partner believes that the
combination of having less total debt (as a result of the application
of proceeds from the purchase of 6,500,000 Preferred Depositary Units by
Forum A/H pursuant to the Recapitalization Agreement), an interest rate
under the Nomura Loan lower than that expected under the Split Coupon Notes
and a seven-year maturity for the Nomura Loan with a 20-year amortization
period should result in lower total debt service requirements for the
Partnership during the term of the Nomura Loan than would otherwise be
expected under the Partnership's capital structure immediately prior to the
closing of the Nomura Loan.
THE BOARD OF DIRECTORS OF THE GENERAL PARTNER DETERMINED THAT IT WAS IN THE
BEST INTERESTS OF HOLDERS OF PREFERRED DEPOSITARY UNITS TO AUTHORIZE THE
PARTNERSHIP TO ENTER INTO THE RECAPITALIZATION AGREEMENT AND THE NOMURA LOAN FOR
THE REASONS SUMMARIZED ABOVE. THE BOARD OF DIRECTORS OF THE GENERAL PARTNER
AUTHORIZED THE SUBSCRIPTION OFFERING TO AFFORD ELIGIBLE HOLDERS THE OPPORTUNITY,
IF THEY ELECT TO DO SO, TO AVOID DILUTION AS A RESULT OF THE ISSUANCE OF
6,500,000 PREFERRED DEPOSITARY UNITS TO FORUM A/H PURSUANT TO THE
RECAPITALIZATION AGREEMENT. ALTHOUGH THE GENERAL PARTNER HAS BEEN INFORMED BY
FORUM GROUP THAT FORUM GROUP BELIEVES THAT THE ACQUISITION OF ADDITIONAL
PREFERRED DEPOSITARY UNITS AT $2.00 PER UNIT REPRESENTED AN ATTRACTIVE
INVESTMENT BY FORUM GROUP (REGARDLESS OF ITS OTHER INTERESTS IN RESPECT OF THE
PARTNERSHIP, INCLUDING ITS RIGHTS UNDER THE MANAGEMENT AGREEMENT), THE BOARD OF
DIRECTORS HAS DETERMINED TO EXPRESS NO OPINION AND MAKE NO RECOMMENDATION TO
ELIGIBLE HOLDERS REGARDING THEIR DECISION EITHER TO EXERCISE OR REFRAIN FROM
EXERCISING THEIR SUBSCRIPTION PRIVILEGE PURSUANT TO THE SUBSCRIPTION OFFERING.
ANY ANALYSIS OF THE VALUE OF AN INVESTMENT IN PREFERRED DEPOSITARY UNITS IS
NECESSARILY UNCERTAIN, IS BASED IN SUBSTANTIAL PART ON FUTURE EVENTS, INCLUDING
THE PARTNERSHIP'S FUTURE OPERATING PERFORMANCE, MANY OF WHICH ARE OUTSIDE THE
CONTROL OF THE PARTNERSHIP, AND IS HEAVILY DEPENDENT UPON THE PARTICULAR
CRITERIA AN INVESTOR DETERMINES TO BE APPROPRIATE FOR PURPOSES OF SUCH
INVESTOR'S ANALYSIS. ACCORDINGLY, ELIGIBLE HOLDERS MUST MAKE THEIR OWN
DECISIONS WHETHER TO SUBSCRIBE FOR AND PURCHASE ADDITIONAL PREFERRED DEPOSITARY
UNITS PURSUANT TO THE SUBSCRIPTION OFFERING AND SHOULD GIVE CAREFUL
CONSIDERATION TO THE TERMS OF THE SUBSCRIPTION OFFERING AND SUCH OTHER FACTORS
AS SUCH ELIGIBLE HOLDERS DETERMINE TO BE RELEVANT, INCLUDING, IN ADDITION TO
FACTORS GENERALLY APPLICABLE TO AN INVESTMENT IN AN ENTITY SUCH AS THE
PARTNERSHIP, THE FACTORS REFERRED TO UNDER THE CAPTIONS "RISK FACTORS."
THE SUBSCRIPTION OFFERING
As a result of the purchase of Preferred Depositary Units by Forum A/H, Forum
Group beneficially owns 8,440,268 Preferred Depositary Units, or approximately
55.2% of the total number of Preferred Depositary Units outstanding as of the
date of this Prospectus. The Subscription Offering is being made pursuant to
the Recapitalization Agreement in order to afford Eligible Holders the
opportunity, if they elect to do so, to avoid dilution as a result of the
issuance of the 6,500,000 Preferred Depositary Units to Forum A/H. THE NET
PROCEEDS OF THE SUBSCRIPTION OFFERING WILL NOT BENEFIT THE PARTNERSHIP, BUT WILL
BE APPLIED TO REPURCHASE FROM FORUM A/H, AT $2.00 PER UNIT, A NUMBER OF
PREFERRED DEPOSITARY UNITS EQUAL TO THE NUMBER OF PREFERRED DEPOSITARY UNITS
ISSUED IN THE SUBSCRIPTION OFFERING. If all of the 5,064,150 Preferred
Depositary Units offered hereby are subscribed for and purchased by Eligible
Holders, after application of the proceeds thereof as described herein (see "Use
of Proceeds"), Forum Group's percentage ownership of the total outstanding
Preferred Depositary Units would be approximately 22.1%, the same ownership
percentage Forum Group had prior to the transactions provided for in the
Recapitalization Agreement. See "The Recapitalization -- Recapitalization
Agreement." Eligible Holders that elect to participate in the Subscription
Offering will not be entitled to purchase any portion of the Preferred
Depositary Units not subscribed for by Eligible Holders that elect not to
participate in the Subscription Offering. Accordingly, Forum Group's percentage
ownership of the total outstanding Preferred Depositary Units will exceed 22.1%
to the extent that Eligible Holders elect not to participate in the Subscription
Offering.
Neither the General Partner nor any of its affiliates will receive any
financing, brokerage, finder's or other fee or commission from the Partnership
in connection with the Nomura Loan or the transactions contemplated
6
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by the Recapitalization Agreement. The Partnership will bear all costs and
expenses incurred in connection with such transactions, including those incurred
by Forum Group. See "The Recapitalization -- The Nomura Loan --Financing Fees;
Expenses" and "The Recapitalization -- Recapitalization Agreement."
THE PREFERRED DEPOSITARY UNITS
The Preferred Depositary Units are listed on the AMEX under the symbol "FRL."
On October 6, 1993, the last full trading day prior to the public announcement
of the Recapitalization, the closing sale price of the Preferred Depositary
Units on the AMEX was $1.875 per unit. For a recent closing sale price of the
Preferred Depositary Units on the AMEX, see the cover page of this Prospectus.
Eligible Holders are urged to obtain current market quotations prior to
determining whether to accept the Subscription Privilege, and Eligible Holders
who wish to increase their equity ownership in the Partnership are urged to
consider open-market and privately negotiated purchases as alternatives to the
purchase of Preferred Depositary Units pursuant to the Subscription Offering.
SUMMARY PRO FORMA FINANCIAL DATA
The following table presents unaudited summary pro forma financial data of the
Partnership for the year ended December 31, 1992 and as of and for the nine
months ended September 30, 1993. The pro forma results of operations have been
derived from the Partnership's audited financial statements contained in the
1992 Form 10-K and the Partnership's unaudited financial statements contained in
the 1993 Third Quarter Form 10-Q, as adjusted to give effect to the transactions
provided for in the Recapitalization Agreement, the General Partner's capital
contribution of $131,000 in accordance with the Partnership Agreement in
connection with the sales of Preferred Depositary Units to Forum A/H, the
closing of the Nomura Loan and the application of proceeds therefrom to the
prepayment of all existing indebtedness of the Partnership (including the Bank
Debt and the Split Coupon Notes) and estimated costs and expenses, as if such
transactions had been consummated on the first day of each period presented.
See "The Recapitalization." The pro forma balance sheet data have been adjusted
to give effect to such transactions as if such transactions had been consummated
on September 30, 1993. The pro forma financial data do not purport to be
indicative of the financial position or results of operations that would
actually have been reported had such transactions in fact been consummated on
such dates or of the financial position or results of operations that may be
reported by the Partnership in the future. All of the following data should be
read in conjunction with the audited financial statements contained in the 1992
Form 10-K (including the notes thereto) and the unaudited financial statements
contained in the 1993 Third Quarter Form 10-Q (including the notes thereto),
copies of which accompany this Prospectus, and the unaudited pro forma financial
information and related notes contained elsewhere in this Prospectus. See "Pro
Forma Financial Information."
7
<PAGE>
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
December 31, 1992 September 30, 1993
---------------------- ----------------------
Historical Pro Forma Historical Pro Forma
---------- ---------- ---------- ----------
(000's Omitted, except per unit data)
<S> <C> <C> <C> <C>
RESULTS OF OPERATIONS:
Total revenues.............. $41,950 $41,950 $32,570 $32,570
Total costs and
expenses.................. 48,111 46,368 34,372 33,665
------- ------- ------- -------
Loss before general
partner's interest in
loss of subsidiary
partnership............... 6,161 4,418 1,802 1,095
General partner's interest
in loss (gain) of
subsidiary
partnership............... 49 32 11 (1)
------- ------- ------- -------
Net loss.................... 6,112 4,386 1,791 1,096
General partner's
interest in net
loss...................... 61 44 18 11
------- ------- ------- -------
Limited partners'
interest in net
loss...................... $ 6,051 $ 4,342 $ 1,773 $ 1,085
Net loss per unit........... $0.69 $0.28 $0.20 $0.07
</TABLE>
<TABLE>
<CAPTION>
At September 30, 1993
---------------------
Historical Pro Forma
---------- ---------
(000's Omitted)
<S> <C> <C>
BALANCE SHEET DATA:
Cash........................ $ 3,628 $ 5,114
Total assets................ 107,582 110,377
Long-term debt.............. 56,570 50,707
Partners' equity............ 28,396 38,326
</TABLE>
8
<PAGE>
PRINCIPAL TERMS OF THE SUBSCRIPTION OFFERING
Eligible Holders............ Each Unitholder of record as of the close of
business on the Record Date (October 18, 1993).
See "The Subscription Offering -- Subscription
Privilege."
Subscription Privilege...... Each Eligible Holder may subscribe for and
purchase 0.7398342 of a Preferred Depositary Unit
for each Preferred Depositary Unit held of record
by the Eligible Holder on the Record Date. No
fractional Preferred Depositary Units will be
issued. The number of Preferred Depositary Units
for which Eligible Holders may subscribe will be
based on the aggregate number of Preferred
Depositary Units held by the Eligible Holder on
the Record Date and will be rounded down to the
nearest whole number. See "The Subscription
Offering -- Subscription Privilege."
Subscription Price.......... $2.00 in cash per Preferred Depositary Unit
subscribed for pursuant to the Subscription
Privilege (the "Subscription Price"). See "The
Subscription Offering -- Subscription Privilege."
Subscription Privilege
Not Transferable.......... The opportunity to subscribe for and purchase
Preferred Depositary Units is not directly or
indirectly assignable or transferable by the
Eligible Holder and will not be evidenced by a
certificate. See "The Subscription Offering --
Subscription Privilege."
Expiration Date............. January 27, 1994, at 5:00 p.m., New York City
time, subject to extension in the discretion of
the Partnership to a time no later than 5:00 p.m.,
New York City time, on February 15, 1994. See
"The Subscription Offering -- Expiration Date."
Certain Conditions;
Termination............... The Subscription Offering is subject to certain
conditions. If such conditions are not satisfied
at the Expiration Date or the Subscription
Offering is earlier terminated because the
Partnership determines that such conditions will
not be satisfied at or prior to the Expiration
Date, the Subscription Privilege will terminate
and the aggregate Subscription Price theretofore
received from Eligible Holders will be returned to
Eligible Holders promptly following the Expiration
Date or the date of such termination, without
interest or deduction. See "The Subscription
Offering -- Certain Conditions."
Procedures for Exercising
Subscription Privilege.... The Subscription Privilege may be exercised by
properly completing the Notice of Exercise
enclosed herewith or a facsimile thereof and
forwarding such Notice of Exercise, together with
payment of the Subscription Price for each
Preferred Depositary Unit subscribed for pursuant
to the Subscription Privilege, to the Subscription
Agent so that they
9
<PAGE>
are received prior to the Expiration Date. If the
mail is used to forward Notices of Exercise, it is
recommended that registered mail be used. See
"The Subscription Offering -- Exercise of
Subscription Privilege."
Once an Eligible Holder has exercised the
Subscription Privilege, such exercise may not be
revoked. See "The Subscription Offering -- No
Revocation."
Persons Holding Preferred
Depositary Units Through
Others.................... Persons that on the Record Date held Preferred
Depositary Units through a broker, dealer,
commercial bank, trust company or other nominee
should contact the appropriate institutions or
nominees and request them to effect the
transactions on their behalf. See "The
Subscription Offering -- Exercise of Subscription
Privilege."
Issuance of Preferred
Depositary Units.......... Depositary receipts evidencing Preferred
Depositary Units purchased pursuant to the
Subscription Privilege will be delivered to
Eligible Holders that have validly exercised their
Subscription Privilege as soon as practicable
after the Expiration Date if the conditions to the
Subscription Offering have been satisfied or
waived at or prior to the Expiration Date and the
Subscription Offering has not theretofore been
terminated by the Partnership. See "The
Subscription Offering -- Issuance of Preferred
Depositary Units" and "The Subscription Offering
-- Certain Conditions."
Use of Proceeds............. The Partnership will apply the entire proceeds of
the Subscription Offering to repurchase from Forum
A/H a number of Preferred Depositary Units equal
to the number of Preferred Depositary Units issued
in the Subscription Offering, at a repurchase
price equal to $2.00 per unit, the same price paid
by Forum A/H for the purchase of Preferred
Depositary Units pursuant to the Recapitalization
Agreement. Accordingly, the proceeds of the
Subscription Offering will not benefit the
Partnership. See "Use of Proceeds." Such
repurchase could be at a price which exceeds the
then-prevailing market prices for Preferred
Depositary Units. Inasmuch as only Forum Group's
affiliate advanced the equity capital necessary to
prepay a portion of the Term Loan pursuant to the
Recapitalization Agreement, no other holders of
Preferred Depositary Units will have the right to
have their Units repurchased.
Subscription Agent.......... American Stock Transfer & Trust Company.
10
<PAGE>
RISK FACTORS
The Preferred Depositary Units offered hereby are subject to a number of
material risks and other investment considerations. These risks and investment
considerations, as well as information contained elsewhere in this Prospectus,
should be carefully considered by Eligible Holders prior to the exercise of the
Subscription Privilege.
HISTORY OF LOSSES
Since its formation in 1986, the Partnership has experienced significant
losses. The Partnership's net loss in 1992 was $6,112,000, compared to net
losses of $23,431,000 and $2,466,000 in 1991 and 1990, respectively. The write-
off of deferred financing costs incurred relating to the Bank Debt and the Split
Coupon Notes and certain other fees and expenses relating to the Nomura Loan
will result in extraordinary charges (presently estimated to be approximately
$2.9 million) in the fourth quarter of 1993. See "Prospectus Summary --
Business Strategy and Outlook" with respect to the Partnership's recent results
of operations.
UNCERTAINTY AS TO FUTURE CASH DISTRIBUTIONS
No distributions were made for 1991 or 1992, and no distributions are
expected to be made for 1993. Distributions were $1.35 per Preferred Depositary
Unit for 1987, $1.35 per Preferred Depositary Unit for 1988, $1.51 per Preferred
Depositary Unit for 1989 and $0.40 per Preferred Depositary Unit for 1990.
These distributions were funded through the purchase of additional Preferred
Depositary Units by Forum Group, through the lease of certain of the
Partnership's RCs by Forum Group and, in 1989, also by proceeds from the sale of
one of the Partnership's RCs. See "Cash Distribution Policy" for a discussion
of the Partnership's policy with regard to cash distributions, if any, in the
future.
THERE CAN BE NO ASSURANCE AS TO THE LEVELS OF DISTRIBUTIONS, IF ANY, THE
PARTNERSHIP MAY MAKE IN THE FUTURE.
RISKS FROM DEFERRED MANAGEMENT FEES
The Management Agreement, as entered into in connection with the Partnership's
formation in 1986, provides that, for periods prior to January 1, 1994, the
quarterly management fee payable to Forum Group will be deferred, in whole or in
part, if and to the extent that all revenues of the Partnership, after the
deduction of operating expenses, capital expenditures, provisions for fixed
asset reserves and other reasonable cash reserves and a provision for a
quarterly distribution at an annual rate of $1.35 per Preferred Unit ("Net
Operating Income After Anticipated Distributions"), are insufficient to pay the
management fee for such quarter. Pursuant to the terms of the Management
Agreement as entered into in 1986, for periods commencing on and after December
31, 1993, management fees are no longer deferrable and Forum Group is entitled
to management fees equal to 8% of the Partnership's gross operating revenues
before any distributions are made to Unitholders.
All management fees payable since the formation of the Partnership in 1986
through September 30, 1993 have been deferred, and the management fee payable to
Forum Group in respect of the quarter ended December 31, 1993 will also be
deferred. The Partnership deferred management fees in the following amounts for
the periods indicated: 1987: $928,000; 1988: $1,398,000; 1989: $1,595,000;
1990: $1,615,000; 1991: $3,391,000; 1992: $3,337,000; and the first nine months
of 1993: $2,589,000. At September 30, 1993, deferred management fees totalled
approximately $14,854,000. Notwithstanding the deferral thereof, all deferred
management fees were expensed in the Partnership's statements of operations and
have been reflected on a deferred basis in the Partnership's balance sheets.
Deferred management fees are generally payable quarterly at the rate of 50%
of
11
<PAGE>
any excess Net Operating Income After Anticipated Distributions after payment of
current management fees. Deferred management fees are also payable out of
Capital Transaction Proceeds (as defined below) after making distributions of
Capital Transaction Proceeds in an amount sufficient (i) to meet the
Unitholders' tax liabilities, (ii) together with all prior distributions of
Capital Transaction Proceeds, to repay the Initial Offering Price (as defined
below) per Preferred Depositary Unit, and (iii) together with all prior
distributions of Capital Transaction Proceeds and Net Cash Flow, to pay a 12.0%
cumulative, simple annual return on the Unitholders' respective Unrecovered
Offering Price (as defined below). The Management Agreement was amended, as
required by the terms of the Nomura Loan, to provide that Forum Group may be
removed as manager of the Properties in certain circumstances upon a vote of
66-2/3% of the holders of Notes (or Certificates), as defined below, and in
certain other respects. This amendment is effective while the Nomura Loan is
outstanding. In the event of the termination of the Management Agreement
resulting from the removal or withdrawal of the General Partner or otherwise in
accordance with the terms thereof (except for termination by Nomura by reason of
a monetary default under the Nomura Loan), Forum Group would be entitled to
receive immediately upon such termination all unpaid management fees for prior
periods, including any deferred management fees, together with any
reimbursements then due to it under the Management Agreement.
See "-- Dependence on Forum Group" and "Conflicts of Interest" and "Cash
Distribution Policy -- Distribution Support Through December 31, 1993" and
"Business and Properties of the Partnership -- Management Agreement." Such fees
would be due regardless of the levels of distributions made to holders of
Preferred Depository Units and would constitute a liability of the Partnership
(and therefor would be entitled to priority over equity interests upon the
liquidation of the Partnership or otherwise).
HIGH LEVERAGE
The Partnership currently has indebtedness that is substantially greater than
its total partners' equity. On a pro forma basis after giving effect to the
transactions provided for in the Recapitalization Agreement and the refinancing
of the Partnership's long-term debt, the Partnership's ratio of long-term
indebtedness, including the current portion thereof, to partners' equity would
have been 1.3:1.0 at September 30, 1993, and its ratio of operating income to
net interest expense would have been 1.5:1.0 and 2.14:1.0 respectively, for the
fiscal year ended December 31, 1992 and the nine-month period ended September
30, 1993. See "Pro Forma Financial Information."
The terms of the Partnership's long-term debt contain various restrictive
covenants applicable to the subsidiary borrower thereunder and the Partnership,
including covenants prohibiting the incurrence of additional debt, certain
affiliated transactions and engaging in any activity other than owning and
operating certain properties. The indebtedness under the Nomura Loan is secured
by all of the Partnership's properties and matures in seven years. See "The
Recapitalization -- The Nomura Loan." There can be no assurance that such
debt will be refinanced, in which case the Partnership could be required to
liquidate its assets to pay such debt. Such liquidation could be on
unfavorable terms.
QUALIFIED OPINION OF ACCOUNTANTS
For the Partnership's fiscal year ended December 31, 1992, the Partnership's
independent accountants rendered an opinion on the Partnership's financial
statements which included an emphasis paragraph related to the potential that
the Partnership would not be a going concern if it were unable to make a
required payment under the Bank Debt on March 31, 1993. Prior to March 31,
1993, the Bank Debt was amended to provide for a maturity of December 31, 1993.
All of the Partnership's long-term debt, including the Bank Debt, was refinanced
on December 30, 1993. See "The Recapitalization -- The Nomura Loan."
DEPENDENCE ON FORUM GROUP
Forum Group was the sponsor of the Partnership in its formation and is
responsible for the management of all of the Partnership's RCs. The General
Partner is a wholly owned subsidiary of Forum Group. Forum Group and certain of
its affiliates (not including the Partnership or the General Partner) commenced
a proceeding under Chapter 11 of the United States Bankruptcy Code in 1991,
emerged from bankruptcy in 1992 and required a substantial recapitalization in
1993.
12
<PAGE>
Forum Group has a substantial equity interest in the Partnership and is
entitled to substantial fees for the management of the Partnership's assets
pursuant to the Management Agreement entered into in connection with the
formation of the Partnership in 1986. The Partnership also reimburses Forum
Group for general and administrative costs incurred on behalf of the
Partnership, regardless of whether management fees are deferrable. See
"Business and Properties of the Partnership -- Management Agreement."
The affirmative vote of holders of at least 80% of the limited partners'
interests is required to remove the General Partner or terminate the Management
Agreement. Forum Group presently beneficially owns 8,440,268 Preferred
Depositary Units, or approximately 55.2% of the total number of Preferred
Depositary Units outstanding as of the date of this Prospectus, although such
ownership will be reduced by such number of Preferred Depositary Units as are
purchased (if any) in the Subscription Offering (see "Use of Proceeds").
However, even if all of the 5,064,150 Preferred Depositary Units offered hereby
are subscribed for and purchased by Eligible Holders, Forum Group would own
approximately 22.1% of the total outstanding Preferred Depositary Units and
accordingly would have (as it had prior to the purchase of additional Preferred
Depositary Units by Forum A/H pursuant to the Recapitalization Agreement)
sufficient voting power to prevent any attempt to remove the General Partner or
terminate the Management Agreement by unitholder action. See "The
Recapitalization -- Recapitalization Agreement," "Business and Properties of the
Partnership -- Management Agreement" and "Summary of Partnership Agreement --
Purposes, Business and Management." The Management Agreement was amended, as
required by the terms of the Nomura Loan, to provide that Forum Group may be
removed as manager of the Properties in certain circumstances upon a vote of
66-2/3% of the holders of Notes, as defined below, and in certain other
respects. This amendment is effective while the Nomura Loan is
outstanding.
The General Partner has agreed to serve as General Partner until December 31,
1996. Subject to certain conditions, at any time after December 31, 1996, the
General Partner and Forum Group could withdraw as general partner and property
manager, respectively, upon 12 months' notice, although neither has any present
intention so to do. See "Summary of Partnership Agreement -- Purposes, Business
and Management."
POTENTIAL CONFLICTS OF INTEREST
The General Partner controls virtually all matters affecting the Partnership,
including day-to-day management of all of the Partnership's RCs, which
management is performed by Forum Group pursuant to the Management Agreement.
Pursuant to the Partnership Agreement, a majority of the members of Board of
Directors of the General Partner who are not directors, officers, employees,
affiliates or greater than 1% shareholders of the General Partner or any of its
affiliates ("Independent Directors") must approve certain transactions between
the Partnership and Forum Group or any of its affiliates, including without
limitation any transaction to which Forum Group is a party involving over
$200,000. Neither the Partnership nor the General Partner employs its own
management personnel and each of them relies on personnel employed by Forum
Group. Certain officers of Forum Group also act as the officers of the General
Partner. Disputes which might otherwise arise between the Partnership and Forum
Group may not arise because the parties representing the entities are identical.
As a result of the relationships among Forum Group, the General Partner and the
Partnership, certain conflicts of interest could arise, including conflicts as
to the allocation of time by Forum Group employees to the affairs of the
Partnership; determinations by the General Partner with respect to the timing
and amount of distributions; the appropriate levels of reserves necessary to
assure adequate funds for operations and other matters; competition between the
General Partner or its affiliates and the Partnership in geographic markets in
which competitive RCs operate; sales of RCs owned by the Partnership (in light
of Forum Group's option, which was granted in connection with the Partnership's
formation in 1986, to purchase any RC the Partnership desires to sell) and other
matters. See "Business and Properties of the Partnership -- Sale of RCs."
A substantial Unitholder asserted on January 6, 1994 that the Unitholder
believes that the current Board of Directors of the General Partner is not
properly constituted. The Unitholder has demanded that a prior Independent
Director's resignation be rescinded and the prior Independent Director be
allowed to select the Independent Directors to constitute a majority of the
Board of Directors of the General Partner. The General Partner disagrees with
this assertion and intends to vigorously oppose such demand.
RISKS OF RC OWNERSHIP GENERALLY
The Properties are subject to the risks generally incident to the ownership of
real property, including adverse changes in general or local economic
conditions, increases in real estate taxes and other operating expenses
(including costs of energy), adverse governmental rules and policies (including
environmental restrictions),
13
<PAGE>
changes in competitive conditions, uninsured losses, repair and replacement of
fixed assets, unbudgeted contingencies and other factors beyond the
Partnership's control.
The value of the Properties may also be affected by changes in the overall
demand for RCs, and assisted living and nursing facilities, as well as general
economic and capital market conditions. Residents of the independent and
assisted living components of the Properties enter into residency agreements on
a short-term basis; consequently, there can be no assurance that independent
living units and assisted living suites presently occupied will continue to be
occupied. The Properties may be subject to competition from other rental and
lifecare RCs and assisted living and nursing facilities in the respective
geographical market areas of the Properties, some of which may be owned or
operated by Forum Group. See "Business and Properties of the Partnership --
Competition."
Two of the Properties have not yet achieved stabilized occupancy (generally
considered to be approximately 90%). One of the Properties which had achieved
stabilized occupancy currently has an occupancy level below 90%. A high
percentage of the Partnership's operating expenses are fixed and are therefore
incurred regardless of the level of occupancy of its RCs. To the extent that
any RC is unable to achieve or maintain stabilized occupancy, the Partnership
may be unable to generate revenues sufficient to pay operating expenses and debt
service, or to generate positive Net Cash Flow. See "Business and Properties of
the Partnership -- Properties."
RISKS FROM GOVERNMENT REGULATION
RC operations are subject to federal, state and local government regulations.
Facilities are subject to periodic inspection by state licensing agencies to
determine whether the standards necessary for continued licensure are
maintained. In granting and renewing licenses, the state agencies consider,
among other things, buildings, furniture and equipment; qualifications of
administrative personnel and staff; quality of care and compliance with laws and
regulations relating to operation of the facilities. State licensure of a
nursing facility is a prerequisite to certification for participation in the
Medicare and Medicaid programs. The Partnership believes that all of the
Properties are presently in substantial compliance with applicable federal,
state and local regulations with respect to licensure requirements. However,
because those standards are subject to change, there can be no assurance that
the Properties will be able to maintain their licenses upon a change in
standards, and future changes in those standards could necessitate substantial
expenditures by the Partnership to comply therewith. Most states have licensure
requirements for the assisted living components of RCs; however, those
requirements are generally much less comprehensive and stringent than
requirements for licensure of nursing facilities. None of the states in which
the Properties are located presently have licensure requirements for the
independent living components of RCs. The failure to obtain or renew certain
required regulatory approvals or licenses, the delicensing of any of the
Properties or the disqualification of the Partnership from participation in
certain federal and state reimbursement programs could have a material adverse
effect upon the Partnership.
The Federal Omnibus Budget Reconciliation Act of 1993 includes certain changes
in the Medicare program effective October 1, 1993, including the elimination of
the provision allowing Medicare providers to receive a return on equity as part
of the provider's payment under the program. See "-- Reimbursement by Third-
Party Payors." Although the Partnership does not presently expect this change
to have a material adverse effect on the Partnership's financial condition or
results of operations, there can be no assurance in this regard.
In January 1993, President Clinton established the Task Force on National
Health Care Reform (the "Task Force"). The Task Force was charged with
preparing health care reform legislation to be presented to Congress. Among the
stated concerns considered by the Task Force were the means to control or reduce
public and private spending on health care, to reform the payment methodology
for healthcare goods and services by both the public (Medicare and Medicaid) and
private sectors and to provide universal access to health care. The Task Force
has presented its report and recommendations to the Administration and the
Administration has recently proposed legislation to Congress. The Partnership
cannot predict the effect the Task Force's report and recommendations or the
proposed legislation may have on its business, and no assurance can be given
that any such report and recommendations or the proposed legislation will not
have a material adverse effect on the Partnership. Various other legislative
and industry groups are studying numerous healthcare issues, including access,
delivery and financing of long-term health care, and at any given time there are
numerous federal and
14
<PAGE>
state legislative proposals relating to the funding and reimbursement of
healthcare costs. It is difficult to predict whether these proposals will be
adopted or the form in which they might be adopted, and no assurance can be
given that any such legislation, if adopted, would not have a material adverse
effect on the Partnership.
REIMBURSEMENT BY THIRD-PARTY PAYORS
For the nine months ended September 30, 1993, the Partnership derived
approximately 15% of its operating revenues from Medicare and Medicaid and
approximately 85% of its operating revenues from private pay sources.
Governmental and other third-party payors have adopted and are continuing to
adopt cost containment measures designed to limit payments to healthcare
providers. Medicaid reimbursement rates are generally less than the rates
charged to private pay residents. There can be no assurance that payments under
governmental or third-party payor programs will remain at levels comparable to
present levels or will, in the future, be sufficient to cover the costs
allocable to residents participating in such programs. Because of the level of
revenues which the Partnership derives from Medicare and Medicaid, the
Partnership's results of operations are sensitive to changes in Medicare and
Medicaid rates. See "Business and Properties of the Partnership -- Sources of
Payment."
FEDERAL INCOME TAX RISKS
Under applicable law, certain publicly traded partnerships are to be treated
as corporations for federal income tax purposes. The Partnership is subject to
an exemption from this provision until 1998. Thereafter, the Partnership will
be treated as a corporation for federal income tax purposes. If the Partnership
becomes taxable as a corporation, taxable gain may be recognized by partners
without a distribution of cash. Moreover, the Partnership would incur tax
liability on its income at corporate rates, and partners would also be subject
to tax on some or all distributions received from the Partnership. The laws
relating to partnership taxation are inherently complex and are not necessarily
subject to definitive interpretation; it is possible that positions taken by the
Internal Revenue Service or other taxing authorities could have a material
adverse effect on the Partnership. For a discussion of these and other tax
risks, see "Federal Income Tax Considerations -- Tax Status of Partnership and
Affiliated Partnership."
ISSUANCE OF ADDITIONAL PREFERRED UNITS; POTENTIAL DILUTION
The Partnership may issue additional limited partners' interests without the
Unitholders' consent. Additional Preferred Depositary Units may be issued to
the General Partner or any of its affiliates, subject to certain minimum price
requirements specified in the Partnership Agreement. Based on the facts and
circumstances of each issue, further issues of limited partners' interests may
dilute the value of the interests of the existing Unitholders. The terms of any
additional securities will be determined by the General Partner at the time of
issuance, but, without requisite Unitholder consent, the Partnership may not
issue additional equity securities having rights, preferences and privileges
senior to those of Preferred Depositary Units. See "Summary of Partnership
Agreement -- Purposes, Business and Management."
THE PARTNERSHIP
The Partnership is a Delaware limited partnership that was formed in 1986 by
Forum Group to own rental RCs developed by Forum Group. The Partnership owns
nine rental RCs acquired from Forum Group and its affiliates. The business and
operations of the Partnership are conducted through an affiliated operating
partnership (the "Affiliated Partnership"), in which the Partnership owns a 99%
limited partner's interest and the General Partner owns a 1% general partner's
interest. Forum Group currently manages all of the Properties pursuant to the
Management Agreement, which was entered into at the time of formation of the
Partnership. See "Business and Properties of the Partnership -- Management
Agreement."
15
<PAGE>
The principal executive offices of the Partnership are located at 8900
Keystone Crossing, Suite 200, Indianapolis, Indiana 46240-0498, telephone (317)
846-0700.
THE RECAPITALIZATION
THE NOMURA LOAN
The Partnership entered into a loan agreement with Nomura (the "Nomura Loan
Agreement") pursuant to which Nomura lent to the Partnership $50.7 million on
December 30, 1993. The Nomura Loan was made to a newly formed bankruptcy
remote affiliated partnership owned and controlled by the Partnership and its
affiliates ("Newco") and now owns all of the Properties, together with all
regulatory licenses required for the operation thereof.
Interest. The Note issued in connection with the Nomura Loan (the "Note")
bears interest, payable monthly, at 9.93% per annum, assuming a servicing cost
of 0.2% per annum.
Maturity. The Note matures January 1, 2001.
Amortization. The Note amortizes over a 20-year schedule.
Prepayment. The Note is not prepayable for three years (except for a
prepayment resulting from the required application of excess cash flow following
a decrease in the debt service coverage ratio ("DSCR") as described below and
except for prepayments resulting from casualties, condemnation or implementation
of certain mortgage taxes). Any prepayment during the fourth through the sixth
year (except for a prepayment resulting from the required application of excess
cash flow following a decrease in DSCR as described below and except for
prepayments resulting from casualties, condemnation or implementation of certain
mortgage taxes)) requires a yield maintenance payment calculated by discounting
monthly to net present value the product of (i) 8.3333% and (ii) the product of
(x) greater of (A) 9.93% less a rate equal to the U.S. Treasury Security yield
of a Security with comparable maturity for such period plus 150 basis points and
(B) 50 basis points, multiplied by (x) the amount prepaid, for the period from
the month of prepayment to maturity at a rate equal to the U.S. Treasury
Security yield of a Security with a comparable maturity for such period plus 150
basis points.
Negative Covenants. The Nomura Loan Agreement includes negative covenants
customarily included in similar agreements, including covenants prohibiting
Newco, its general partner and the Partnership from (i) engaging in any activity
other than owning and operating the Properties and (ii) incurring certain types
of additional debt.
Financial Tests. The aggregate principal amount of the Note has been
allocated among the Properties based on their respective DSCRs. If the
aggregate DSCR of the Properties at the end of a calendar quarter is less than
1.3x or 1.2x, then 50% and 100%, respectively, of the excess cash flow from the
Properties may not be distributed to the Partnership and is required to be
applied to amortize the principal balance of the Note, for so long as the
aggregate DSCR of the Properties remains below such levels. For this purpose,
"excess cash flow" means all available cash from the Properties after the
payment of debt service, operating expenses, management fees and permitted
capital expenditures, in excess of prudent levels to be maintained for working
capital, capital expenditure reserves and other partnership purposes.
Security. The Note is secured by first priority and perfected mortgage liens
on the Properties, assignments of rents and a security interest in all personal
property, contract rights, general intangibles and other assets of Newco. The
mortgages on the Properties are recorded and are cross-defaulted and cross-
collateralized. The Notes are fully recourse to Newco, but the Partnership's
liabilities thereunder are limited to certain specific, and presently
unanticipated, circumstances.
16
<PAGE>
A specific Property may be released from the applicable lien securing the
Nomura Loan after January 1, 1997 provided that (i) an amount equal to 125% or
greater of such Property's allocated portion of the aggregate principal amount
of the Notes is applied to the prepayment of the Notes and (ii) the aggregate
DSCR of the remaining Properties is not lower than 1.15x the aggregate DSCR of
such Properties on the Nomura Closing Date and in no event is lower than 1.4x as
a result of such release.
Use of Proceeds. The proceeds of the Nomura Loan were used (i) to repay any
existing debt on the Properties (including without limitation the Bank Debt and
the Split Coupon Notes, and all related costs and expenses), (ii) to pay to
Nomura and affiliates thereof the financing and securitization fees and to pay
or reimburse other expenses directly related to the Nomura Loan, and (iii) to
fund reserves for capital expenditures. After establishing and funding certain
cash collateral accounts, there will be no restrictions on the use of excess
loan proceeds (estimated to be approximately $658,000).
Financing Fees; Expenses. Financing fees totaling 2% of the principal amount
of the Note were paid by the Partnership to Nomura and one of its affiliates on
the Nomura Closing Date. In addition, the Partnership has paid to Nomura
approximately $1 million in fees and accrued interest relating to the purchase
of the Split Coupon Notes by Forum A/H to facilitate the closing and reduce the
amount of prepayment premiums which the Partnership otherwise would have had to
pay. The Partnership or Newco is also obligated to pay all reasonable fees and
expenses relating to the Nomura Loan.
Possible Securitization. Subsequent to the issuance of the Note, Nomura could
sell the Note or, in connection with a securitization, could deposit the Note
into a trust (the "Trust") to be created pursuant to a pooling and servicing
agreement between Nomura and a trustee to be selected by Nomura (the "Trustee")
in exchange for certificates (the "Certificates") representing beneficial
interests in the Trust and sell the Certificates to sophisticated investors.
Newco would be required to pay or reimburse Nomura for fees, costs and expenses
relating to any such securitization, including without limitation (i) all costs
associated with or incidental to the preparation of disclosure documentation in
connection therewith and (ii) the fees and expenses of rating agencies in
connection with the rating of the Certificates (if Nomura determines to obtain a
rating).
As a condition to rating the Certificates, rating agencies may require Newco
to (i) establish debt service, operating, deferred maintenance or capital
expenditure reserve funds or accounts and (ii) agree to escrow or deposit funds
on a periodic basis to fund debt service, operating, deferred maintenance or
capital expenditure reserve funds or accounts. Pursuant to the Nomura Loan
Agreement, Newco is required to comply with such rating agency requirements. To
the extent funds required for such reserve funds, escrow accounts or similar
items are in excess of $500,000, Newco would not be permitted to make any
distributions to the Partnership until such requirements were satisfied and
would be required to apply excess cash flow to build up reserves and escrows to
satisfy required levels. All reserve funds and other accounts would be interest
bearing and for the benefit of Newco (and Newco's interest therein would be
subject to the security interest described above).
To the extent required by the rating agencies, all revenue from the Properties
will be required to be deposited directly for credit into a sweep account
maintained by the Trustee. On a monthly basis, excess cash flow, subject to the
limitations described above, may be distributed by Newco to the Partnership.
Funds necessary to complete certain deferred capital improvements were
deposited by Newco into a reserve account and will be released by the Trustee to
cover such expenses. In addition, Newco will make a monthly deposit into an
escrow account of an amount to cover one-twelfth of the annual replacement
reserve for capital expenditures (annual reserves for all Properties is
$532,746). Newco will pledge the amounts on deposit in the reserve account and
the escrow account to the Trust as additional collateral for the Notes.
Removal of Manager. As required by the Nomura Loan Agreement, the Management
Agreement has been amended to provide for, among other things, the removal of
the manager (presently Forum Group) upon the vote of the holders of 66-2/3% of
the principal amount of the then outstanding Notes (or Certificates) in certain
circumstances. In the event of the termination of the Management Agreement as a
result of removal (except for a removal by Nomura by reason of a monetary
default under the Nomura Loan), deferred
17
<PAGE>
management fees owed by the Partnership to Forum Group would become payable in
full. See "Risk Factors -- Deferred Management Fees" and "Business and
Properties of the Partnership -- Management Agreement."
RECAPITALIZATION AGREEMENT
To facilitate the Nomura Loan, the Partnership entered into the
Recapitalization Agreement, which provided for, among other things, an immediate
infusion of equity into the Partnership. The Recapitalization Agreement
was approved by a committee of the Board of Directors of the General Partner
consisting solely of Independent Directors, after consultation with independent
legal counsel and the financial advisor retained by such committee. See
"Prospectus Summary -- The Recapitalization." Pursuant to the Recapitalization
Agreement, the Partnership issued 6,500,000 Preferred Depositary Units to Forum
A/H, and Forum A/H made a capital contribution to the Partnership of $13.0
million in the aggregate, or $2.00 per unit. The $2.00 per unit purchase price
paid for the Preferred Depositary Units purchased by Forum A/H was determined by
the committee of Independent Directors in accordance with the minimum price
requirements contained in the Partnership Agreement, after consultation with its
financial advisor. See "Summary of Partnership Agreement -- Purposes, Business
and Management."
The Recapitalization Agreement contemplated the refinancing of all of the
Partnership's long-term debt, including approximately $9.5 million (after the
prepayment of approximately $13.0 million from the capital contribution made
pursuant to the Recapitalization Agreement) of Bank Debt that matured on
December 31, 1993 and approximately $34.1 million aggregate principal amount of
the Split Coupon Notes, and to pay related fees and expenses. As a result of
the purchase of Preferred Depositary Units by Forum A/H, Forum Group
beneficially owns 8,440,268 Preferred Depositary Units, or approximately 55.2%
of the total number of Preferred Depositary Units outstanding on the date of
this Prospectus. The Subscription Offering is being made pursuant to the
Recapitalization Agreement in order to afford Eligible Holders the opportunity,
if they elect to do so, to avoid dilution as a result of the issuance of the
6,500,000 additional Preferred Depositary Units to Forum A/H. If all of the
5,064,150 Preferred Depositary Units offered hereby are subscribed for and
purchased by Eligible Holders, after application of the proceeds thereof as
described herein (see "Use of Proceeds"), Forum Group's percentage ownership of
the total outstanding Preferred Depositary Units would be approximately 22.1%,
the same ownership percentage Forum Group had prior to the transactions provided
for in the Recapitalization Agreement. Eligible Holders that elect to
participate in the Subscription Offering will not be entitled to purchase any
portion of the Preferred Depositary Units not subscribed for by Eligible Holders
that elect not to participate in the Subscription Offering. Accordingly, Forum
Group's percentage ownership of the total outstanding Preferred Depositary Units
will exceed 22.1% to the extent that Eligible Holders elect not to participate
in the Subscription Offering.
The Recapitalization Agreement provides that the Partnership will bear all of
the costs and expenses incurred in connection with the transactions contemplated
by the Recapitalization Agreement, including the costs and expenses incurred by
Forum Group.
The Recapitalization Agreement provides that at any time and from time to time
the Partnership will, on the request of Forum Group or any of its affiliates, in
accordance with the Partnership Agreement file with the Commission as promptly
as practicable after receiving the request, and use all reasonable efforts to
cause to become effective, a registration statement under the Securities Act,
registering for offer and sale all or a portion of the Preferred Depositary
Units acquired pursuant to the Recapitalization Agreement or owned as of October
6, 1993 by Forum Group or its affiliates included in the request.
Pursuant to the Recapitalization Agreement, the Partnership has agreed that,
subject to certain exceptions, it will indemnify and hold Forum Group and each
of its respective affiliates (other than the Partnership, the General Partner
and the directors of the General Partner) harmless against any and all
liabilities relating to any claim, action or proceeding made or brought by a
third party in respect of the transactions and matters referred to or
contemplated by the Recapitalization Agreement. Also, each of the Partnership
and Forum Group has agreed under the Recapitalization Agreement that it will
indemnify and hold the other, together with its affiliates, harmless against
liabilities relating to any breach of any of the indemnifying party's
representations, warranties or covenants made under the Recapitalization
Agreement.
18
<PAGE>
USE OF PROCEEDS
The Partnership will apply the entire proceeds of the Subscription Offering to
repurchase from Forum A/H, at $2.00 per unit, a number of Preferred Depositary
Units equal to the number of Preferred Depositary Units issued in the
Subscription Offering. Accordingly, the Partnership will not benefit from the
purchase of Preferred Depositary Units pursuant to the Subscription Offering.
The repurchases from Forum A/H could be at a price which exceeds then-prevailing
market prices for Preferred Depositary Units. Inasmuch as only Forum A/H
advanced the equity capital necessary to prepay a portion of the Partnership's
indebtedness pursuant to the Recapitalization Agreement, no other holders of
Preferred Depositary Units will have the right to have Units repurchased.
PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information is based upon the
Partnership's unaudited financial statements as of and for the nine months ended
September 30, 1993 contained in the 1993 Third Quarter Form 10-Q and the
Partnership's audited financial statements for the year ended December 31, 1992
contained in the 1992 Form 10-K. The Pro Forma Condensed Consolidated
Statements of Operations have been adjusted to give effect to the transactions
provided for in the Recapitalization Agreement, the General Partner's capital
contribution of $131,000 in accordance with the Partnership Agreement in
connection with the acquisition of Preferred Depositary Units by Forum A/H, the
closing of the Nomura Loan and the application of proceeds therefrom to the
prepayment of all existing indebtedness of the Partnership (including the Bank
Debt and the Split Coupon Notes) and estimated costs and expenses, as if such
transactions had been consummated on the first day of each period presented.
See "The Recapitalization." The Pro Forma Condensed Consolidated Balance Sheet
has been adjusted to give effect to such transactions as if such transactions
had been consummated on September 30, 1993. The following pro forma financial
information does not purport to be indicative of the financial position or
results of operations that would actually have been reported had such
transactions in fact been consummated on such dates or of the financial position
or results of operations that may be reported by the Partnership in the future.
The following pro forma financial information should be read in conjunction with
the audited financial statements contained in the 1992 Form 10-K (including the
notes thereto) and the unaudited financial statements contained in the 1993
Third Quarter Form 10-Q (including the notes thereto), copies of which accompany
this Prospectus, and the other financial information contained elsewhere in this
Prospectus.
19
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1993
(000'S OMITTED)
(WITHOUT AUDIT)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
HISTORICAL DEBIT CREDIT PRO FORMA
----------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
ASSETS
Property and equipment, net $ 98,588 $ 98,588
Cash and cash equivalents 3,628 $ 1,486(a) 5,114
Deferred costs, net 903 2,184(a) $ 828(b) 2,259
Restricted cash 1,967 47(a) 1,920
Other assets 2,496 2,496
-------- --------
Total assets $107,582 $110,377
======== ========
LIABILITIES AND PARTNERS'
EQUITY
Long-term debt $ 56,570 56,570(a) 50,707(a) $ 50,707
Accounts payable and
accrued expenses 5,626 845(a) 4,354
427(c)
Other liabilities (d) 16,766 16,766
-------- --------
Total liabilities 78,962 71,827
-------- --------
General partner's equity
in subsidiary
partnerships 224 224
Partners' equity:
General partner 1,043 3(a) 131(a) 1,171
Limited partners (8,785
and 15,285 units
issued and outstanding
on a historical
and pro forma basis, 96,904 321(a) 13,000(a) 109,583
respectively) -------- --------
Contributed
capital 97,947 110,754
-------- --------
Accumulated losses (39,616) 2,476(a) 427(c) (42,493)
828(b)
Cash distributions to
limited partners (29,935) (29,935)
-------- --------
Accumulated
deficit (69,551) (72,428)
-------- --------
Total partners'
equity 28,396 38,326
-------- --------
Total liabilities and
partners' equity $107,582 $110,377
======== ========
</TABLE>
SEE ACCOMPANYING NOTES TO PRO FORMA FINANCIAL STATEMENTS.
20
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1992 AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1993
(000'S OMITTED, EXCEPT PER UNIT AMOUNTS)
(WITHOUT AUDIT)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1992 NINE MONTHS ENDED SEPTEMBER 30, 1993
----------------------------------- ------------------------------------
PRO FORMA PRO FORMA
HISTORICAL ADJUSTMENT PRO FORMA HISTORICAL ADJUSTMENT PRO FORMA
---------- ---------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Operating revenues $41,648 $41,648 $32,333 $32,333
Other income 302 302 237 237
------- ------- ------- -------
Total revenues 41,950 41,950 32,570 32,570
Costs and expenses:
Operating expenses 33,873 33,873 24,544 24,544
Management fee
expense payable to
the parent of the
general partner (a) 3,337 3,337 2,589 2,589
Depreciation and
amortization 3,731 $ (16)(b) 3,715 2,847 $ (99)(b) 2,748
Interest:
Parent of general
partner 67 67 39 39
Other 7,103 (1,727)(c) 5,376 4,353 (608)(c) 3,745
------- -------- ------- ------- -------- -------
Total costs and
expenses 48,111 (1,743) 46,368 34,372 (707) 33,665
------- -------- ------- ------- -------- -------
Loss before general
partner's interest
in loss (gain)
of subsidiary 6,161 (1,743) 4,418 1,802 (707) 1,095
partnerships
General partner's
interest in loss
(gain) of subsidiary
partnerships 49 (17)(c) 32 11 (12)(c) (1)
------- -------- ------- ------- -------- -------
Net loss 6,112 (1,726) 4,386 1,791 (695) 1,096
General partner's
interest in net loss 61 (17) 44 18 (7) 11
------- -------- ------- ------- -------- -------
Limited partners'
interest in net loss $ 6,051 $(1,709) $ 4,342 $ 1,773 $(688) $ 1,085
======= ======== ======= ======= ======== =======
Average number of
units outstanding 8,785 6,500(d) 15,285 8,785 6,500(d) 15,285
Net loss per unit $0.69 $0.28 $0.20 $0.07
</TABLE>
SEE ACCOMPANYING NOTES TO PRO FORMA FINANCIAL STATEMENTS.
21
<PAGE>
NOTES TO PRO FORMA FINANCIAL STATEMENTS
(WITHOUT AUDIT)
NOTE 1 - PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1993
(a) To adjust for the Recapitalization and Nomura Loan as follows (000's
omitted):
<TABLE>
<CAPTION>
<S> <C>
Sources of cash:
Nomura Loan gross proceeds $50,707
Capital contributions 13,131
Reduction in Fixed Asset Reserve 47
-------
Total sources of cash $63,885
Uses of cash:
Repayment of Bank Debt $22,500
Repayment of Split Coupon Notes 34,070
Yield maintenance and purchase price
in excess of face for prepayment of
Split Coupon Notes 2,476
Accrued interest payments 845
Estimated costs and expenses - Refinancing 2,184
- Recapitalization 324
-------
Total uses of cash $62,399
Total increase in cash $ 1,486
</TABLE>
(b) To write off the balance of the deferred financing costs associated with
the Bank Debt and Split Coupon Notes.
(c) To adjust for the reduction in accrued interest due to the early retirement
of the Split Coupon Notes.
(d) Other liabilities include $14,854,000 of management fees owed to Forum
Group pursuant to the Management Agreement. For periods prior to January
1, 1994, deferred management fees are subordinate to (i) annual
distributions of $1.35 per Preferred Depositary Unit from net operating
cash flow and are then payable from 50% of any excess Net Operating Income
After Anticipated Distributions after payment of current management fees
and (ii) certain distributions to Unitholders from any Capital Transaction
Proceeds. If the Management Agreement were terminated by the Partnership
as a result of the removal or withdrawal of the General Partner as the
general partner of the Partnership or otherwise in accordance with the
terms thereof, all deferred management fees would become immediately due
and payable. See "Business and Properties of the Partnership -- Management
Agreement."
NOTE 2 - PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEAR
ENDED DECEMBER 31, 1992 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1993
(a) Management fees payable to Forum Group have been deferred, pursuant to the
Management Agreement, since the formation of the Partnership in 1986. For
periods commencing on or after January 1, 1994, management fees earned will
become currently payable. See "Business and Properties of the Partnership
-- Management Agreement."
(b) To adjust amortization of financing costs for changes in the amounts and
amortization period due to the Nomura Loan and the Recapitalization.
(c) To adjust for the decrease in interest expense reflecting the decreased
cost of borrowing resulting from the Nomura Loan and the Recapitalization.
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
December 31, 1992 September 30, 1993
----------------- -------------------
<S> <C> <C>
Pro forma interest on Nomura Loan $ 4,996 $ 3,745
Interest on Loan for RC sold 3/15/92 380 -0-
------- -------
5,376 3,745
Less Actual Interest Expense (7,103) (4,353)
------- -------
Net Adjustment $(1,727) $ (608)
</TABLE>
(d) To adjust for Preferred Depositary Units issued to Forum A/H pursuant to
the Recapitalization Agreement.
22
<PAGE>
CASH DISTRIBUTION POLICY
DISTRIBUTIONS FROM OPERATIONS
General. The Partnership Agreement provides that the Partnership will make
quarterly distributions of all Net Cash Flow within 45 days after the end of
each calendar quarter, to the extent Net Cash Flow is available for such
purpose. For this purpose, "Net Cash Flow" is defined as operating revenues of
the Partnership less (i) operating expenses (including fees payable under the
Management Agreement, see "Business and Properties of the Partnership
- --Management Agreement"), (ii) debt service, (iii) provisions for fixed asset
reserves, working capital reserves and such other reserves as the General
Partner, in its sole discretion, deems appropriate, and (iv) capital
expenditures not made out of the fixed asset reserves.
Distributions were $1.35 per Preferred Depositary Unit for 1987, $1.35 per
Preferred Depositary Unit for 1988, $1.51 per Preferred Depositary Unit for 1989
and $0.40 per Preferred Depositary Unit for 1990. These distributions were
funded through the purchase of additional Preferred Depositary Units by Forum
Group, through the lease of certain of the Partnership's RCs by Forum Group and,
in 1989, also from the proceeds from the sale of one of the Partnership's RCs.
No distributions were made for 1991 or 1992, and it is not anticipated that any
will be made in 1993. With the continued improvement in the Partnership's
operating results and the completion of the Refinancing in the fourth quarter of
1993, the Partnership expects to have positive cash flow commencing in 1994, in
which event the Partnership expects to consider the possibility of renewing the
making of distributions to Unitholders. Whether or not the Partnership will
make such distributions will depend on various factors, including the
Partnership's results of operations, future prospects, capital and reserve
requirements (including reserves required to be established under the Nomura
Loan Agreement (See "The Recapitalization -- The Nomura Loan"), conditions in
the capital markets, the requirements of the Partnership Agreement and such
other factors as the Board of Directors of the General Partner may consider
relevant. THERE CAN BE NO ASSURANCE AS TO THE LEVELS OF DISTRIBUTIONS, IF ANY,
THE PARTNERSHIP MAY MAKE IN THE FUTURE. See "Risk Factors -- Uncertainty as to
Future Cash Distributions."
Certain Restrictions Under Nomura Loan Agreement. The terms of the Nomura
Loan permit the Partnership to begin to make quarterly distributions of Net Cash
Flow, subject to certain restrictions. The Nomura Loan Agreement provides that
if the aggregate DSCR of the Properties at the end of a calendar quarter is less
than 1.3x or 1.2x, then 50% and 100%, respectively, of excess cash flows (as
defined in the Nomura Commitment) could not be distributed by Newco to the
Partnership, and such amounts would be applied to amortize the principal balance
of the Notes for so long as the aggregate DSCR of the Properties remains below
such levels. The Nomura Loan Agreement further provides that if Newco is
required by rating agencies or Nomura to establish reserve funds or accounts or
to agree to escrow or deposit funds on a periodic basis to fund reserve funds or
accounts, then, to the extent funds required for such reserve funds, escrow
accounts or similar items are in excess of the then current resources of Newco,
Newco would not be permitted to make any distributions to the Partnership or
otherwise apply its resources until such requirements were satisfied. See "The
Recapitalization -- The Nomura Loan -- Financial Tests" and "The
Recapitalization -- The Nomura Loan --Possible Securitization." THERE CAN BE NO
ASSURANCE THAT THE PARTNERSHIP WILL HAVE NET CASH FLOW IN THE FUTURE. See
"Risk Factors -- Uncertainty as to Future Cash Distributions."
Distribution Percentages. All Unitholders share pro rata in any distributions
of Net Cash Flow. Net Cash Flow is distributed to the Unitholders and the
General Partner as follows: first, 99% to the Unitholders and 1% to the General
Partner until the Unitholders have received aggregate distributions of Net Cash
Flow equal to a 12% cumulative, simple annual return from December 29, 1986 on
an assumed original investment of $12.75 per Preferred Depositary Unit (the
"Initial Offering Price") and, second, 70% to the Unitholders and 30% to the
General Partner.
Distribution Support Through December 31, 1993. In connection with the
formation of the Partnership in 1986, Forum Group agreed that up to 100% of the
management fees otherwise payable to it under the Management Agreement in
respect of any quarter through and including the quarter ended December 31, 1993
would be deferred to the extent Net Cash Flow in respect of any such quarter was
insufficient to make quarterly distributions at an annual rate of $1.35 per
Preferred Depositary Unit. All management fees payable since the formation of
the Partnership in 1986 through September 30, 1993 have been deferred, and it is
expected that the management fee payable to Forum Group in respect of the
quarter ended December 31, 1993 will also be deferred. The Partnership deferred
management fees in the following amounts for the periods indicated: 1987:
$928,000; 1988: $1,398,000; 1989: $1,595,000; 1990: $1,615,000; 1991:
$3,391,000; 1992: $3,337,000; and the first nine months of 1993: $2,589,000. At
September 30, 1993, deferred management fees totalled approximately $14,854,000.
Deferred management fees are generally payable quarterly at a rate of 50% of any
excess Net Operating Income After Anticipated Distributions, after payment of
current management fees. Deferred
23
<PAGE>
management fees are also payable to Forum Group out of Capital Transaction
Proceeds after making distributions of Capital Transaction Proceeds in an amount
sufficient (i) to meet the Unitholders' tax liabilities, (ii) together with all
prior distributions of Capital Transaction Proceeds, to repay the Initial
Offering Price per Preferred Depositary Unit, and (iii) together with all prior
distributions of Capital Transaction Proceeds and Net Cash Flow, to pay a 12%
cumulative, simple annual return on the Unitholders' respective Unrecovered
Offering Price per Preferred Depositary Unit. For this purpose, "Unrecovered
Offering Price per Preferred Depositary Unit" equals the Initial Offering Price
less all previous distributions of Capital Transaction Proceeds with respect to
such Preferred Depositary Unit. In the event of the termination of the
Management Agreement resulting from the removal or withdrawal of the General
Partner or otherwise in accordance with the terms thereof, Forum Group would be
entitled to receive immediately upon such termination all unpaid management fees
for prior periods, including any deferred management fees, together with any
reimbursements then due to it under the Management Agreement. Such fees would
be due regardless of the levels of distributions made to holders of Preferred
Depositary Units and would constitute a liability of the Partnership (and
therefor be entitled to priority over equity interests upon the liquidation of
the Partnership). See "Risk Factors -- Uncertainty as to Future Cash
Distributions," "Risk Factors -- Dependence on Forum Group" and "Business and
Properties of the Partnership -- Management Agreement."
DISTRIBUTIONS FROM SALES AND REFINANCINGS
Net proceeds to the Partnership from sales and refinancings of the
Partnership's RCs ("Capital Transaction Proceeds") prior to January 1, 1997 may
be distributed or retained by the Partnership for reinvestment or other
Partnership purposes in the discretion of the General Partner, except that
Capital Transaction Proceeds will be distributed in an amount sufficient to pay
any income tax liability imposed upon the Unitholders as a consequence of the
transaction (assuming the maximum marginal federal income tax rate for an
individual taxpayer in effect from time to time, without regard to phase-outs of
lower graduated rates or personal exemptions, plus 5%, for all Unitholders).
All Capital Transaction Proceeds from sales and refinancings after December 31,
1996 are required to be distributed.
Capital Transaction Proceeds are distributed as follows: first, 99% to the
Unitholders and 1% to the General Partner until the Unitholders have received
aggregate distributions of Capital Transaction Proceeds equal to the Initial
Offering Price of $12.75 per Preferred Depositary Unit; second, 99% to the
Unitholders and 1% to the General Partner until the Unitholders have received,
from all distributions of Net Cash Flow and Capital Transaction Proceeds, an
amount equal to a 12% cumulative, simple annual return on their respective
Unrecovered Offering Price per Preferred Depositary Unit outstanding from time
to time; and third, subject to repayment to Forum Group of management fees
deferred as described under the caption "-- Distribution Support Through
December 31, 1993" above, 70% to the Unitholders and 30% to the General Partner.
Generally, distributions from a liquidation of the Partnership will be made in
the same manner as distributions of Capital Transaction Proceeds from a sale,
subject to the overall requirement that distributions be made to partners in
accordance with their positive capital account balances.
THE SUBSCRIPTION OFFERING
SUBSCRIPTION PRIVILEGE
Pursuant to the Recapitalization Agreement, the Partnership is offering to
Unitholders of record (other than Forum Group and its affiliates) as of the
close of business on the Record Date (October 18, 1993), the opportunity to
subscribe for and purchase additional Preferred Depositary Units. Eligible
Holders may subscribe for and purchase 0.7398342 of a Preferred Depositary Unit
for each Preferred Depositary Unit held of record by them on the Record Date for
a purchase price of $2.00 per unit.
No fractional Preferred Depositary Units will be issued. The number of
Preferred Depositary Units for which an Eligible Holder may subscribe will be
based on the aggregate number of Preferred Depositary Units
24
<PAGE>
held by such Eligible Holder on the Record Date and will be rounded down to the
nearest whole number. A broker, dealer, commercial bank, trust company or other
nominee holding Preferred Depositary Units on the Record Date for more than one
beneficial owner will be required to certify to the Subscription Agent and the
Partnership (i) the total number of Preferred Depositary Units subscribed for by
such nominee on behalf of beneficial owners pursuant to the Subscription
Privilege, (ii) the aggregate number of Preferred Depositary Units held by it as
of the Record Date on behalf of each beneficial owner for which it has exercised
the Subscription Privilege, and (iii) the aggregate number of Preferred
Depositary Units subscribed for by it on behalf of each such beneficial owner.
The number of Preferred Depositary Units which may be subscribed for and
purchased on behalf of each beneficial owner will be based on the aggregate
number of Preferred Depositary Units held for such beneficial owner on the
Record Date and will be rounded down to the nearest whole number.
EXPIRATION DATE
The opportunity to subscribe for and purchase Preferred Depositary Units will
expire at the Expiration Date, unless earlier terminated. The term "Expiration
Date" means 5:00 p.m., New York City time, on January 27, 1994, unless and until
the Partnership, in its sole discretion, has extended the time for expiration of
the opportunity to subscribe for and purchase Preferred Depositary Units
pursuant to the Subscription Offering to a time no later than 5:00 p.m., New
York City time, on February 15, 1994, in which event the term "Expiration Date"
will mean the latest time and date on which such opportunity, as so extended by
the Partnership, expires. The Partnership will not honor any purported exercise
of the Subscription Privilege received by the Subscription Agent after the
Expiration Date, regardless of when the documents relating to such exercise were
sent.
CERTAIN CONDITIONS
The Subscription Offering is subject to the following conditions:
(i) At the Expiration Date, there shall be no action or proceeding,
pending or threatened, before any court or governmental agency which seeks to
restrain, prohibit or invalidate the Subscription Offering or any other
transaction contemplated by the Recapitalization Agreement, in whole or in
part, or which alleges material damages arising therefrom; and
(ii) At the Expiration Date, all required approvals from any
governmental or regulatory authorities having jurisdiction in respect of the
Subscription Offering or any other transaction contemplated by the
Recapitalization Agreement shall have been received.
The Partnership will not be required to issue any Preferred Depositary Units
subscribed for pursuant to the Subscription Offering if such conditions are not
satisfied and may, if it determines such conditions will not be satisfied at or
prior to the Expiration Date, terminate the Subscription Offering prior to the
Expiration Date. In the event such conditions are not satisfied at the
Expiration Date or the Subscription Offering is terminated by the Partnership
prior thereto, the Subscription Privilege will thereupon terminate and the
aggregate Subscription Price theretofore received from each Eligible Holder will
be mailed to such Eligible Holder promptly following such Expiration Date or the
date of such termination, without interest or deduction.
The General Partner reserves the right to waive any conditions to the
Subscription Offering in its sole discretion.
ANNOUNCEMENT OF EXTENSION OR TERMINATION
Any extension of the Expiration Date beyond January 27, 1994 or termination of
the Subscription Privilege will be followed as promptly as practicable by public
announcement thereof. In the case of an extension, the announcement will be
issued no later than 9:00 a.m., New York City time, on the next business day
after the previously scheduled Expiration Date. Without limiting the manner in
which the Partnership may choose to make any public announcement, the
Partnership currently intends to make announcements by issuing a release to the
Dow Jones News Service.
25
<PAGE>
EXERCISE OF SUBSCRIPTION PRIVILEGE
Subject to the right of the Partnership to terminate the Subscription Offering
as described above, the Subscription Privilege may be exercised by delivering to
American Stock Transfer & Trust Company, prior to the Expiration Date, a
properly completed and executed Notice of Exercise or a facsimile thereof,
together with payment in full of the Subscription Price for each Preferred
Depositary Unit subscribed for pursuant to the Subscription Privilege. A copy
of the Notice of Exercise accompanies this Prospectus.
Such payment in full must be by (i) check or bank draft drawn upon a U.S. bank
or postal, telegraphic or express money order payable to American Stock Transfer
& Trust Company, as Subscription Agent, or (ii) wire transfer of funds to the
account maintained by the Subscription Agent for such purpose at Chemical Bank,
Account No. 610093045; ABA No. 021000128 (reference should be made to Forum
Retirement Partners, L.P. and the name of the Eligible Holder making such
payment should be indicated). The Subscription Price will be deemed to have
been received by the Subscription Agent only upon (a) clearance of any
uncertified check, (b) receipt by the Subscription Agent of any certified check
or bank draft drawn upon a U.S. bank or of any postal, telegraphic or express
money order, or (c) receipt of good funds in the Subscription Agent's account
designated above. If paying by uncertified personal check, please note that the
funds paid thereby may take at least five business days to clear. Accordingly,
Eligible Holders who wish to pay the Subscription Price by means of uncertified
personal check are urged to make payment sufficiently in advance of the
Expiration Date to ensure that such payment is received and clears by such date
and are urged to consider payment by means of certified or cashier's check,
money order or wire transfer of funds.
The address to which Notices of Exercise and payment of the Subscription Price
should be delivered is:
AMERICAN STOCK TRANSFER & TRUST COMPANY
40 WALL STREET, 46TH FLOOR
NEW YORK, NEW YORK 10005
ATTENTION: REORGANIZATION DEPARTMENT
Eligible Holders, such as brokers, dealers, commercial banks and trust
companies that on the Record Date held Preferred Depositary Units for the
account of others should notify the respective beneficial owners of such
Preferred Depositary Units as soon as possible to ascertain such beneficial
owners' intentions and to obtain instructions with respect to the Subscription
Privilege. Beneficial owners of Preferred Depositary Units held through such a
nominee holder on the Record Date should contact the Eligible Holder and request
the Eligible Holder to effect transactions in accordance with the beneficial
owner's instructions. If the beneficial owner so instructs, the Eligible Holder
should complete a Notice of Exercise and submit it to the Subscription Agent
with the proper payment.
The instructions accompanying the Notice of Exercise should be read carefully
and followed in detail. Do not send Notices of Exercise or payments of the
Subscription Price to the Partnership or the General Partner.
The method of delivery of Notices of Exercise and payment of the Subscription
Price to the Subscription Agent will be at the election and risk of the Eligible
Holder, but if sent by mail it is recommended that such Notices of Exercise and
payments be sent by registered mail, with return receipt requested, and that a
sufficient number of days be allowed to ensure delivery to the Subscription
Agent and clearance of payment prior to the Expiration Date. Because
uncertified personal checks may take at least five business days to clear,
Eligible Holders are urged to pay, or arrange for payment, by means of certified
or cashier's check, money order or wire transfer of funds.
All questions concerning the timeliness, validity, form and eligibility of any
exercise of the Subscription Privilege will be determined by the Partnership,
whose determinations will be final and binding. The Partnership in its sole
discretion may waive any defect or irregularity, or permit a defect or
irregularity to be corrected within such time as it may determine, or reject the
purported exercise of any Subscription Privilege. Subscriptions will not be
deemed to have been received or accepted until all irregularities have been
waived or cured within such time as the Partnership determines in its sole
discretion. Neither the Partnership nor the Subscription Agent will be under
any duty to give notification of any defect or irregularity in connection with
the submission of Notices of Exercise or incur any liability for failure to give
such notification.
26
<PAGE>
Any questions or requests for assistance concerning the method of exercising
Subscription Privileges or requests for additional copies of this Prospectus or
Notices of Exercise, should be directed to John H. Sharpe, Esq., in writing at
8900 Keystone Crossing, Suite 200, Indianapolis, Indiana, or by telephone at
(317) 846-0700.
ISSUANCE OF PREFERRED DEPOSITARY UNITS
Depositary receipts representing Preferred Depositary Units purchased pursuant
to the Subscription Privilege will be delivered to Eligible Holders that have
validly exercised their Subscription Privilege as soon as practicable after the
Expiration Date if the conditions to the Subscription Offering set forth above
(see "-- Certain Conditions") have been satisfied or waived and the Subscription
Offering has not theretofore been terminated.
NO REVOCATION
Once an Eligible Holder has exercised the Subscription Privilege, such
exercise may not be revoked.
BUSINESS AND PROPERTIES OF THE PARTNERSHIP
GENERAL
The Partnership was formed in 1986 by Forum Group to own rental RCs developed
by Forum Group, most of which are designed to appeal to the financially
independent elderly. On December 31, 1986, the Partnership acquired (i) four
RCs from Forum Group and (ii) five additional RCs previously owned by Forum
Group. On March 31, 1988, the Partnership acquired a tenth RC from Forum Group.
In the second quarter of 1989, the Partnership sold one of its mature RCs, The
Forum at the Crossing, Indianapolis, Indiana, to a partnership of which Forum
Group is the general partner and in which Forum Group is a major investor. In
the third quarter of 1989, Forum Retirement Operations, L.P. ("Operations"),
formerly an affiliated partnership of the Partnership, purchased The Forum at
Lincoln Heights ("Forum/Lincoln Heights"), a newly developed RC in San Antonio,
Texas, from Forum Group, pursuant to the option described below. In the first
quarter of 1992, the Partnership sold the business and substantially all of the
assets of The Lafayette/Philadelphia, an RC in Philadelphia, Pennsylvania, to
Redeemer LTC & Elder Services, Inc., an affiliate of Holy Redeemer Health
Systems, Inc.
Although the General Partner currently believes that it is unlikely that the
Partnership will acquire additional rental RCs, the Partnership has been granted
the option to purchase each additional rental RC developed by Forum Group until
the Partnership has purchased an additional 14 RCs. The Partnership has
purchased one RC, Forum/Lincoln Heights, from Forum Group pursuant to that
option. The Partnership has been informed that, while Forum Group expects to
consider the acquisition of additional RCs, Forum Group has no present plans to
develop any new RCs. The Partnership's option to purchase additional RCs from
Forum Group would not cover RCs acquired, but not developed, by Forum Group.
The Properties compete in the continuing care RC segment of the senior housing
market. This market segment consists of a specialized form of housing combining
luxury rental independent living accommodations with special healthcare services
and amenities designed to meet the needs of the elderly. Because most of its
RCs are designed to appeal to the financially independent elderly, the
independent living components of the Partnership's RCs typically contain
significantly more living space than is available in a nursing home and are
significantly more upscale than the living accommodations in a home for the aged
or a nursing home. The nursing, assisted living and independent living
components of the Partnership's RCs are believed by the Partnership to be among
the highest quality available.
PROPERTIES
The Affiliated Partnership owns RCs in Delaware (four), Florida, New Mexico,
South Carolina and Texas (two). All of the Properties are managed by Forum
Group pursuant to the Management Agreement. See "-- Management Agreement."
Seven of the Properties (Foulk Manor, Foulk Manor North, Forum/Lincoln
27
<PAGE>
Heights, Millcroft, The Montebello on Academy, Myrtle Beach Manor and Shipley
Manor) are mature operating communities. Two of the Properties (The Montevista
at Coronado and the Park Summit of Coral Springs) have yet to achieve stabilized
(i.e., 90%) occupancy. One of the Properties (Foulk Manor) which had achieved
stabilized occupancy currently has an occupancy level below 90%. See the table
containing occupancy rates and certain other operating data set forth below.
Except as described below, each of the Properties contains an independent
living component and a nursing component, and each of the Properties (other than
Millcroft, Myrtle Beach Manor and Shipley Manor) also includes an assisted
living component. One of the Properties (Foulk Manor) consists of an assisted
living component and a nursing component, and does not contain an independent
living component.
The independent living component, if any, of each of the Properties contains a
variety of accommodations, together with amenities such as dining facilities,
lounges, and game and craft rooms. All residents of the independent living
components are provided security, meals and housekeeping and linen service.
Emergency healthcare service is available 24 hours a day from an on-site nursing
staff, and each independent living unit is equipped with an emergency call
system. The independent living components of the Properties consist of
apartments, villas and, in the case of Foulk Manor North, condominiums.
Independent living unit first person residency fees presently range from $999 to
$3,960 per month, depending on the size of accommodations. Each apartment and
villa resident enters into a residency agreement that may be terminated by the
resident on short notice, and each condominium resident enters into a residency
agreement coterminous with his or her ownership. Although there can be no
assurance that, as apartment and villa residency agreements expire or are
terminated, available apartments and villas will be reoccupied, since the
Partnership's formation, at least 80% of the residents of the apartments and
villas have renewed their residency agreements from year to year. All residents
of the independent living components of the Properties are assured space in the
assisted living, if any, and nursing components should the need therefor arise.
The nursing component of each of the Properties provides residents a full
range of nursing care. Residents have private or semiprivate rooms, and share
communal dining and social facilities. In most instances, each resident of the
independent living component of a Property is entitled to care in the assisted
living, if any, or nursing component at no extra charge for up to a specific
number of days annually or an aggregate of a specified number of days during the
resident's lifetime. After utilizing this accrued time, the resident pays for
both independent living occupancy, and assisted living or nursing care, until
cancelling one or the other. The charge for a private nursing room presently
ranges from $67 to $160 per day.
The assisted living component, if any, of each of the Properties provides
residents a semistructured environment that encourages independent living.
Residents have private or semiprivate suites, eat meals in a private dining room
and are provided the added services of scheduled activities, housekeeping and
linen service, preventive health surveillance, periodic health monitoring,
assistance with activities of daily living and emergency care. The charge for a
private assisted living suite presently ranges from $46 to $125 per day.
The Properties provide ancillary healthcare services, including the operation
of an adult day care center on the premises of one of the Properties and the
placement of private duty registered nurses and nursing technicians.
The following table indicates the name and location, current capacity, average
occupancy rate for each of the last five years and for the nine months ended
September 30, 1993, and average effective annual fees/charges per unit/suite/bed
for each of the last five years and for the nine months ended September 30,
1993, of each of the Properties and for all of the Properties collectively:
28
<PAGE>
<TABLE>
<CAPTION>
Capacity
(Updated for 11/30)
- ----------------------------------------------------------------------
Inde- Total
pendent Assisted Units/
Name and Living Living Nursing Suites/
Location Units Suites Beds Beds
- ------------------------------ -------- -------- -------- --------
<S> <C> <C> <C> <C>
The Forum at 152 30 60 242
Lincoln Heights
San Antonio, Texas
Foulk Manor -0- 51 52 103
Wilmington, Delaware
Foulk Manor North 58 11 46 115
Wilmington, Delaware
Millcroft 63 -0- 100 163
Newark, Delaware
The Montebello on Academy 114 15 60 189
Albuquerque, New Mexico
The Montevista at Coronado 123 15 120 258
El Paso, Texas
Myrtle Beach Manor 61 -0- 80 141
North Myrtle Beach,
South Carolina
The Park Summit of Coral 199 22 35 256
Springs
Coral Springs, Florida
Shipley Manor 61 -0- 82 143
Wilmington, Delaware
-------- -------- -------- --------
All of the Properties
collectively 831 144 635 1,610
</TABLE>
<TABLE>
<CAPTION>
Average Occupancy Rate
- ------------------------------------------------------------------------------------------------------------------------------
Nine
Months
Name and Ended
Location Sept. 30, 1993 1992 1991 1990 1989 1988
- ------------------------------ -------------- -------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
The Forum at Lincoln 93.6% 86.80% 68.50% 56.30% 17.10% N/A
Heights
San Antonio, Texas
Foulk Manor 83.5% 80.20% 70.90% 83.50% 87.00% 93.80%
Wilmington, Delaware
Foulk Manor North 90.3% 89.930% 88.10% 82.70% 84.60% 89.36%
Wilmington, Delaware
Millcroft 92.3% 90.60% 87.90% 90.00% 93.60% 95.24%
Newark, Delaware
The Montebello on Academy 96.3% 90.10% 85.00% 87.40% 80.80% 65.80%
Albuquerque, New Mexico
The Montevista at Coronado 85.0% 81.60% 81.10% 74.30% 58.90% 40.90%
El Paso, Texas
Myrtle Beach Manor 93.5% 89.930% 79.40% 86.10% 88.60% 87.54%
North Myrtle Beach,
South Carolina
The Park Summit of Coral 89.1% 81.70% 76.30% 76.30% 77.40% 62.60%
Springs
Coral Springs, Florida
Shipley Manor 93.5% 85.80% 85.90% 90.80% 90.70% 97.60%
Wilmington, Delaware
-------------- -------------- -------------- -------------- -------------- --------------
All of the Properties
collectively 90.8% 85.9% 79.0% 77.8% 76.4% 73.0%
</TABLE>
<TABLE>
<CAPTION>
Average Effective Annual
Fees/Charges Per Unit/Suite/Bed
- ------------------------------------------------------------------------------------------------------------------------------
Nine
Months
Ended
Name and Sept. 30, 1993
Location (annualized) 1992 1991 1990 1989 1988
- ------------------------------ -------------- -------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
The Forum at Lincoln $26,648 $26,366 $18,858 $22,779 $10,190 N/A
Heights
San Antonio, Texas
Foulk Manor $30,071 $30,149 $31,512 $29,583 $25,735 $25,656
Wilmington, Delaware
Foulk Manor North $29,097 $28,322 $26,711 $25,678 $23,601 $22,155
Wilmington, Delaware
Millcroft $28,700 $27,803 $27,087 $25,071 $23,308 $23,167
Newark, Delaware
The Montebello on Academy $27,343 $27,426 $25,722 $24,804 $24,815 $22,005
Albuquerque, New Mexico
The Montevista at Coronado $23,033 $22,588 $20,321 $19,823 $17,690 $12,145
El Paso, Texas
Myrtle Beach Manor $23,289 $21,813 $20,752 $19,349 $17,872 $17,152
North Myrtle Beach,
South Carolina
The Park Summit of Coral $24,623 $24,687 $25,072 $24,177 $21,596 $19,451
Springs
Coral Springs, Florida
Shipley Manor $29,211 $29,501 $29,396 $26,655 $24,826 $23,482
Wilmington, Delaware
- ------------------------------ -------------- -------------- -------------- -------------- -------------- --------------
All of the Properties
collectively $26,364 $26,057 $24,573 $24,156 $20,175 $20,938
</TABLE>
29
<PAGE>
Mortgages. All of the Properties are subject to a first mortgage securing the
Notes issued in connection with the Nomura Loan. The aggregate amount currently
outstanding under the Notes is approximately $50.7 million, which bears interest
at the rate of 9.93% per annum. The Notes mature on January 1, 2001. The
mortgages on the Properties are recorded and are cross-defaulted and cross-
collateralized. See "The Recapitalization -- The Nomura Loan."
Depreciation. The following table indicates, with respect to each component
of each of the Properties upon which depreciation is taken, the federal tax
basis (as of December 31, 1992), rate, method and life claimed with respect to
such component for purposes of depreciation:
<TABLE>
<CAPTION>
============================================================================================
Net
Federal
Tax Basis Life
Name and Location Component (12/31/92) Rate Method/*/ (Years)
============================================================================================
<S> <C> <C> <C> <C> <C>
The Forum at Lincoln Heights Real property $17,556,243 2.5-5% SL 20-40
San Antonio, Texas Personal property 718,012 10% SL/ADS 10
Foulk Manor Real property 2,278,060 2.5-5.3% SL 19-40
Wilmington, Delaware Personal property 196,369 10-20% SL/ADS 5-10
Foulk Manor North Real property 2,400,014 2.5-5.3% SL 19-40
Wilmington, Delaware Personal property 189,560 10% ADS 10
Millcroft Real property 4,770,195 2.5-5.3% SL 19-40
Newark, Delaware Personal property 197,204 10-20% ADS 5-10
The Montebello on Academy Real property 7,481,536 2.5-6.7% SL 15-40
Albuquerque, New Mexico Personal property 137,231 10-20% SL/ADS 5-10
The Montevista at Coronado Real property 12,378,050 2.5-5% SL 20-40
El Paso, Texas Personal property 1,779,108 5.3-20% SL/ADS 5-10
Myrtle Beach Manor Real property 2,532,549 2.5-5.3% SL 19-40
North Myrtle Beach, South Personal property 126,060 10-20% ADS 5-10
Carolina
The Park Summit of Coral Real property 10,054,457 2.5-5.3% SL 19-40
Springs Personal property 299,527 6.7-20% SL/ADS 5-15
Coral Springs, Florida
Shipley Manor Real property 5,194,171 2.5-20% SL 15-40
Wilmington, Delaware Personal property 166,744 10-20% SL/ADS 5-10
============================================================================================
________________________
* ADS = Alternative depreciation system
SL = Straight line
</TABLE>
30
<PAGE>
Real Estate Taxes. The following table indicates, with respect to each of the
Properties, the assessed value, real estate tax rate and annual real estate
taxes for 1993:
<TABLE>
<CAPTION>
=========================================================================
Annual
Real
Estate
Assessed Real Estate Taxes
Name and Location Value Tax Rate (1992)
=========================================================================
<S> <C> <C> <C>
The Forum at Lincoln Heights $13,000,000 2.23% $ 289,743
San Antonio, Texas
Foulk Manor 2,247,600 1.18% 26,586
Wilmington, Delaware
Foulk Manor North 4,093,200 1.18% 48,417
Wilmington, Delaware
Millcroft 6,352,000 1.40% 88,790
Newark, Delaware
The Montebello on Academy 6,215,237 1.09% 67,927
Albuquerque, New Mexico
The Montevista at Coronado 5,099,392 2.38% 121,119
El Paso, Texas
Myrtle Beach Manor 4,448,800 1.07% 47,780
North Myrtle Beach, South
Carolina
The Park Summit of Coral Springs 12,240,000 2.45% 300,235
Coral Springs, Florida
Shipley Manor 5,274,800 1.18% 62,395
Wilmington, Delaware
=========================================================================
All $58,971,029 1.80% $1,052,992
=========================================================================
</TABLE>
Sources of Payment. The independent and assisted living components, if any,
of the Properties receive direct payment for resident occupancy solely on a
private pay basis. The nursing components of the Properties receive payment for
resident care directly on a private pay basis, including payment from private
health insurance, and from governmental reimbursement programs such as the
federal Medicare program for certain elderly and disabled residents and state
Medicaid programs for certain indigent residents. The following table indicates
the approximate percentages of operating revenues for each of the last five
years and the nine months ended September 30, 1993 derived by the Partnership
from private sources and from Medicare and Medicaid:
31
<PAGE>
<TABLE>
<CAPTION>
Independent and Assisted
Living Components Nursing Components Total RCs
---------------------------------- ---------------------------------- ----------------------------------
1993 1992 1991 1990 1989 1988 1993 1992 1991 1990 1989 1988 1993 1992 1991 1990 1989 1988
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Private
Sources..... 100% 100% 100% 100% 100% 100% 71% 72% 77% 73% 78% 87% 85% 86% 89% 87% 91% 93%
Medicare and
Medicaid.... 0 0 0 0 0 0 29% 28% 23% 27% 22% 13% 15% 14% 11% 13% 9% 7%
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Total..... 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
</TABLE>
32
<PAGE>
Most private insurance carriers reimburse their policyholders, or make direct
payment to facilities, for covered services at rates established by the
facilities. Where applicable, the resident is responsible for any difference
between the insurance proceeds and the total charges. In certain states, Blue
Cross plans pay for covered services at rates negotiated with facilities. In
other states, Blue Cross plans are administered under contracts with facilities
providing for payment under formulae based on the cost of services. The
Medicare program also makes payment under a cost-based reimbursement formula
plus a return on equity. Under the Medicaid program, each state is responsible
for developing and administering its own reimbursement formula.
Both governmental and third-party payors have employed cost containment
measures designed to limit payments made to health care providers such as the
Partnership. Those measures include the adoption of initial and continuing
recipient eligibility criteria which may limit payment for services, the
adoption of coverage criteria which limit the services that will be reimbursed
and the establishment of payment ceilings which set the maximum reimbursement
that a provider may receive for services. Furthermore, government reimbursement
programs are subject to statutory and regulatory changes, retroactive rate
adjustments, administrative rulings and government funding restrictions, all of
which may materially increase or decrease the rate of program payments to the
Partnership for its services. There can be no assurance that payments under
governmental and private third-party payor programs will remain at levels
comparable to present levels or will be sufficient to cover the costs allocable
to patients eligible for reimbursement pursuant to such programs. See "Risk
Factors -- Risks of Government Regulation" and "Risk Factors -- Risks of
Dependence Upon Third-Party Payors."
Competition. The Properties compete with senior housing and long-term
healthcare facilities of varying similarity in the respective geographical
market areas in which the Properties are located. Competing facilities are
operated on a national, regional and local basis by religious groups and other
nonprofit organizations, as well as by private operators, some of which have
substantially greater resources than the Partnership. The independent living
components of the Properties face competition from all the various types of
residential opportunities available to the elderly. However, the number of RCs
that offer on-premises healthcare services is limited. The assisted living and
nursing components of the Properties compete with other assisted living and
nursing facilities, and, to a lesser extent, with general hospitals. The
Partnership believes that the demand for full-service RCs is high and that
competition is not presently a significant risk affecting the value of the
Properties. However, because the target market segment of the Properties is
relatively narrow, the risk of competition may be higher than with some other
types of RCs. Additionally, the Properties may be subject to competition from
new RCs, and assisted living and nursing facilities, developed in close
proximity to them. The Properties in the Wilmington, Delaware area may compete
with other RCs managed by Forum Group and in which Forum Group has ownership
interests.
Significant competitive factors for attracting residents to the independent
living components of the Properties include price, physical appearance and
amenities and services offered. Additional competitive factors for attracting
residents to the assisted living and nursing components of the Properties
include quality of care, reputation, physician and nursing services available
and family preferences. The Partnership believes that the Properties generally
rate high in each of these categories, except that the Properties are generally
more expensive than competing facilities. The assisted living and nursing
components of the Properties are designed to supplement, not to compete with,
healthcare services provided by general hospitals.
Insurance. The Partnership maintains professional liability, comprehensive
general liability and other typical insurance coverage on all the Properties.
The Partnership believes that its insurance is adequate in amount and coverage.
MANAGEMENT AGREEMENT
Forum Group manages all of the Properties pursuant to the Management
Agreement, dated as of December 31, 1986, as amended (the "Management
Agreement"), among Forum Group, the Partnership and the Affiliated Partnership,
which was entered into in connection with the formation of the Partnership.
Forum Group's responsibilities under the Management Agreement include, among
other things, preparing and implementing annual budgets; hiring and supervising
qualified personnel; providing for the furnishing of necessary
33
<PAGE>
services to residents; maintaining the Properties; obtaining and maintaining in
force and effect all required approvals; providing complete accounting and
record-keeping services; processing third-party reimbursement claims; collecting
all revenues and paying all operating expenses of the Properties. Forum Group
is responsible for hiring a qualified administrator for each of the Properties
and, when necessary or desirable, a qualified assistant administrator for each
of the Properties.
The Management Agreement provides that the Partnership will indemnify Forum
Group and its affiliates for liabilities arising by reason of, resulting from or
incident to Forum Group's management and operation of the Properties, except for
those arising by reason of, resulting from or incident to the indemnitee's gross
negligence or willful or wanton misconduct.
The term of the Management Agreement is coterminous with the term of the
Partnership unless the term of the Management Agreement is sooner terminated as
provided therein. Either party may terminate the Management Agreement upon 30
days' prior written notice if the other party fails substantially to perform in
accordance with the terms thereof through no fault of the terminating party and
if the other party does not cure the failure within that 30-day period.
Additionally, the Management Agreement provides that the Partnership may
terminate the Management Agreement without cause upon (i) the simultaneous
withdrawal or removal of the General Partner as the general partner of the
Partnership and (ii) the affirmative vote of at least 80% in interest of the
Unitholders. As a result of the purchase of 6,500,000 Preferred Depositary
Units by Forum A/H pursuant to the Recapitalization Agreement, Forum Group
presently beneficially owns 8,440,268 Preferred Depositary Units, or
approximately 55.2% of the total number of Preferred Depositary Units
outstanding as of the date of this Prospectus, although such ownership will be
reduced by such number of Preferred Depositary Units as are purchased (if any)
in the Subscription Offering (see "Use of Proceeds"). However, even if all of
the 5,064,150 Preferred Depositary Units offered hereby are subscribed for and
purchased by Eligible Holders, Forum Group would own approximately 22.1% of the
total outstanding Preferred Depositary Units and accordingly would have (as it
had prior to the purchase of additional Preferred Depositary Units by Forum A/H
pursuant to the Recapitalization Agreement) sufficient voting power to prevent
any attempt to remove the General Partner or terminate the Management Agreement.
Pursuant to the Management Agreement, Forum Group is entitled to receive
management fees in respect of the Properties, payable quarterly, in an amount
equal to 8% of the Partnership's gross operating revenues. All management fees
payable since the formation of the Partnership in 1986 through September 30,
1993 have been deferred, and it is expected that the management fees payable to
Forum Group in respect of the quarter ended December 31, 1993 will also be
deferred. The Partnership deferred management fees in the following amounts for
the periods indicated: 1987: $928,000; 1988: $1,398,000; 1989: $1,595,000; 1990:
$1,615,000; 1991: $3,391,000; 1992: $3,337,000; and the first nine months of
1993: $2,589,000. At September 30, 1993, deferred management fees totalled
approximately $14,854,000. Management fees are no longer deferrable for periods
from and after January 1, 1994 under the terms of the Management Agreement
entered into in 1986 in connection with the formation of the Partnership.
Deferred management fees will generally be paid quarterly at a rate of 50% of
any excess Net Operating Income After Anticipated Distributions, after payment
of current management fees. Deferred management fees are also payable to Forum
Group out of Capital Transaction Proceeds after making distributions of Capital
Transaction Proceeds in an amount sufficient (i) to meet the Unitholders' tax
liabilities, (ii) together with all prior distributions of Capital Transaction
Proceeds, to repay the Initial Offering Price per Preferred Depositary Unit, and
(iii) together with all prior distributions of Capital Transaction Proceeds and
Net Cash Flow, to pay a 12% cumulative, simple annual return on the Unitholders'
respective Unrecovered Offering Price per Preferred Depositary Unit. The
Partnership also reimburses Forum Group for general and administrative costs
incurred on behalf of the Partnership (which amounted to $160,000, $189,000,
$187,000, $196,000, $195,000, $176,000 and $135,000 in 1987, 1988, 1989, 1990,
1991, 1992 and the first nine months of 1993, respectively). In connection with
the bankruptcy proceeding of Forum Group and certain of its affiliates (not
including the Partnership or the General Partner), the Partnership and Forum
Group agreed that, commencing with the last quarter of 1992, general and
administrative costs incurred by Forum Group on behalf of the Partnership would
be reimbursed at a rate of $180,000 per annum. In the event of the termination
of the Management Agreement resulting from the removal or withdrawal of the
General Partner or otherwise in accordance with the terms thereof (except for a
removal by Nomura by reason of a monetary default under the Nomura Loan), Forum
Group would be entitled immediately upon such termination to receive all unpaid
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management fees for prior periods, including without limitation any deferred
management fees, together with any reimbursements then due to it under the
Management Agreement. See "Risk Factors -- Uncertainty as to Future Cash
Distributions," "Risk Factors -- Dependence on Forum Group" and "Cash
Distribution Policy --Distribution Support." Such fees would be due regardless
of the levels of distributions made to holders of Preferred Depositary Units and
would constitute a liability of the Partnership (and therefor be entitled to
priority over equity interests upon the liquidation of the Partnership).
The Management Agreement has been amended four times since it was entered into
in connection with the formation of the Partnership. In June 1989, the
Management Agreement was amended to (i) subordinate Forum Group's right to
receive deferred management fees and 4% of the management fees for each calendar
quarter from and after January 1, 1994 to the payment of amounts due and payable
under the Split Coupon Notes and (ii) provide for interest on unpaid management
fees for periods from and after January 1, 1994 at the rate of 12% per annum.
In September 1989, the Management Agreement was amended to, among other things,
permit the termination of the Management Agreement by the bank lender upon the
occurrence of an event of default under the credit agreement relating to the
Bank Debt. In May 1992, the Management Agreement was amended to (x) revise the
subordination provisions relating to the Split Coupon Notes so as to subordinate
Forum Group's right to receive all management fees and deferred management fees
attributable to six of the Properties to payment of principal and base interest
on the Split Coupon Notes and to subordinate Forum Group's right to receive
management fees attributable to such Properties in excess of 4% of the gross
operating revenues of such Properties to payment of additional interest on the
Split Coupon Notes, (y) revise the provision relating to interest payable on
management fees to provide that interest will be paid on any unpaid management
fees (other than deferred management fees) at the rate of 12% per annum, and (z)
permit the termination of the Management Agreement as to any Property by the
holder of a mortgage or deed of trust on such Property upon the foreclosure
thereof. Pursuant to the Recapitalization Agreement, the Management Agreement
was amended to provide for the termination of the manager (presently Forum
Group) upon the vote of the holders of 66-2/3% of the principal amount of the
then-outstanding Notes (or Certificates) in certain circumstances and in certain
other respects.
SALE OF RCs
Pursuant to an option agreement entered into at the time of the Partnership's
formation in 1986, Forum Group has the option to purchase, for a price equal to
the appraised fair market value thereof, any RC which the Partnership determines
to sell. Consummation of a transaction to sell any of the Properties would be
subject to fulfillment of various conditions precedent, including the election
of Forum Group not to exercise such option.
INVESTMENT OBJECTIVES
The Partnership's investment objectives are to provide the Unitholders (i)
distributions of Net Cash Flow (to the extent available and permitted) and (ii)
the opportunity to participate in any long-term appreciation in value of its
RCs. However, there can be no assurance that these objectives will be attained.
DESCRIPTION OF PREFERRED DEPOSITARY UNITS
The following is a description of certain provisions of the Amended and
Restated Agreement of Limited Partnership, dated as of December 29, 1986, of the
Partnership, as amended (the "Partnership Agreement"), and the Depositary
Agreement, dated as of December 29, 1986 (the "Deposit Agreement"), among the
Partnership, the General Partner and Manufacturers Hanover Trust Company, which
subsequently assigned its interests thereunder to American Stock Transfer &
Trust Company (the "Depositary"), and is qualified in its entirety by reference
to the Partnership Agreement and the amendments thereto and to the Deposit
Agreement, each of which is an exhibit to the Registration Statement of which
this Prospectus is a part.
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GENERAL
Generally, the Preferred Depositary Units are in the nature of equity
securities entitled to participate in distributions of Partnership funds made
from time to time in accordance with the provisions of the Partnership Agreement
and, in the event of any liquidation or winding up of the Partnership, to share
in any assets of the Partnership remaining after satisfaction of the
Partnership's liabilities and capital account requirements. The Preferred
Depositary Units are fully paid and the Unitholders are not required to make
additional contributions to the Partnership.
The Preferred Depositary Units offered hereby consist of 5,064,150 preferred
depositary units representing preferred limited partners' interests in the
Partnership. Preferred limited partners' interests ("Preferred Units")
presently represent the only class of limited partners' interests in the
Partnership authorized and outstanding. As of the date of this Prospectus,
15,285,248 Preferred Depositary Units are outstanding, and there are no
undeposited Preferred Units outstanding. Subsequent to the Subscription
Offering, pursuant to the terms of the Recapitalization Agreement, the
Partnership will be required to apply the proceeds of the Subscription Offering
to repurchase from Forum A/H a number of Preferred Depositary Units equal to the
number of Preferred Depositary Units subscribed for and purchased in the
Subscription Offering. Therefore, following such repurchase, the total number
of outstanding Preferred Depositary Units will remain 15,285,248. See "The
Recapitalization -- Recapitalization Agreement" and "Use of Proceeds."
The percentage interest in the Partnership (the "Percentage Interest")
represented by a Preferred Depositary Unit is equal to the ratio it bears at the
time of determination to the total number of Preferred Depositary Units and
undeposited Preferred Units outstanding, multiplied by 99%, which is the
aggregate Percentage Interest of the Unitholders. Each Preferred Depositary
Unit evidences entitlement to participate in the Partnership's profits, losses
and distributions in accordance with the provisions of the Partnership Agreement
and the Percentage Interest represented thereby.
The Preferred Depositary Units have been registered under the Exchange Act,
and the Partnership is subject to the reporting requirements of the Exchange Act
and the rules and regulations thereunder.
The Preferred Depositary Units are listed on the AMEX under the symbol "FRL."
TRANSFER OF PREFERRED DEPOSITARY UNITS
The Preferred Depositary Units are freely transferable, unless such transfer
would (i) violate federal or state securities laws, (ii) result in the
Partnership being treated as an association taxable as a corporation for federal
income tax purposes, or (iii) affect the Partnership's existence or
qualification as a limited partnership under the Delaware Revised Uniform
Limited Partnership Act (the "Delaware Act"). Until a Preferred Depositary Unit
has been transferred on the books of the Depositary, the Depositary and the
Partnership may treat the record holder thereof as the absolute owner for all
purposes. A transfer of a Preferred Depositary Unit will not be recorded by the
Depositary or recognized by the Partnership unless the transferee executes and
delivers a transfer application (the "Transfer Application"). By executing and
delivering a Transfer Application, a transferee of Preferred Depositary Units
automatically requests admission as a substituted limited partner, agrees to be
bound by the terms and conditions of the Partnership Agreement and the Deposit
Agreement, represents that it has authority to enter into the Partnership
Agreement and the Deposit Agreement, grants powers of attorney to the General
Partner and makes the consents and waivers contained in the Partnership
Agreement. The record holder of a Preferred Depositary Unit, pending admission
as a substituted limited partner, has the rights of an assignee of a limited
partner (an "Assignee"). An Assignee will become a substituted limited partner
in respect of the transferred Preferred Depositary Units upon the approval of
the General Partner and the recordation of the name of the Assignee in the books
and records of the Partnership. A purchaser or other transferee of Preferred
Depositary Units who does not execute and deliver a Transfer Application obtains
only (i) the right to transfer the Preferred Depositary Units to a purchaser or
other transferee and (ii) the right to transfer the right to seek admission as a
substituted limited partner with respect to the Preferred Depositary Units.
Thus, a purchaser or transferee of Preferred Depositary Units who does not
execute and deliver a Transfer Application will not receive cash distributions,
federal income tax allocations or reports furnished to record holders of
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Preferred Depositary Units. Whether or not a transferee of Preferred Depositary
Units executes a Transfer Application, the transferee, by acceptance of a
depositary receipt evidencing the Preferred Depositary Units, is deemed to
become a party to the Deposit Agreement and to be bound by its terms and
conditions. A transferor of Preferred Depositary Units has a duty to provide
its transferee all information which may be necessary to obtain recordation of
the transfer of the Preferred Depositary Units, but a transferee of Preferred
Depositary Units agrees, by acceptance of a depositary receipt evidencing the
Preferred Depositary Units, that its transferor has no duty to cause the
execution and delivery of a Transfer Application by the transferee and has no
liability or responsibility if the transferee neglects or chooses not to execute
and deliver a Transfer Application.
WITHDRAWAL OF PREFERRED UNITS
Upon the written request of a Unitholder for withdrawal of Preferred Units
represented by Preferred Depositary Units from deposit and surrender of the
Unitholder's depositary receipt or receipts evidencing the Preferred Depositary
Units in compliance with the terms of the Deposit Agreement, the Depositary will
request from the Partnership and deliver to the Unitholder a certificate
representing the Preferred Units. Any charge for withdrawals of Preferred Units
represented by Preferred Depositary Units will be borne by the Partnership and
not by the Unitholder. Preferred Units withdrawn from the Depositary are not
transferable, except by death or operation of law. In order to transfer the
Preferred Units so withdrawn, a holder must redeposit the withdrawn Preferred
Units with the Depositary by delivering the certificate or certificates
evidencing the Preferred Units to the Depositary and requesting a depositary
receipt evidencing Preferred Depositary Units representing those Preferred
Units, which may then be transferred. Redeposit of withdrawn Preferred Units
with the Depositary requires 60 days' advance written notice (except for
redeposit by the General Partner or its affiliates, which does not require any
prior notice) and is subject to certain other restrictions.
RESIGNATION AND REMOVAL OF DEPOSITARY
Subject to certain notice provisions, the Depositary may at any time resign or
be removed by the General Partner, in which case a qualified successor will be
appointed by the General Partner. If no successor depositary is appointed
within 30 days after resignation or removal, the General Partner is authorized
to act as the depositary until a successor depositary is appointed.
AMENDMENT
Any provision of the Deposit Agreement, including the form of depositary
receipt or Transfer Application, may at any time and from time to time be
amended by the General Partner and the Depositary in any respect deemed
necessary or desirable by them, without the approval of the Unitholders.
However, no amendment to the Deposit Agreement may impair the right of a
Unitholder to surrender a depositary receipt and withdraw the Preferred Units
represented by the Preferred Depositary Units evidenced thereby. The Depositary
will furnish each Unitholder of record and each securities exchange on which the
Preferred Depositary Units are listed for trading notice of any material
amendment to the Deposit Agreement. Each Unitholder of record at the time any
amendment to the Deposit Agreement becomes effective will be deemed, by
continuing to hold the Preferred Depositary Units, to consent and agree to the
amendment and to be bound by the Deposit Agreement as amended.
The Depositary will give notice of the imposition of any fee or charge upon
the Unitholders or transferees (other than fees and charges provided for in the
Deposit Agreement), or any change therein, to each Unitholder of record and each
securities exchange on which Preferred Depositary Units are listed for trading.
The imposition of any fee or charge, or change therein, will not be effective
until the expiration of 90 days after the date of notice, unless it earlier
becomes effective in the form of an amendment to the Deposit Agreement effected
by the General Partner and the Depositary.
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TERMINATION
The Depositary will terminate the Deposit Agreement, whenever directed to do
so by the General Partner, by mailing notice of termination to the record
holders of all Preferred Depositary Units then outstanding at least 30 days
before the date fixed for termination.
DUTIES AND STATUS OF DEPOSITARY
The Depositary's duties are essentially ministerial and are set forth in the
Deposit Agreement. The Depositary makes no warranties or representations as to
the validity or sufficiency of any certificate representing Preferred Units
deposited with the Depositary or the underlying interests. In addition to
acting as depositary for Preferred Units, the Depositary acts as registrar and
transfer agent for depositary receipts evidencing Preferred Depositary Units.
The Depositary receives a fee from the Partnership for serving in those
capacities. The Partnership will indemnify the Depositary and its agents
against all claims that may arise out of acts performed or omitted in respect of
Deposit Agreement except for any liability due to any negligent action,
negligent failure to act, bad faith or intentional misconduct of the Depositary
or one of its agents. All fees charged by the Depositary for transfers of
Preferred Depositary Units and withdrawals of Preferred Units represented
thereby will be borne by the Partnership and not by the Unitholders except that
fees similar to those customarily paid by shareholders for surety bond premiums
to replace lost or stolen certificates, taxes or other governmental charges,
special charges for services requested by the Unitholders, including redeposit
of withdrawn Preferred Units, and other similar fees or charges, will be borne
by the affected Unitholder. There is no charge to the Unitholders for
disbursements of the Partnership's cash distributions.
SUMMARY OF PARTNERSHIP AGREEMENT
The following is a summary of certain provisions of the Partnership Agreement.
Other provisions are described in appropriate sections of this Prospectus. The
following summary is qualified in its entirety by reference to the Partnership
Agreement and the amendments thereto, each of which is an exhibit to the
Registration Statement of which this Prospectus is a part.
ORGANIZATION AND DURATION
The Partnership is a Delaware limited partnership. The General Partner is the
general partner of the Partnership and owns a 1% general partner's interest in
the Partnership. The Partnership will dissolve on December 31, 2087, unless
sooner dissolved pursuant to the Partnership Agreement.
All of the business and operations of the Partnership currently are conducted
through the Affiliated Partnership. The General Partner is the sole general
partner of the Affiliated Partnership, owning a 1% general partner's interest in
the Affiliated Partnership, and the Partnership is the sole limited partner of
the Affiliated Partnership, owning a 99% limited partner's interest in the
Affiliated Partnership. The General Partner has the discretion to create
additional operating partnerships, to dissolve the Affiliated Partnership, and
to merge the Affiliated Partnership with the Partnership.
PURPOSES, BUSINESS AND MANAGEMENT
The purpose and business of the Partnership is to own RCs. The General
Partner is authorized to perform all acts deemed necessary to carry out the
purposes and to conduct the business of the Partnership. The General Partner
has the authority to cause the Partnership to issue additional Preferred
Depositary Units or other classes or series of limited partners' interests,
without the consent of the limited partners of the Partnership. Additional
Preferred Depositary Units may be issued to the General Partner or any of its
affiliates, subject to certain requirements with respect to the minimum purchase
price to be paid therefor. See "Risk Factors -- Issuance of Additional
Preferred Depositary Units; Potential Dilution." The terms of any additional
securities will be determined by the General Partner at the time of issuance,
but the Partnership may not issue additional equity securities having rights,
preferences and privileges senior to those of the Preferred Depositary Units.
Subject
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to this limitation, the General Partner also has the authority to cause the
Partnership to offer securities in exchange for RCs, to repurchase or otherwise
reacquire Preferred Depositary Units or other securities and to borrow money.
The General Partner does not expect to make loans to other persons, to invest in
the securities of other issuers for the purpose of exercising control or to
underwrite the securities of other issuers. No Unitholder may take part in the
control of the Partnership or the Affiliated Partnership.
The authority of the General Partner is limited in certain respects. The
General Partner is prohibited, without the prior approval of holders of
partnership interests representing more than 50% of the Percentage Interests of
all limited partners of the Partnership (a "Majority Interest"), from, among
other things: selling or otherwise disposing of all or substantially all of the
Partnership's assets in a single transaction, a series of related transactions
or a plan of liquidation of the Partnership; causing the Partnership to merge
with or into another entity (other than a merger of the Partnership with the
Affiliated Partnership); or amending the Partnership Agreement or the
partnership agreement of the Affiliated Partnership, except for certain
amendments described below under the caption "Amendment of Partnership
Agreement." Except as generally described below under the caption "Amendment of
Partnership Agreement," any amendment to the Partnership Agreement that
materially affects the interests of the preferred limited partners requires the
approval of preferred limited partners owning more than 50% of the Preferred
Depositary Units and undeposited Preferred Units outstanding.
The General Partner has agreed to act as the general partner of the
Partnership and the Affiliated Partnership through December 31, 1996, after
which time the General Partner may withdraw upon 12 months' notice. In
addition, the General Partner may withdraw at any time prior to January 1, 1997,
with the consent of a Majority Interest (excluding the General Partner and its
affiliates). The General Partner may be removed only upon the vote of owners of
at least 80% of the aggregate limited partners' interests (including the General
Partner and its affiliates). Withdrawal or removal of the General Partner is in
all events subject to receipt of an opinion of counsel that the withdrawal or
removal, and the selection and admission of a successor general partner, will
not result in loss of the limited liability of the limited partners or cause the
Partnership to be treated as an association taxable as a corporation for federal
income tax purposes (unless the Partnership is already taxable as a corporation
in all material respects). The Management Agreement was amended to provide that
Forum Group may be removed as manager of the Properties in certain circumstances
upon a vote of 66-2/3% of the holders of Notes, as defined below. In the event
of the withdrawal or removal of the General Partner, the Partnership may
thereafter be continued if a successor general partner is proposed to and
approved by a Majority Interest; otherwise, the Partnership will be dissolved.
The withdrawal or removal of the General Partner as general partner of the
Partnership will also constitute its withdrawal or removal as general partner of
the Affiliated Partnership and the withdrawal or removal of Forum Group as
manager of the Partnership's RCs. In the event of the termination of the
Management Agreement resulting from the removal or withdrawal of the General
Partner from the Partnership or otherwise in accordance with the terms thereof,
Forum Group will receive all unpaid management fees for periods prior to the
date of termination of the Management Agreement, including without limitation
any deferred management fees, together with any reimbursements then due to it
under the Management Agreement. See "Risk Factors -- Risks from Deferred
Management Fees" and "Cash Distribution Policy -- Distributions from Operations
- -- Distribution Support Through December 31, 1993."
In the event of removal of the General Partner, the Partnership will acquire
the General Partner's interests in the Partnership and the Affiliated
Partnership for an amount equal to the fair market value thereof as of the date
of removal. The fair market value will be determined by agreement of the
General Partner and the successor general partner or, if no agreement is
reached, by an independent appraiser selected by the General Partner and the
successor general partner (or, if no independent appraiser is agreed upon, by an
independent appraiser chosen by agreement of independent appraisers selected by
the General Partner and the successor general partner). In the event of
withdrawal of the General Partner, the successor general partner will have the
option to acquire the General Partner's interests in the Partnership and the
Affiliated Partnership for an amount equal to the fair market value thereof as
of the date of withdrawal. If that option is not exercised, the General
Partner's interests in the Partnership and the Affiliated Partnership will be
converted into Preferred Units, according to the combined percentage interest
represented by its general partners' interests, and the successor general
partner will make a contribution to the capital of the Partnership in an amount
that immediately after the contribution equals 1% of the total capital of the
Partnership. The General Partner will have certain registration rights as to
any Preferred Units so acquired.
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The General Partner may not transfer its general partner's interest in the
Partnership or any Affiliated Partnership (except in the case of a transfer to
an affiliate or a merger, consolidation or transfer of substantially all its
assets as described below) unless (i) a Majority Interest consents to the
transfer, (ii) the transferee agrees to maintain net assets in an amount
required by the Partnership Agreement so long as it is the general partner in
the same manner and to the same extent as the General Partner has agreed to
maintain net assets at that level, and (iii) the Partnership receives an opinion
of counsel that the transfer will not result in loss of the limited liability of
any limited partner or cause the Partnership to be treated as an association
taxable as a corporation for federal income tax purposes (unless the Partnership
is already taxable as a corporation in all material respects). The General
Partner may transfer its general partners' interests in the Partnership and the
Affiliated Partnership to an affiliate, or upon its merger with or consolidation
into another entity, or upon the transfer of substantially all of its assets to
another entity, provided the transferee assumes the rights and duties of the
General Partner as the general partner of the Partnership and the Affiliated
Partnership and furnishes an opinion of counsel similar to that described above.
As a result of the purchase of 6,500,000 Preferred Depositary Units by Forum
A/H pursuant to the Recapitalization Agreement, Forum Group beneficially owns
8,440,268 Preferred Depositary Units, or approximately 55.2% of the total number
of Preferred Depositary Units outstanding as of the date of this Prospectus. If
all of the 5,064,150 Preferred Depositary Units offered hereby are subscribed
for and purchased by Eligible Holders, after application of the proceeds thereof
as described herein (see "Use of Proceeds"), Forum Group's percentage ownership
of the total outstanding Preferred Depositary Units would be approximately
22.1%, the same ownership percentage Forum Group had prior to the transactions
provided for in the Recapitalization Agreement. See "The Recapitalization." As
a result of such ownership, because there is generally no limitation on the
ability of the General Partner or its affiliate to vote on matters submitted to
the limited partners in the Partnership, without the approval of Forum Group,
the General Partner cannot be removed and the Management Agreement cannot be
terminated by vote of the limited partners. Moreover, as a result of its
present ownership position, Forum Group generally has the ability to approve
transactions requiring the consent of a Majority Interest. Eligible Holders
that elect to participate in the Subscription Offering will not be entitled to
purchase any portion of the Preferred Depositary Units not subscribed for by
Eligible Holders that elect not to participate in the Subscription Offering.
Accordingly, Forum Group's percentage ownership of the total outstanding
Preferred Depositary Units will exceed 22.1% to the extent that Eligible Holders
elect not to participate in the Subscription Offering.
Each substituted limited partner, and each person who acquires a Preferred
Depositary Unit and executes and delivers a Transfer Application with respect
thereto, grants the General Partner a power of attorney to execute and file
certain documents required in connection with the qualification, continuance or
dissolution of the Partnership, the amendment of the Partnership Agreement and
the deposit of preferred limited partners' interests with the Depositary, and
grants the consents and waivers contained in the Partnership Agreement.
The Partnership may borrow funds from the General Partner and its affiliates
at interest rates which are not less favorable than those the Partnership could
obtain from unaffiliated third-party lenders.
ALLOCATION OF PROFITS AND LOSSES
The Partnership Agreement generally provides that, in determining the rights
of the partners among themselves and for financial accounting purposes, items of
profit and loss are generally credited or charged, as the case may be, to the
partners in accordance with their respective Percentage Interests (except for
profits and losses from sales, as described below). In addition, for federal
income tax purposes, items of income, gain, loss, deduction and credit, except
items of gain and loss from capital transactions, are generally allocated among
the partners in accordance with their respective Percentage Interests, except as
required to maintain uniformity of tax characteristics among Preferred
Depositary Units.
Profits from a sale will generally be allocated 99% to the limited partners
and 1% to the General Partner, except that any profit attributable to a sale
giving rise to a distribution of Capital Transaction Proceeds will be allocated
in accordance with the provisions relating to distribution of Capital
Transaction Proceeds described above. See "Cash Distribution Policy --
Distributions from Sales and Refinancings." Losses from a sale will be
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allocated 99% to the limited partners and 1% to the General Partner. All
profits and losses from sales will be allocated among the limited partners in
accordance with their respective Percentage Interests.
The Partnership's taxable income and loss will generally be determined on an
annual basis, apportioned equally among the constituent months and allocated
among the partners of record in accordance with their respective Percentage
Interests as of the close of business on the last day of the month preceding
each constituent month. The primary exception to this general allocation rule
relates to items of income, gain, loss and deduction attributable to contributed
properties, which items will be allocated in a manner consistent with Section
704(c) of the Internal Revenue Code of 1986, as amended. Upon the issuance of
additional limited partners' interests by the Partnership, those items may be
reallocated in a manner consistent with such Section 704. See "Federal Income
Tax Considerations."
See "Cash Distribution Policy" for a description of the provisions of the
Partnership Agreement with respect to distributions.
STATUS AS A LIMITED PARTNER OR ASSIGNEE
Except as described under the caption "Limited Liability" below, the Preferred
Depositary Units are fully paid, and the Unitholders will not be required to
make additional contributions to the capital of the Partnership.
A transferee of Preferred Depositary Units, in order to be recorded on the
books of the Depositary as the record holder of the Preferred Depositary Units,
must execute and deliver a Transfer Application. See "Description of Preferred
Depositary Units -- Transfer of Preferred Depositary Units" for a more detailed
description of the requirements for the transfer of Preferred Depositary Units.
The record holder of a Preferred Depositary Unit, pending admission as a
substituted limited partner, has the rights of an Assignee. An Assignee is
entitled to an interest in the Partnership equivalent to that of a limited
partner with respect to allocations and distributions, including liquidating
distributions, but without the right to vote directly on Partnership matters and
otherwise subject to the limitations under the Delaware Act on the rights of an
assignee of a limited partner who has not become a substituted limited partner.
The General Partner will vote, and exercise other powers attributable to, the
Preferred Depositary Units owned by an Assignee at the written direction of the
Assignee. An Assignee will have no other rights of a limited partner.
As promptly as practicable after the last business day of each month, the
Depositary will cause a list of transfers of depositary receipts since the last
day of the previous month to be furnished to the General Partner. An Assignee
will become a substituted limited partner in respect of the transferred
Preferred Depositary Units upon the approval of the General Partner and the
recordation of the name of the Assignee in the books and records of the
Partnership. A transferee of Preferred Depositary Units who does not execute
and deliver a Transfer Application will not be treated as the record holder of
the Preferred Depositary Units, and will not receive cash distributions, federal
income tax allocations or reports furnished to record holders of Preferred
Depositary Units unless the Preferred Depositary Units are held in a nominee or
street name account and the nominee or broker has executed and delivered a
Transfer Application.
Preferred Units withdrawn from the Depositary are not transferable (except to
the Partnership or the General Partner), except by death or operation of law,
unless redeposited with the Depositary. See "Description of Preferred
Depositary Units -- Withdrawal of Preferred Units."
AMENDMENT OF PARTNERSHIP AGREEMENT
Amendments to the Partnership Agreement may be proposed by the General Partner
or 10% in interest of the limited partners. Proposed amendments (other than
those described below) must be approved by the General Partner and limited
partners owning more than 50% of the Preferred Units then outstanding.
At least 95% in interest of the limited partners must consent to any amendment
unless the Partnership has received an opinion of counsel to the Partnership
that the amendment will not result in the loss of the limited liability of the
limited partners or cause the Partnership to be treated as an association
taxable as a corporation
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for federal income tax purposes (unless the Partnership is already taxable as a
corporation in all material respects). Any provision of the Partnership
Agreement providing for a vote of more than 50% in interest of the limited
partners (e.g., provisions relating to removal of the General Partner) may only
be amended with the consent of the specified percentage in interest of the
limited partners.
The General Partner may make amendments to the Partnership Agreement without
the consent of any limited partner or Assignee if, among other things, the
amendments do not materially adversely affect the limited partners, or are
necessary or desirable to satisfy any requirement, condition or guideline
contained in any opinion, directive, ruling or regulation of any federal or
state agency or judicial authority or in any federal or state statute, or are
necessary or desirable to implement certain tax related provisions of the
Partnership Agreement, or are necessary or desirable to facilitate the trading
of the Preferred Depositary Units or to comply with any rule, regulation,
guideline or requirement of any securities exchange on which the Preferred
Depositary Units are listed for trading, compliance with any of which the
General Partner deems to be in the best interests of the Partnership and the
limited partners, or is required or contemplated by the Partnership Agreement.
MEETINGS; VOTING
Only record holders of Preferred Depositary Units and undeposited Preferred
Units on a record date set pursuant to the Partnership Agreement are entitled to
notice of, and to vote at, meetings of the limited partners and to act on
matters with respect to which consents are solicited.
The General Partner does not anticipate that it will call any meeting of the
limited partners in the foreseeable future. Generally, any action that is
required or permitted to be taken by the limited partners may be taken either at
a meeting of the limited partners or without a meeting if consents in writing
setting forth the action so taken are signed by the percentage in interest of
the limited partners necessary to authorize or take the action at a meeting of
the limited partners. Meetings of the limited partners may be called by the
General Partner or by at least 10% in interest of the limited partners. Limited
partners may vote either in person or by proxy at meetings. A Majority Interest
represented in person or by proxy will constitute a quorum at a meeting of the
limited partners. Except as otherwise expressly provided, the act of limited
partners whose Percentage Interest represent a majority of the Percentage
Interests entitled to vote and present in person or by proxy at such meeting
shall be deemed to constitute the act of all limited partners.
Each limited partner has a vote according to the limited partner's respective
Percentage Interest. The Partnership Agreement provides that Preferred
Depositary Units held in a nominee or street name account will be voted by the
broker (or other nominee) pursuant to the instruction of the beneficial owner
unless the arrangement between the beneficial owner and the broker (or other
nominee) provides otherwise.
Any notice, demand, request, report or proxy materials required or permitted
to be given or made to a limited partner under the terms of the Partnership
Agreement will be delivered to the limited partner by the Partnership or by the
Depositary at the request of the Partnership. Holders of any undeposited
Preferred Units will also receive those notices, demands, requests, reports or
proxy materials from the Partnership.
INDEMNIFICATION
The Partnership Agreement provides that the General Partner and its officers,
directors, agents and employees will not be liable to the Partnership or any
limited partner for any error in judgment or breach of fiduciary duty that does
not constitute (i) a breach of that person's duty of loyalty to the Partnership,
as that duty of loyalty may be specified in or modified by the Partnership
Agreement, (ii) an act or omission not in good faith or which involves
intentional misconduct or a knowing violation of law, or (iii) a transaction
from which an improper personal benefit is derived. The Partnership Agreement
provides that the Partnership will indemnify the General Partner and its
affiliates, directors, officers, employees and agents, to the full extent
permitted by law, against liabilities, costs and expenses (including legal fees
and expenses) incurred by the indemnified persons in connection with litigation
or threatened litigation as a result of its status as the general partner of the
Partnership or an affiliate, officer, employee or agent of the General Partner
where (x) the indemnified person acted in good faith and in a manner it believed
in good faith to be in, or not opposed to, the best interests of
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the Partnership and, with respect to a criminal proceeding, had no reasonable
cause to believe its conduct was unlawful and (y) the indemnified person's
conduct did not constitute willful misconduct. Any indemnification under these
provisions will be limited to the assets of the Partnership. The Partnership is
authorized to purchase insurance against liabilities asserted against and
expenses incurred by the foregoing persons in connection with the Partnership's
activities, whether or not the Partnership would have the power to indemnify
those persons against those liabilities under the provisions described above.
The Partnership has purchased such insurance. The Partnership Agreement
provides that the Partnership may enter into contracts with the foregoing
persons or adopt written procedures pursuant to which arrangements are made for
the advancement of expenses, the funding of the Partnership's indemnity
obligations and other procedures regarding indemnification as are appropriate.
As a result of those provisions, the limited partners have more limited rights
against the General Partner and its affiliates than they would have absent the
limitations in the Partnership Agreement.
The General Partner has entered into indemnification agreements with each of
its directors. These indemnification agreements provide for, among other
things, (i) the indemnification by the General Partner of the indemnified
persons thereunder to the extent permitted by Delaware law, (ii) the advancement
of attorneys' fees and other expenses, and (iii) the establishment, upon
approval by the Board of Directors of the General Partner, of trusts or other
funding mechanisms to fund the General Partner's indemnification obligations
thereunder. Forum Group has also entered into indemnification agreements with
each of the directors of the General Partner. These indemnification agreements
provide for, among other things, (i) the indemnification by Forum Group of the
indemnified persons thereunder to the extent permitted by Indiana law and Forum
Group's Restated Articles of Incorporation, (ii) the advancement of attorneys'
fees and other expenses, and (iii) the establishment, upon approval by the Board
of Directors of Forum Group, of trusts or other funding mechanisms to fund Forum
Group's indemnification obligations thereunder.
LIMITED LIABILITY
Assuming that a limited partner does not take part in the control of the
business of the Partnership and otherwise acts in conformity with the provisions
of the Partnership Agreement, the liability of the limited partner will, under
the Delaware Act, be limited, subject to certain possible exceptions, generally
to the amount contributed by the limited partner or the limited partner's
predecessor in interest to the capital of the Partnership. Under the Delaware
Act, a limited partner may not receive a distribution from the Partnership if,
at the time of the distribution and after giving effect thereto, the liabilities
of the Partnership (other than liabilities to partners on account of their
partnership interests and liabilities for which the recourse of creditors is
limited to specified property of the Partnership) exceed the fair value of the
Partnership's net assets (including the fair value of specified property subject
to a liability for which the recourse of creditors is limited, but only to the
extent that the fair value of such property exceeds such liability). The
Delaware Act provides that a limited partner that receives a distribution in
violation of the Act is liable to the Partnership for a period of three years
after the distribution, for the amount of the distribution if, at the time of
the distribution, the limited partner knew such distribution violated the
Delaware Act. Under the Delaware Act, an assignee of a limited partner who
becomes a substituted limited partner is liable for the obligation of the
assignor to restore capital contributions, except that the assignee is not
obligated for liabilities unknown to the assignee at the time the assignee
became a substituted limited partner which could not be ascertained from the
Partnership Agreement.
The Partnership currently conducts business in several states through the
Affiliated Partnership in which it is the sole limited partner. Maintenance of
limited liability requires compliance with legal requirements of the states in
which business is conducted. Limitations on the liability of a limited partner
for the obligations of a limited partnership have not clearly been established
in many states; accordingly, if it were determined that the right or exercise of
the right by the limited partner to remove the general partner, to make certain
amendments to the partnership agreement or to take other action pursuant to the
partnership agreement constituted "control" of the Affiliated Partnership's
business for the purposes of the statutes of any relevant state, the Partnership
may be held personally liable for the Affiliated Partnership's obligations.
Further, under the laws of certain states, the Partnership might be liable for
other amounts, such as the amount of any undistributed profits to which it is
entitled, with interest, or for interest on the amount of any capital
contributions rightfully returned to it. The Partnership and the Affiliated
Partnership will operate in a manner
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the General Partner deems reasonable, necessary and appropriate to preserve the
limited liability of the limited partners and the Partnership.
Upon dissolution of the Partnership for any reason (including the withdrawal
or removal of the General Partner if no successor general partner is selected),
the assets of the Partnership may, in certain instances, be distributed in kind
to the limited partners. If a distribution in kind is made, the limited
partners receiving the distribution in kind will no longer have limited
liability with respect to, and will be required to make arrangements for further
operation of, the assets distributed to them and will receive the assets subject
to certain operating agreements and liabilities for indebtedness of the
Partnership. Disposing of distributed assets or arranging for the operation
thereof could be difficult, particularly in view of the large number of persons
who could receive undivided interests in the assets in certain events. See
"-- Termination, Dissolution and Liquidation."
BOOKS AND REPORTS
The General Partner is required to keep or cause to be kept appropriate books
of the Partnership's business at the Partnership's principal offices. The books
currently are maintained for financial reporting and tax purposes on an accrual
basis and the fiscal year of the Partnership currently is the calendar year. A
limited partner has the right of access to the Partnership's books at any
reasonable time and for any proper purpose reasonably related to the limited
partner's interest as a limited partner, but any inspection and copying is at
the limited partner's expense. The General Partner nonetheless may keep
confidential from the limited partners trade secrets or other information the
disclosure of which the General Partner believes in good faith could damage the
Partnership or its business or that it must keep confidential under the terms of
agreements with third parties.
As soon as practicable, but in any event not later than 120 days after the
close of each fiscal year, the General Partner must cause to be mailed to each
limited partner an annual report containing financial statements of the
Partnership for the fiscal year, including a balance sheet and statements of
income, partners' equity and cash flows. The annual financial statements must
be audited by a firm of independent public accountants. As soon as practicable,
but in any event not later than 60 days after the close of each fiscal quarter
(except the fourth quarter), the General Partner must cause to be mailed to each
limited partner a quarterly report containing such financial information for the
quarter as the General Partner deems appropriate. Typically, such reports
contain unaudited financial statements of the Partnership for the fiscal
quarter, including a balance sheet and statements of income. Each annual and
quarterly report will also include a statement setting forth (i) any
transactions between the Partnership and the General Partner or any affiliate
thereof, (ii) the amount of any fees, compensation, income, distributions and
other payments paid or accrued to the General Partner or any affiliate thereof,
and (iii) a description of any services rendered to the Partnership by the
General Partner or any affiliate thereof. The financial information contained
in the reports currently are prepared on an accrual basis of accounting.
The General Partner will use all reasonable efforts to furnish each limited
partner information required for tax purposes not later than 90 days after the
close of each fiscal year. The information is furnished in summary form so that
certain complex calculations normally required of partners can be avoided. The
General Partner's ability to furnish summary information to the limited partners
depends on the cooperation of the limited partners in supplying certain
information to the General Partner.
RIGHT TO INSPECT DEPOSITARY AND PARTNERSHIP BOOKS AND RECORDS
The Depositary keeps books for the transfer of the Preferred Depositary Units
at its corporate office. The books are open at all reasonable times for
inspection by the limited partners, provided that the inspection is not for the
purpose of communicating with other limited partners regarding a business or
object other than the business of the Partnership.
The Partnership Agreement provides that a limited partner has the right for a
proper purpose reasonably related to the limited partner's interest in the
Partnership, upon reasonable demand and at its own expense, to
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have furnished to it (i) a current list of the name and last known address of
each limited partner, (ii) copies of the Partnership's tax returns, (iii)
information as to the contribution by each partner, (iv) copies of the
Partnership Agreement, the certificate of limited partnership of the
Partnership, amendments thereto and restatements thereof, and powers of attorney
pursuant to which the same have been executed, and (v) certain other information
regarding the affairs of the Partnership as is just and reasonable.
TERMINATION, DISSOLUTION AND LIQUIDATION
The Partnership will continue until December 31, 2087, unless sooner
terminated pursuant to the Partnership Agreement. The Partnership can be
dissolved upon the election of the General Partner, if approved by a Majority
Interest, by operation of law or, unless a Majority Interest elects to continue
the Partnership, by the withdrawal, removal, bankruptcy or dissolution of the
General Partner. The right of the limited partners to continue the Partnership
upon the withdrawal, removal, bankruptcy or dissolution of the General Partner
is subject to selection of a successor general partner and receipt by the
Partnership of an opinion of counsel that the selection and continuation will
not result in loss of the limited liability of the limited partners or cause the
Partnership to be treated as an association taxable as a corporation for federal
income tax purposes (unless the Partnership is already taxable as a corporation
in all material respects).
Upon dissolution, the General Partner or another person authorized to wind up
the Partnership's affairs (the "Liquidator") will liquidate the Partnership's
assets and apply the proceeds thereof in the order of priority set forth in the
Partnership Agreement. The Liquidator may defer liquidation or distribution of
the Partnership's assets, or distribute the Partnership's assets to the partners
in kind, if it determines that a sale would be impractical or would cause undue
loss to the partners.
FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of the material federal income tax considerations
that a Unitholder who is considering whether to accept the Subscription
Privilege should consider. It is impractical to discuss in detail all the
possible tax consequences of an investment in the Partnership and its present
and contemplated operations, and such consequences may vary depending on an
investor's particular circumstances. Furthermore, the discussion does not
purport to address all tax consequences applicable to all categories of
investors, some of which, such as corporations, tax-exempt entities, trusts or
non-U.S. persons, may be subject to special rules. Such investors are urged to
consult with their tax advisors regarding the tax consequences of an investment
in the Preferred Depositary Units.
The federal income tax considerations and the opinions of counsel discussed
herein are based on existing provisions of the Internal Revenue Code of 1986, as
amended (the "Code"), existing Treasury regulations, published interpretations
of the Code and regulations by the Internal Revenue Service (the "Service") and
existing court decisions, any of which could be changed at any time. Any such
change may be retroactive with respect to transactions prior to the date of such
changes and could significantly modify the statements made and tax
considerations discussed in this Prospectus.
NO ASSURANCE CAN BE GIVEN THAT EXISTING TAX LAWS WILL NOT BE CHANGED BY
LEGISLATION OR JUDICIAL INTERPRETATION, EITHER OF WHICH MAY ADVERSELY AFFECT THE
ANTICIPATED TAX CONSEQUENCES OF THE ACQUISITION OF THE PREFERRED DEPOSITARY
UNITS OR OF AN INVESTMENT IN THE PARTNERSHIP. THIS SUMMARY IS NOT INTENDED AS A
SUBSTITUTE FOR CAREFUL TAX PLANNING, PARTICULARLY BECAUSE THE INCOME TAX
CONSEQUENCES OF AN INVESTMENT IN REAL ESTATE LIMITED PARTNERSHIPS SUCH AS THE
PARTNERSHIP ARE OFTEN UNCERTAIN AND COMPLEX, AND THE TAX SITUATIONS OF ALL
UNITHOLDERS WILL NOT BE THE SAME.
The Partnership has received an opinion from Jones, Day, Reavis & Pogue ("Tax
Counsel") that, subject to the conditions and qualifications set forth therein,
the information in the Prospectus under the captions "Risk Factors -- Federal
Income Tax Risks" and "Federal Income Tax Considerations" to the extent that it
constitutes matters of law or legal conclusions is correct in all material
respects. Except for the specific opinion set forth above, Tax Counsel has not
opined as to the probable outcome on the merits of any other issues or matters.
The
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opinions of Tax Counsel are not binding on the Service. Accordingly, no
assurance can be given that the conclusions reached in any opinions would be
sustained by a court if challenged by the Service.
EACH PROSPECTIVE INVESTOR IS ADVISED TO CONSULT HIS PERSONAL TAX ADVISOR WITH
RESPECT TO THE FEDERAL, STATE, LOCAL AND FOREIGN INCOME AND OTHER TAX
CONSEQUENCES OF SUCH INVESTOR'S ELECTION TO PURCHASE PREFERRED DEPOSITARY UNITS.
TAX STATUS OF PARTNERSHIP AND AFFILIATED PARTNERSHIP
No federal income tax is paid by a partnership as an entity. In determining
its income tax (if any), each partner takes into account separately its
allocable share (generally as determined by the partnership agreement) of the
partnership's income, gains, losses, deductions and credits, whether or not any
actual cash distribution is made to the partner during its taxable year.
Neither the Partnership nor the Affiliated Partnership have sought rulings
from the Service that they will be treated for federal income tax purposes as
partnerships rather than as associations taxable as corporations. Based upon
facts set forth in this Prospectus and on certain representations described
below, however, the Partnership has been advised by Tax Counsel that, under
existing federal income tax law and regulations, as of the date hereof, the
Partnership and the Affiliated Partnership will be treated as partnerships and
not as associations taxable as corporations, and that the beneficial owners of
Preferred Depositary Units will be treated as partners of the Partnership for
federal income tax purposes. To be treated as a partnership for federal income
tax purposes, a partnership must lack two or more of the following four
relevant corporate characteristics: continuity of life; free transferability of
interests; limited liability and centralized management. The Partnership lacks
continuity of life because it is subject to a statute (the Delaware Act) that
corresponds to the Revised Uniform Limited Partnership Act. The Partnership
will also lack limited liability because, based upon a representation by the
General Partner, the General Partner has substantial assets (other than its
interests in the Partnership and the Affiliated Partnership) which could be
reached by a creditor of the Partnership. There can be no assurance, however,
that a court or the Service would agree with this representation or the
foregoing analysis. The Partnership does not satisfy certain preconditions for
obtaining an advance ruling from the Service as to partnership status, and in
particular does not meet conditions relating to the net worth of its general
partner. Tax Counsel has advised the Partnership, however, that a failure by
the Partnership to satisfy those advance ruling guidelines does not necessarily
adversely affect the status of the Partnership as a partnership for federal
income tax purposes as a matter of law. There can be no assurance, however,
that a court would not view failure to satisfy such guidelines as material in
analyzing partnership status or that a court would conclude that the General
Partner's assets (other than its interests in the Partnership and Affiliated
Partnership), which presently consists of approximately $1.1 million in cash and
cash equivalent assets, are sufficiently substantial for purposes of the
foregoing analysis. Similarly, it is anticipated that Newco will lack
continuity of life because it will be subject to a statute (the Delaware Act)
that corresponds to the Revised Uniform Limited Partnership Act, and Newco will
also lack limited liability because its general partner will have substantial
assets (other than its interest in Newco) which could be reached by a creditor
of Newco.
The treatment of the Partnership and the Affiliated Partnership as
partnerships for federal income tax purposes is dependent upon present law and
regulations, which are subject to change, and upon the continuation of certain
factual conditions which cannot be assured, including the condition that the
general partner of each continues to maintain substantial assets, other than its
interests in such partnerships, which could be reached by creditors of the
corresponding partnerships, and that the conduct of each partnership will remain
in substantial compliance with its partnership agreement and with the Delaware
Act. The General Partner (as general partner of the Partnership and general
partner or parent of the general partner of Newco) intends to use reasonable
efforts to cause the Partnership and Newco to remain in substantial compliance
with the Delaware Act and to maintain general partner net worth at a level
sufficient to assure that the Partnership and Newco will be treated for federal
income tax purposes as partnerships. However, there can be no assurance that
the General Partner will be successful in this regard.
If the Partnership or Newco, as a result of a change in the law or a failure
of the factual conditions upon which the opinion of Tax Counsel referred to
above is based, including the condition that the general partner
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continues to maintain substantial assets (other than its interests in the
Partnership and Newco) which could be reached by creditors of those
partnerships, or for any other reason, were classified as an association taxable
as a corporation, the Partnership (except to the extent it were able to qualify
prospectively and pass-through ordinary income as a real estate investment
trust) or Newco would be required to pay federal income tax at corporate rates
on its net income, thereby reducing the amount of any cash available to be
distributed by the Partnership or Newco; all items of income, gain, loss,
deduction and credit of the Partnership or Newco would be reflected only on its
tax returns and would not be passed through to the limited partners in the
Partnership; all or part of any distributions made either directly to the
limited partners and the General Partner (or by Newco to the Partnership) would
be treated as dividends to the extent of the current and accumulated earnings
and profits of the Partnership or Newco (except that if the Partnership and
Newco were taxed as corporations, partial relief from a double tax on dividends
may be available through a "dividends received" deduction); and distributions in
excess thereof would be treated as a return of capital to the extent of the
recipient's basis, while the remainder would be treated as capital gain
(assuming the limited partner's Preferred Units were capital assets). Taxable
income resulting from distributions would be treated as portfolio income for
purposes of the passive loss limitation rules, and losses from interests in
other limited partnerships could not offset that taxable income. See
"-- Passive Activity Losses and Income." Further, the Partnership or Newco
would not be entitled to deduct distributions to partners in computing the
taxable income of the Partnership or Newco. In addition, if the Partnership or
Newco should cease to qualify as a partnership for federal income tax purposes,
the change in the partnership's status for tax purposes could be treated by the
Service as a taxable event, in which event the limited partners in the
Partnership could have a tax liability under circumstances in which they would
not receive a cash distribution from the Partnership.
The Omnibus Budget Reconciliation Act of 1987 provides that certain publicly
traded partnerships will be treated as corporations for federal income tax
purposes. A grandfather provision delays corporate tax status until 1998 for
those publicly traded partnerships in existence prior to December 18, 1987. For
an existing partnership to maintain that 10-year exemption, it may not add a
"substantial new line of business." Recently issued Treasury regulations define
a new line of business as a business activity not closely related to a pre-
existing business of the Partnership, and provide guidance as to when a new
business is substantial. The General Partner has represented to Tax Counsel
that it has not added any new lines of business, and that it does not anticipate
any acquisitions of new businesses by the Partnership in the future.
On January 1, 1998, the Partnership will be treated as transferring all of its
assets, including its interest in Newco (subject to liabilities), to a new
corporation in exchange for the stock thereof and distributing the stock to the
partners in liquidation of their interests in the Partnership. This deemed
exchange and liquidation may result in gain being realized by the Partnership to
the extent the liabilities of the Partnership (including its share of the
liabilities of Newco) exceed the adjusted basis of the Partnership's properties
deemed contributed to the newly formed corporation. Any such gain would be
allocated to the partners under the Partnership Agreement. See "-- Allocations
of Profits or Losses." Moreover, the deemed contribution of the assets of the
Partnership to the newly formed corporation will result in a deemed cash
distribution to each partner of his share of the liabilities of the Partnership.
Such deemed distribution will reduce a partner's basis in his Preferred Units
dollar for dollar (but not below zero). See "-- Basis in Preferred Depositary
Units" and "-- Cash Distributions." To the extent the amount of cash deemed
distributed exceeds the tax basis of a partner's Preferred Units, gain will
result. The tax basis that a partner will have in the stock deemed distributed
to him will equal the tax basis such partner had in its Preferred Units, as
adjusted by the transactions described above. Each partner will, in general,
have a holding period for the stock deemed received that includes the holding
period of the assets of the Partnership deemed transferred to the newly formed
corporation.
TAX CONSEQUENCES OF PREFERRED DEPOSITARY UNIT ISSUANCE
Generally, a partnership does not recognize any gain or loss upon receipt of
property for a partnership interest. In addition, the proceeds from the
issuance of Preferred Depositary Units will be used only to redeem an equal
number of Preferred Depositary Units held by Forum A/H. Accordingly, it is
possible that, notwithstanding the actual structure of the transaction, the
issuance of Preferred Depositary Units could be treated for federal income tax
purposes as a direct sale of Preferred Depositary Units by Forum A/H to the new
purchaser, so that the Partnership is not a party to the transaction.
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It is not anticipated that characterization as a purchase and sale transaction
rather than a capital contribution to the Partnership should have material
adverse federal income tax consequences to Unitholders, except that if
the issuance were treated for federal income tax purposes as a purchase of
Preferred Depositary Units from Forum A/H, the resulting change in ownership
could, in combination with other transfers in the preceding or following 12
months, including other transactions contemplated in the Recapitalization
Agreement, result in or contribute to a termination of the Partnership for
federal income tax purposes, with the consequences described in "-- Termination
of Partnerships."
BASIS IN PREFERRED DEPOSITARY UNITS
A limited partner's basis in its partnership interest is relevant, among other
things, for determining gain on cash distributions, ability to deduct losses
from the partnership and gain or loss on a sale or other disposition of its
interest in the partnership. Generally, the tax basis of any limited partner's
interest in a partnership is equal to the limited partner's cost, increased
generally by the limited partner's proportionate share of partnership income and
the limited partners's share of nonrecourse liabilities (if any) to which
partnership assets are subject, and reduced (but not below zero) by the limited
partner's share of partnership distributions and losses.
The Service has ruled that a partner has one basis for its entire interest in
a partnership. If a partner acquires an additional interest subsequent to its
initial investment in a partnership, such as with respect to the acquisition of
the Preferred Depositary Units in the Subscription Offering, the amount paid
therefor (and any share of nonrecourse liabilities attributable to that
interest) will be added to its basis for its entire interest. Upon a sale of a
portion of its aggregate interest, the partner is required to allocate its
aggregate tax basis between the interest sold and the interest retained by some
equitable apportionment method, such as the relative fair market value of those
interests on the date of sale. It is not clear whether the Service's ruling
applies in the case of a publicly traded limited partnership, such as the
Partnership, the interests in which are evidenced by separate registered
certificates providing a verifiable means of identifying each separate interest
and tracing the purchase price of that interest. As discussed below, possible
adverse tax consequences could result by applying the Service's ruling to a sale
of Preferred Depositary Units. See "-- Sale or Transfer of Preferred Depositary
Units."
The Nomura Loan has been allocated among the partners in the Partnership in
accordance with recently issued Treasury regulations under Section 752 of the
Code. Because the Notes provide for no personal liability for any partner of
Newco, such Notes should be treated as nonrecourse liabilities for purposes of
determining the basis of Unitholders. Assuming that the General Partner and
each Unitholder or any affiliates of any of the foregoing do not guarantee,
purchase or participate in the Notes, or otherwise assume an "economic risk of
loss" for such Notes for purposes of Section 752 of the Code, the Notes should
remain nonrecourse liabilities for this purpose. The Treasury regulations under
Section 752 of the Code allocate nonrecourse indebtedness of a partnership to
the partners in three tiers. First, such indebtedness is allocated to those
partners with a share of partnership minimum gain in accordance therewith and to
the extent thereof (see "Allocations of Profits or Losses"). Second, the debt
is allocated to the partners based on the amount of taxable gain that would be
allocated to the partners under Section 704(c) of the Code if the partnership
disposed of the property subject to the nonrecourse debt in full satisfaction of
such debt and for no other consideration (see "Allocations of Profits or
Losses"). Third, any remaining nonrecourse debt of the partnership is allocated
among the partners in accordance with their respective shares of partnership
"profits." The Nomura Loan has been allocated solely under the third provision,
so that each Unitholder has been allocated a share of the Nomura Loan
corresponding to its Percentage Interest.
CASH DISTRIBUTIONS
Cash distributions from a partnership may be different from partnership income
as determined for income tax purposes.
If the cash distributions to a limited partner by the Partnership in any year
(including the limited partner's share of any reduction in nonrecourse
liabilities) exceed the limited partner's share of the Partnership's taxable
income for that year, the excess will constitute a return of capital to the
limited partner to the extent of the limited partner's basis. A return of
capital will not be reportable as taxable income by a recipient for federal
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income tax purposes, but will reduce the tax basis of the recipient's
partnership interest (but not below zero). If a limited partner's tax basis in
its partnership interest is reduced to zero, its share of any subsequent cash
distributions for any year (including its share of any reduction in nonrecourse
liabilities) in excess of its share of Partnership taxable income will be
taxable to the limited partner as though the excess were a gain on the sale or
exchange of its partnership interest. A decrease in a limited partner's
proportionate share of nonrecourse liabilities is treated for tax purposes as
though the decrease were a cash distribution.
FORMATION OF NEWCO
To consummate the Nomura Loan, assets held by former affiliated partnerships
were contributed to Newco following the merger or consolidation of the
Partnership and the then-existing affiliated partnerships. Tax Counsel believes
that the transfers of assets required by the Nomura Loan Agreement should be
treated for federal income tax purposes as a merger of the former affiliated
partnerships with Newco. In such a merger, all partnerships except the one
having the largest dollar value of assets will be treated as contributing their
assets to the surviving partnership in return for interests therein, and then
terminating and distributing their assets (the partnership interests in the
surviving partnership) to their partners (the General Partner and the
Partnership). It is the position of the Service that the liabilities of the
partnerships in a merger must be reallocated at each stage of this analysis
(e.g., after the deemed contributions to the surviving partnership but before
the deemed distribution of interests therein). Such a reallocation of
liabilities could, to the extent one or more of the partnerships involved is
considered to have been relieved of liabilities, give rise to a deemed cash
distribution. Such a deemed cash distribution could in turn give rise to
taxable gain to the extent it exceeds the basis of the non-surviving partnership
in the surviving partnership. The transfers discussed in this paragraph would,
in the Service's view, give rise to reallocations of liabilities, but there are
material uncertainties in the application of the law to the particular facts of
such transfers. Based on present information and assumptions concerning the
Nomura Loan, however, the General Partner does not anticipate any material
adverse federal income tax consequences to the Unitholders as a result of these
transfers of assets. Because of uncertainties in the application of the law,
however, there can be no assurance that the Service or a court would reach the
same result.
AT RISK LIMITATIONS
A Unitholder may not deduct from taxable income its share of the Partnership's
losses to the extent that those losses exceed the lesser of (i) the adjusted tax
basis of its Preferred Depositary Units at the end of the Partnership's taxable
year in which the loss occurs and (ii) the amount the Unitholder is considered
"at risk" under Section 465 of the Code at the end of the year. In general, a
Unitholder is initially "at risk" to the extent of the amount of cash paid for
its Preferred Depositary Units. A Unitholder's "at risk" amount increases or
decreases as its adjusted basis in its Preferred Units increases or decreases,
except for increases or decreases attributable to changes in the Unitholder's
share of partnership liabilities for which the Unitholder is not liable other
than nonrecourse financing secured by real property used in the activity and
made by certain persons engaged in the business of lending money. Although the
matter is not free from doubt, the General Partner anticipates that the Nomura
Loan will constitute such a liability. The "at risk" rules as applied to the
Partnership are effective for property placed in service after December 31,
1986, and for losses attributable to a Partnership interest acquired after
December 31, 1986. Losses disallowed to a Unitholder as a result of these
limitations will carry forward and will be allowable to the Unitholder to the
extent that its adjusted basis or "at risk" amount (whichever was the limiting
factor) is increased. The "at risk" limitation applies to an individual
Unitholder, a shareholder of a corporate Unitholder that is an electing S
corporation and a corporate Unitholder if 50% or more of the value of its stock
is owned directly or indirectly by five or fewer individuals.
PASSIVE ACTIVITY LOSSES AND INCOME
Section 469 of the Code provides that losses of certain taxpayers from passive
activities are generally allowed only to the extent of the taxpayer's income
from passive activities. Any excess passive losses are suspended until future
years. Passive losses from a publicly traded partnership, however, will be
allowed only to the extent of income from passive activities of that particular
publicly traded partnership. It is expected that any losses allocable to
holders of Preferred Depositary Units (other than Forum Group and its
affiliates) will be passive
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losses, either because such losses are derived from rental activities or because
such holders will not materially participate with respect to such activities.
Thus any losses allocable to such a holder of Preferred Depositary Units can be
utilized only to offset income of the Partnership in future years. If a holder
disposes of his entire interest in the Partnership in a fully taxable
transaction with an unrelated party, however, any suspended passive losses will
be available to offset other types of income.
Section 469 of the Code does not clearly address the treatment of net income
from a passive activity of a publicly traded partnership. Based upon the
statutory language, it could be argued that such income is passive income which
can be offset by passive losses from any other activity. In Notice 88-75, the
Service stated that a taxpayer's net income from such a passive activity was not
passive income, and that future regulations would provide that such income would
be treated as investment income for purposes of Section 163(d) of the Code.
Until such regulations are published, Notice 88-75 provides for the treatment as
investment income of a portion of the taxpayer's gross income from a publicly
traded partnership passive activity equal to such taxpayer's net income from the
activity (net of expenses outside the partnership, such as interest, which are
properly allocable to such activity). The passive activity rules described
above apply to individuals, estates, trusts and certain closely held
corporations, and are applied after application of the basis and at risk
limitations.
LIMITATIONS ON INVESTMENT INTEREST DEDUCTIONS
The deductibility of a non-corporate taxpayer's "investment interest expense"
is generally limited to the amount of such taxpayer's "net investment income."
The Service has indicated that a Unitholder's net passive income from the
Partnership will be treated as investment income for this purpose. In addition,
the Unitholder's share of the Partnership's portfolio income will be treated as
investment income. Investment interest expense includes (i) interest on
indebtedness properly allocable to property held for investment, (ii) a
partnership's interest expense attributed to portfolio income, and (iii) the
portion of interest expense incurred to purchase or carry an interest in a
passive activity to the extent attributable to portfolio income. The
computation of a Unitholder's investment interest expense will take into account
interest on any margin account borrowing or other loan incurred to purchase or
carry a Preferred Depositary Unit to the extent attributable to portfolio income
of the Partnership. Net investment income includes gross income from property
held for investment, gain attributable to the disposition of property held for
investment and amounts treated as portfolio income pursuant to the passive loss
rules less deductible expenses (other than interest) directly connected with the
production of investment income.
ALLOCATIONS OF PROFITS OR LOSSES
In general, profits and losses are allocated in accordance with the Percentage
Interests of the General Partner and the limited partners in the Partnership.
However, as discussed in greater detail below, the General Partner is empowered
by the Partnership Agreement to make special allocations of various Partnership
tax items other than in accordance with the Percentage Interests when, in the
judgment of the General Partner, special allocations are necessary to comply
with applicable provisions of the Code and the Treasury regulations or, to the
extent permissible under the Code and the Treasury regulations, to insure, to
the extent possible, that all Preferred Depositary Units have identical tax
attributes.
Under Section 704(b) of the Code, a special allocation of income, gain, loss,
deduction or credit (or an item thereof) of a partnership to a partner will not
be given effect for federal income tax purposes unless the allocation has
"substantial economic effect." If the allocation does not have "substantial
economic effect," a partner's distributive share will be recomputed on the basis
of the partner's interest in the partnership, taking into account all facts and
circumstances. Generally, an allocation has substantial economic effect if it
affects the partners' shares of total partnership income or loss independent of
tax consequences.
Final Treasury regulations under Section 704(b) of the Code (the "Section
704(b) Regulations") delineate the circumstances under which the Service will
view partnership allocations as having "economic effect" and as being
"substantial." Generally, in order for an allocation to have "economic effect"
under the Section 704(b) Regulations (i) the allocation must be reflected as an
appropriate increase or decrease in each partner's capital account, (ii) the
capital accounts must be maintained in accordance with the Section 704(b)
Regulations,
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(iii) liquidation proceeds must, throughout the term of the partnership, be
distributable in accordance with the partners' positive capital account
balances, and (iv) any partner with a deficit in its capital account following
the distribution of liquidation proceeds must be required to restore the amount
of the deficit to the partnership, which amount shall be distributed to partners
in accordance with their positive capital account balances or paid to creditors.
Under an alternate test for economic effect, the requirement that there exist an
obligation to restore deficit capital accounts is waived if (a) the agreement
contains a "qualified income offset" provision and (b) the allocation does not
cause or increase a deficit balance in a partner's specially adjusted capital
account (adjusted for certain reasonably anticipated future distributions, among
other adjustments) as of the end of the partnership's taxable year to which the
allocation relates. A qualified income offset requires that in the event of any
unexpected distribution (or specified adjustments or allocations) there must be
an allocation of income or gain to the distributee that eliminates the resulting
capital account deficit as quickly as possible. The Partnership Agreement
contains a qualified income offset provision at Section 5.2(c) thereof.
The Section 704(b) Regulations permit the partners' capital accounts to be
increased or decreased to reflect the revaluation of partnership property (at
fair market value) on the partnership's books if the adjustments are made
principally for a substantial non-tax business purpose in connection with a
contribution or distribution of money or other property (other than a de minimis
amount) as consideration for the acquisition or relinquishment of an interest in
the partnership. However, crediting a partner's book capital account with a
property's fair market value may create a disparity between the partner's book
capital account and its "tax" capital account (a "Book-Tax Disparity"), because
the tax capital account reflects only recognized tax consequences (i.e., it
reflects only the basis rather than the value of contributed property). A Book-
Tax Disparity exists because the partner has been given credit for specific
economic consequences, through the amount recorded in its book capital account,
but has not recognized the corresponding tax consequences. The role of the
principles of Section 704(c) of the Code is to eliminate Book-Tax Disparities
through allocations that cause the partner whose book capital account reflects
built-in gain or loss to bear the tax burden or receive the tax benefit
corresponding thereto. One of the fundamental concepts underlying the Section
704(b) Regulations is that the partners' distributive shares of all book items
are governed by Section 704(b) of the Code; once the appropriate book treatment
has been determined, the principles of Section 704(c) of the Code govern the
partners' distributive shares of all tax items attributable to property that
reflects a Book-Tax Disparity, and Section 704(b) of the Code governs all other
distributive shares of tax items.
In general, deductions and credits associated with nonrecourse debt must be
allocated in accordance with the partners' interests in the partnership. The
amount of nonrecourse deductions for a partnership taxable year equals the net
increase, if any, in the amount of partnership "minimum gain" during that
taxable year. In general, partnership minimum gain is determined by computing,
with respect to each nonrecourse liability of the partnership (other than a
nonrecourse liability payable to a partner), the amount of gain, if any, that
the partnership would realize for tax purposes by disposing of the partnership
property (subject to the liability) in a taxable transaction in full
satisfaction of the liability. If, however, partnership property subject to one
or more nonrecourse liabilities of the partnership is properly reflected on the
books of the partnership at a book value that differs from the adjusted tax
basis of the property, the book value, rather than the adjusted tax basis, of
the partnership property will be used to compute the minimum gain.
Pursuant to the Section 704(b) Regulations, nonrecourse deductions will be
deemed to be made in accordance with the partners' interests in the partnership
if, in part, the partnership agreement provides that allocations of nonrecourse
deductions are made in a manner that is reasonably consistent with allocations,
which have substantial economic effect, of some other significant partnership
item attributable to partnership property securing the nonrecourse liabilities
(other than minimum gain recognized by the partnership). In addition, the
partnership agreement must contain a "minimum gain chargeback" provision. In
general, a partnership agreement contains a minimum gain chargeback provision if
it provides that, if there is a net decrease in partnership minimum gain during
a partnership taxable year, each partner must be allocated, prior to any other
allocations of partnership items under Section 704(b) of the Code, items of
income and gain for the year (and, if necessary, subsequent years) equal to such
partner's share of the decrease in partnership minimum gain, subject to limited
exceptions.
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A special allocation must not only have economic effect to be respected, but
the economic effect also must be "substantial." The economic effect of an
allocation is substantial if there is a reasonable possibility that the
allocation will affect substantially the dollar amounts to be received by the
partners from the partnership, independent of tax consequences. In general, the
economic effect of an allocation is not substantial if at the time the
allocation becomes part of the partnership agreement (i) the after-tax economic
consequences to at least one partner may, in present value terms, be enhanced
compared to those consequences if the allocation were not contained in the
partnership agreement and (ii) there is a strong likelihood that the after-tax
economic consequences to no partner will, in present value terms, be
substantially diminished compared to those consequences if the allocation were
not contained in the partnership agreement.
The manner of allocating items of income, gain, loss, deduction and credit for
both book and federal income tax purposes is set forth in the Partnership
Agreement. In general, the Partnership's income, gains, losses, deductions and
credits are allocated pursuant to the Partnership Agreement among the limited
partners in accordance with their Percentage Interests (pro rata). The
Partnership Agreement provides, for both book and federal income tax purposes,
certain special allocations of income and gain for the qualified income offset
and minimum gain chargeback provisions (discussed above). In addition, the
Partnership Agreement authorizes, for both book and federal income tax purposes,
special allocations of income and deductions and other methods to preserve the
uniformity among all Preferred Depositary Units. See "-- Uniformity of
Preferred Depositary Units." The Partnership Agreement further provides solely
for federal income tax purposes special allocations of (i) income, gain, loss
and deduction attributable to properties contributed to the Partnership in
exchange for Preferred Depositary Units ("Contributed Property"), (ii) income,
gain, loss and deduction attributable to Partnership properties where the
Partnership has adjusted the book value of the properties upon the Partnership's
issuance of additional Preferred Units to reflect unrealized appreciation or
depreciation in value from the later of the Partnership's acquisition date of
the properties or the date of the most recent issuance of Preferred Depositary
Units ("Adjusted Property"), and (iii) recapture income resulting from the sale
or disposition of Partnership assets ("Recapture Income").
With respect to Contributed Property, the Partnership Agreement provides that,
for federal income tax purposes, items of income, gain, loss and deduction shall
first be allocated among the partners in a manner consistent with Section 704(c)
of the Code. Pursuant to Section 704(c) of the Code, items of income, gain,
loss and deduction with respect to Contributed Property are to be shared among
the partners (pursuant to Treasury regulations not yet issued in final form) so
as to take account of the differences between the Partnership's basis for the
property and the fair market value of the property at the time of the
contribution. In addition, the Partnership Agreement provides that items of
income, gain, loss and deduction attributable to Adjusted Property shall be
allocated for federal income tax purposes in accordance with Section 704(c)
principles. The purpose of those allocations is to eliminate the Book-Tax
Disparities attributable to any Contributed Property or Adjusted Property. The
General Partner will continue to administer these allocations to result, to the
extent possible, in a Unitholder having a share of the Partnership's basis in
Contributed Property or Adjusted Property equivalent to that which the
Unitholder would have had if it had purchased a direct interest in the property
(taking into account any Section 743(b) adjustment attributable to the property,
as described below).
As discussed above, allocations under Section 704(c) of the Code are required
in order to reflect any unrealized gain or loss inherent in property contributed
to a partnership by a partner. These allocations may require the allocation of
depreciation deductions from the contributed property away from the contributing
partner where there is unrealized gain. If the actual depreciation deductions
available to the partnership with respect to the property are insufficient fully
to eliminate the Book-Tax Disparity, the so-called "ceiling rule" limits the
depreciation allocable to that actually realized by the partnership. This rule
can prevent the full elimination of Book-Tax Disparities and can result in less
depreciation being allocated to a non-contributing partner than its share of
book depreciation. A similar rule applies with respect to Adjusted Property.
With regard to Contributed Property or Adjusted Property, the Partnership
seeks to correct ceiling rule problems by making allocations of gross income to
the contributing partner (or, in the case of Adjusted Property, to the non-
contributing partner) pursuant to Section 704(c) of the Code, which will
completely eliminate Book-Tax Disparities and will give the non-contributing
partners the equivalent of depreciation deductions equal to book depreciation.
Under Proposed Treasury regulations issued on December 24, 1992, partnerships
would
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generally be permitted to eliminate Book-Tax Disparities using any reasonable
method which is consistent with the purposes of Section 704(c). In addition to
this general rule of reasonableness, three methods are identified as reasonable,
one of which permits use of reasonable curative allocations. If the Proposed
Treasury regulations were to be adopted as final and were to apply to the
Partnership, it is not completely clear whether the curative allocations
provided for in the Partnership Agreement are reasonable curative allocations
under these standards.
The Partnership Agreement also requires that gain from the sale of Partnership
properties characterized as Recapture Income will be allocated (to the extent
the allocation does not alter the allocation of gain otherwise provided for in
the Partnership Agreement) among the partners (or their successors) in the same
manner in which the partners are allocated the deductions giving rise to the
Recapture Income. The Section 704(b) Regulations and Sections 1.1245-1(e) and
1.1250-1(f) of the Treasury regulations tend to support a special allocation of
Recapture Income. However, those regulations do not specifically address a
special allocation based on the allocation of the deductions giving rise to the
Recapture Income as stated in the Partnership Agreement. Therefore, it is not
clear that the allocation of Recapture Income will be given effect for federal
income tax purposes. If it is not, Recapture Income will be allocated to all
limited partners and the General Partner.
The Partnership Agreement does not require the limited partners to restore any
deficit balance in their capital accounts upon liquidation of the Partnership.
However, the Partnership Agreement contains "minimum gain chargeback" and
"qualified income offset" provisions which, to some extent, substitute for the
restoration of negative capital accounts. Pursuant to the Partnership
Agreement, taxable income and gain will be allocated in a manner consistent with
allocations of book income and gain associated with the minimum gain chargeback
and qualified income offset provisions. The Section 704(b) Regulations permit a
qualified income offset as included in the Partnership Agreement as a limited
deficit makeup and a minimum gain chargeback provision.
Tax Counsel is unable to provide any assurance that the allocations meet the
standards of the Section 704(b) Regulations because, among other reasons, of the
allocations that may be made to preserve uniformity among Preferred Depositary
Units. However, the General Partner believes that the allocations are
reasonable under the circumstances of a publicly traded partnership such as the
Partnership.
DEPRECIATION
The Section 754 election permits a purchaser of the Preferred Depositary Units
(including the Preferred Depositary Units offered hereby) to adjust the basis in
the Partnership's properties pursuant to Section 743(b) of the Code to reflect
the price at which the Units are purchased as if the purchaser had acquired a
direct interest in the Partnership's assets. See "-- Section 754 Election."
The Section 743(b) adjustment is attributed solely to the purchaser of Preferred
Depositary Units and is not added to the basis of Partnership assets associated
with all the limited partners (the common basis). Proposed Regulation Section
1.168-2(n) requires that a Section 743(b) adjustment to the basis of the
Partnership's depreciable assets be depreciated as if the adjustment were newly
acquired recovery property placed in service when the transfer occurs. Thus,
under that provision, the depreciation method and useful lives associated with
the Section 743(b) adjustment may differ from the method and useful lives
generally used to depreciate the Partnership's common basis in those properties.
The differing depreciation methods and useful lives will likely result in
different tax consequences to holders and subsequent purchasers of Preferred
Depositary Units. See "-- Allocations of Profits or Losses." The Partnership
Agreement provides that if, based on the advice of counsel, the General Partner
determines that there is a reasonable and meritorious reporting position to
depreciate a Section 743(b) adjustment (or some portion thereof) using a rate
determined under the same depreciation method and useful life as is applied to
the common basis attributable to a depreciable property, such a method may be
adopted. The General Partner has adopted such a reporting position in the
Partnership's tax returns, despite its inconsistency with Proposed Regulation
Section 1.168-2(n).
As described above, to preserve the uniformity of the Preferred Depositary
Units, the General Partner has the authority under the Partnership Agreement to
make special allocations of items of income or deductions. In addition, if the
above-described reporting position is not available, the General Partner also
has the authority to apply the same depreciation method and life to the common
basis of a Partnership asset as is applied to the Section 743(b) adjustment
attributable to that asset to preserve the uniformity of Preferred Depositary
Units
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provided that the utilization of this convention does not have a material
adverse effect on the limited partners (including any holder of Preferred
Depositary Units issued by the Partnership after the Subscription Offering). If
the General Partner uses this depreciation convention method, it may result in
lower depreciation expense otherwise allowable to certain limited partners and
risk the loss of depreciation deductions not taken in the year those deductions
are otherwise allowable. Tax Counsel is unable to provide any assurance as to
the availability of this convention or as to the impact on a Unitholder. See
"-- Uniformity of Preferred Depositary Units."
SALE OR FORECLOSURE OF PARTNERSHIP PROPERTIES
Upon the sale of any of the RCs by Newco or of any Partnership properties,
taxable income will be recognized to the extent that the amount realized from
the sale (which will include the then-unpaid balance of any mortgage on the
property to the extent that the acquiring party assumes, or takes subject to,
the mortgage even though no cash would actually be received with respect
thereto) exceeds the adjusted tax basis of the property. Any profit or loss
which may be realized by the Partnership or the Affiliated Partnership on a sale
or other disposition will be treated as long-term or short-term capital gain or
loss (except to the extent that the profit represents depreciation recapture
taxable as ordinary income), unless it is determined that (i) the assets sold
constitute stock in trade, inventory or property held primarily for sale to
customers in the ordinary course of the seller's trade or business or (ii) the
assets sold constitute "Section 1231 assets" i.e., real property and depreciable
assets used in a trade or business and held longer than one year. The RCs
should constitute Section 1231 assets. If the assets constitute Section 1231
assets, a Unitholder's proportionate share of gains or losses from the sale of
the assets will be combined with any other Section 1231 gains or losses
recognized by it in that year and its net Section 1231 gain or loss will be
taxed as capital gain or constitute ordinary loss, as the case may be. However,
net Section 1231 gain will be treated as ordinary income to the extent of
unrecaptured net Section 1231 losses for the five most recent prior years. In
general, an involuntary transfer (such as a disposition arising out of a
mortgage foreclosure) of the Partnership's or the Affiliated Partnership's
property will have the same effect as a sale.
TERMINATION OF PARTNERSHIPS
Under Section 708(b) of the Code, if at any time no part of the business of a
partnership continues to be carried on by any of its partners in a partnership,
or if within a 12-month period there is a sale or exchange of 50% or more of the
total interest in the partnership's capital and profits, a termination of the
partnership will occur, and the taxable year of the partnership will end. In
the case of such a sale or exchange, the properties of the partnership will be
treated as distributed to the partners and, following the deemed distribution,
contribution of the same properties, in the form of undivided interests, will be
deemed to be made to a new partnership. Such a recontribution will cause a
Book-Tax Disparity with regard to each Unitholder. The amount of this disparity
with respect to any Unitholder will depend on the Unitholder's tax basis in his
interest in the Partnership at the time of the termination. The closer the tax
basis on a per unit basis is to the fair market value of a Preferred Depositary
Unit, the smaller the Book-Tax Disparity will be. Differing Book-Tax
Disparities could cause the Preferred Depositary Units to cease to be uniform
since, among other reasons, Section 704(c) of the Code generally requires that
allocations of tax items of a partnership be made in a manner that reduces the
Book-Tax Disparity. Thus, different Preferred Depositary Units may receive
different tax allocations. See "Allocations of Profits or Losses." Among the
other tax consequences arising from a termination, (i) the Partnership's
properties will have a different basis which will, in the aggregate, equal the
aggregate bases of all Partnership interests, (ii) the Partnership may have to
depreciate the property over a newly determined and generally longer recovery
period resulting in smaller depreciation deductions, and (iii) the Partnership's
taxable year will close, resulting in a potential "bunching" of income for
partners with a taxable year different from the Partnership. In addition,
investment tax credit recapture may result. Finally, a termination could cause
the Partnership or its assets to become subject to unfavorable statutory or
regulatory changes enacted prior to the termination but previously not
applicable to the Partnership or their assets because of protective
"transitional" rules. A termination of the Partnership will cause a termination
of the Affiliated Partnership.
As discussed above, if the issuance of Preferred Depositary Units pursuant to
the Subscription Offering is treated as a sale of such units by Forum A/H for
federal income tax purposes, such issuance could result in a termination of the
Partnership. See "-- Tax Consequences of Preferred Depositary Unit Issuance."
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SALE OR TRANSFER OF PREFERRED DEPOSITARY UNITS
General. Upon a sale of its Preferred Depositary Units, a Unitholder will
recognize gain or loss equal to the difference between (i) the proceeds of the
sale plus the Unitholder's proportionate share of the Partnership's nonrecourse
liabilities, if any (including the Partnership's proportionate share of
nonrecourse indebtedness to which the property of the Affiliated Partnership is
subject), and (ii) the Unitholder's tax basis in such Preferred Depositary
Units. Gain or loss recognized on a sale of a Preferred Depositary Unit by a
Unitholder who does not hold the Preferred Depositary Unit as a "dealer" and who
has held the Preferred Depositary Unit for more than one year will generally be
long-term capital gain or loss, as the case may be, except that the portion of
the selling Unitholder's gain allocable to "substantially appreciated inventory
items" and "unrealized receivables" of the Partnership (or Newco) as defined in
Section 751 of the Code will be treated as ordinary income. Included in
"unrealized receivables" is depreciation recapture determined as if the selling
Unitholder's proportionate share of all of the Partnership's (or Newco's)
properties had been sold at that time for fair market value. If a Unitholder's
tax basis, before taking into account its share of any nonrecourse mortgage
loans, has been decreased below the price paid for the Preferred Depositary Unit
by tax deductions and cash distributions, a Unitholder's tax liability could
exceed the cash proceeds of a sale.
In general, upon the death of a Unitholder, neither the decedent nor the
decedent's estate will recognize any gain or loss. Generally, no gain or loss
is recognized for federal income tax purposes as a result of a gift of property.
However, a gift of Preferred Depositary Units will generally result in federal
income tax liability for a limited partner if and to the extent that its
proportionate share of nonrecourse liabilities (including a proportionate share
of a subsidiary partnership liabilities) exceeds its adjusted basis in the
donated Preferred Depositary Units.
The Code requires each person who transfers an interest in a partnership (such
as the Partnership) possessing "unrealized receivables" or "substantially
appreciated inventory items" (within the meaning of Section 751 of the Code) to
report the transfer, together with certain information relating thereto, to the
partnership. If so notified, the partnership must report the identity of the
transferor and transferee to the Service, together with other information
described in regulations issued by the Treasury Department. Failure by a
partner to report a transfer covered by this provision may result in a penalty
of $50 per occurrence.
The Service has ruled that a partner must maintain an aggregate adjusted tax
basis in a single partnership interest (consisting of all interests acquired in
separate transactions). Upon a sale of a portion of the aggregate interest, the
partner is required to allocate its aggregate tax basis between the interest
sold and the interest retained by some equitable apportionment method. (The
ruling apportioned the aggregate tax basis based on the relative fair market
values of the interests on the date of sale.) If applicable, the aggregation of
tax basis for all Preferred Depositary Units of a Unitholder effectively
prohibits the Unitholder from choosing among Preferred Depositary Units with
varying amounts of inherent gain or loss to control the timing of the
recognition of the inherent gain or loss. Thus, the ruling may result in an
acceleration of gain or deferral of loss on a sale of a portion of the Preferred
Depositary Units. The ruling does not address (i) whether this aggregation
concept results in the tacking of the holding period of earlier purchased
Preferred Depositary Units on the holding period of more recently acquired
Preferred Depositary Units and (ii) whether the ruling applies to publicly
traded limited partnerships such as the Partnership, the interests in which are
evidenced by separate registered certificates providing a verifiable means of
identifying each separate interest and tracing the purchase price of the
interest. See "-- Basis in Preferred Depositary Units." A Unitholder
considering the purchase of additional Preferred Depositary Units should consult
its own tax advisor as to the possible consequences of this ruling.
Transferor/Transferee Allocations. The Partnership Agreement requires that
the Partnership's taxable income and losses be determined on an annual basis,
apportioned equally among the constituted months, and allocated among the
partners of record in accordance with their respective Percentage Interests as
of the close of business on the last day of the month preceding each constituent
month. Thus, in the case of a sale or transfer of a Preferred Depositary Unit,
the transferor will be allocated taxable income and losses deemed to accrue
during the month of the transfer, and the transferee will be allocated taxable
income and losses deemed to accrue during the month following the month of the
transfer and thereafter. Therefore, taxable income or loss may be allocated to
some extent to a Unitholder even though the Unitholder did not own the Preferred
Units at the time
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the income or loss was actually realized by the Partnership. If the Preferred
Depositary Units are treated as purchased from Forum A/H by the Unitholders for
federal income tax purposes, taxable income and losses will be allocated between
the Unitholders acquiring Preferred Depositary Units and Forum A/H in accordance
with these rules.
Code Section 706 generally requires that items of partnership income and
deduction be allocated among transferors and transferees of partnership
interests (as well as among partners whose partnership interests otherwise vary
during a taxable period) on a daily basis. The Partnership's proposed
allocation method will not literally comply with this requirement. However, the
legislative history under the Code indicates that monthly and semimonthly
conventions may be permitted by regulations in nonabusive situations. Although
the legislative history does not appear to prohibit or otherwise restrict the
use of a monthly or semimonthly convention in conjunction with the proration
method of allocation, a Service release issued in anticipation of regulations on
transferor/ transferee allocations states that partnerships that use the
proration method will be required to use a daily convention.
In the event a monthly convention is not allowed by the regulations (or only
applies to transfers of less than all of a partner's interest), the Service may
contend that taxable income or losses of the Partnership must be reallocated
among the partners. If the Service were to sustain any such contention, the
Unitholders' respective tax liabilities would be adjusted to the possible
detriment of certain Unitholders. The General Partner is authorized to revise
the Partnership's method of allocation between transferors and transferees (as
well as among partners whose interests otherwise vary during a taxable period)
to comply with any future regulations.
The Code also addresses application of transferor/transferee allocation rules
in the context of a change in a partner's interest in a "parent" partnership
that holds an interest in a "subsidiary" partnership (as in the case of the
Partnership and the Affiliated Partnership). The Code provides that in the
event of such a change in interest, the items of the subsidiary partnership are
to be allocated among the partners of the parent partnership by (i) assigning
the appropriate portion of each item to the appropriate day in the parent
partnership's taxable year and (ii) allocating the items assigned to each day
among the partners of the parent partnership based on their interest in that
partnership as of the close of that day. The Partnership's share of items of
taxable income and loss of a subsidiary partnership will be prorated among the
partners on a monthly basis. However, the General Partner is authorized to
revise this method of allocation if it determines it is necessary to comply with
the Code or otherwise is in the best interests of the Partnership.
UNIFORMITY OF PREFERRED DEPOSITARY UNITS
Allocations may be required to preserve uniformity among all Preferred
Depositary Units, including Preferred Depositary Units issued subsequent to the
Subscription Offering. A lack of uniformity could result from a literal
application of Proposed Regulation Section 1.168-2(n). See "-- Depreciation"
and "-- Allocation of Profits or Losses." In addition, a lack of uniformity
could arise upon a subsequent offering of Preferred Depositary Units by the
Partnership as a result of certain limitations imposed under Section 704(c)
principles on allocations designed to eliminate Book-Tax Disparities
attributable to Adjusted Properties. See "-- Allocations of Profits or Losses."
Book-Tax Disparities may arise as a result of a termination of the Partnership
under Section 708 of the Code. See "-- Tax Consequences of Preferred Depositary
Unit Issuance" and "-- Termination of Partnerships." A lack of uniformity in
the tax characteristics of the Preferred Depositary Units could have a negative
impact on their value.
The General Partner has the authority under the Partnership Agreement to make
special allocations of items of income and deductions in a manner that will
preserve the uniformity among all Preferred Depositary Units, including any
Preferred Depositary Units subsequently issued by the Partnership so long as the
allocations are consistent with and supportable under the principles of Section
704 of the Code and do not have a material adverse impact on the limited
partners. That authority also applies upon a termination of the Partnership
pursuant to Section 708(b)(1)(B) of the Code. The special allocations may be
made for both book and federal income tax purposes or solely for federal income
tax purposes. Allocations made by the General Partner to preserve uniformity of
Preferred Depositary Units since such allocations may not technically comply
with Section 704(c) of the Code. See "-- Allocations of Profits or Losses." If
the General Partner determines, based upon
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advice of counsel, that no reasonable allowable allocations, conventions or
other methods are available to preserve the uniformity of Preferred Depositary
Units or the General Partner in its discretion so elects, to the extent
possible, the Preferred Depositary Units will be separately identified as
distinct classes to reflect differences in tax consequences.
POSSIBLE FEDERAL INCOME TAX LIABILITIES IN EXCESS OF CASH DISTRIBUTIONS
Depending on the circumstances existing in a particular year, taxable income
allocable to the limited partners, and the resulting tax liability, may exceed
cash distributions to the limited partners from operations. In addition, a
limited partner's tax liability upon the sale or other disposition of a real
property investment (including by reason of a sale or other disposition of a
Preferred Depositary Unit) by the Partnership or Newco may exceed the limited
partner's share of the cash proceeds, if any, from the disposition. Further, a
limited partner's tax liability could exceed the actual cash proceeds of a sale
of its Preferred Depositary Units if the limited partner's tax basis, before
taking into account its share of the Partnership's liabilities, has been
decreased below the price it paid for its Preferred Depositary Units by tax
deductions and cash distributions.
To the extent that tax liabilities arising from investment in the Partnership
exceed cash distributions from the Partnership, cash proceeds from the sale or
disposition of the Partnership's investments or cash proceeds from the transfer
of Preferred Depositary Units, the excess would give rise to an out-of-pocket
tax payment by a limited partner. See "-- Cash Distributions," "-- Sale or
Foreclosure of Partnership Properties" and "-- Sale or Transfer of Preferred
Depositary Units."
SECTION 754 ELECTION
The Partnership has made the election permitted by Section 754 of the Code to
adjust the basis of Partnership property upon the sale or exchange of a
Preferred Depositary Unit. The effect of the election is that, with respect to
the transferee of Preferred Depositary Units only, the basis of the
Partnership's property is increased or decreased by the difference between the
transferee's basis in its Preferred Depositary Units and its proportionate share
of the Partnership's adjusted basis for all of the Partnership's property. Any
increase or decrease resulting from this adjustment is allocable among the
Partnership's assets in accordance with rules established under the Code. After
this adjustment has been made, the transferee's share of the adjusted basis of
the Partnership's property is equal to the adjusted basis of its Preferred
Depositary Units. These basis adjustments will affect depreciation deductions
as discussed under "-- Depreciation."
The Partnership has adopted the following procedures for calculating the
adjustments resulting from a Section 754 election:
(i) The General Partner treats transfers of Preferred Depositary Units
as taxable transfers, unless notified otherwise. The General Partner makes
precise adjustments under Section 754 if the transferee furnishes the purchase
price for its Preferred Depositary Units to the General Partner; otherwise the
General Partner assumes that the transferee paid a price equal to the lowest
price at which Preferred Depositary Units traded during the month in which the
transfer occurred;
(ii) For purposes of computing depreciation and gain or loss, purchase
prices are allocated among the Partnership's assets based on the relative fair
market value of each, taking into consideration the principles for which
Section 743 was enacted; and
(iii) The General Partner adopts certain conventions and assumptions
which it deems reasonable in the circumstances.
There is a risk that the Service might challenge the methods used by the
Partnership and require the Unitholders to adjust their allocated share of
deductions and gain or loss from the Partnership's operations, with a resulting
increase in the share of income or reduction in the share of deductions, which
change could be material. A termination of the Partnership under Section 708 of
the Code would nullify the 754 elections made, and the Partnership would be
required to make a new Section 754 election. See "-- Termination of
Partnerships."
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UNRELATED BUSINESS TAXABLE INCOME
Certain entities are exempt from federal income tax, including trusts formed
as part of Keogh and corporate pension or profit-sharing plans which are
qualified under Section 401(a) of the Code ("Qualified Plans"), individual
retirement accounts qualified under Section 408 of the Code ("IRAs") and certain
charitable and other organizations described in Section 501(c) of the Code.
However, these tax-exempt entities are subject to federal income tax with
respect to any "unrelated business taxable income" and would be required to file
federal income tax returns (on Form 990-T) for any taxable year in which they
have gross income, included in computing unrelated business taxable income, in
excess of $1,000 (whether or not any tax was due).
The unrelated business income tax is imposed directly on, and is paid out of
the assets of the Qualified Plan, IRA or other tax-exempt entity. Under prior
law, income from a publicly traded partnership such as the Partnership was
automatically treated as unrelated business taxable income, but effective for
tax years of the Partnership beginning after December 31, 1993, unrelated
business taxable income status will be determined for income from the
Partnership under the general rules described below. "Unrelated business
taxable income" generally includes income (other than, in the case of property
which is not "debt-financed property," interest, dividends, real property rents
not dependent upon income or profits, and gain from disposition of non-inventory
property) derived by certain trusts from a trade or business or by certain other
tax-exempt organizations from a trade or business, the conduct of which is not
substantially related to the exercise of the organization's charitable,
educational or other exempt purpose, and all income to the extent derived from
"debt-financed property." Certain types of real property rent are excluded from
unrelated business taxable income even if it is debt-financed, depending on,
among other things, the nature of the financing.
OTHER POSSIBLE TAX CONSEQUENCES TO INVESTORS
Interest Related to Tax-Exempt Obligations. Sections 265(2) and 265(4) of the
Code provide, respectively, that interest on indebtedness incurred or continued
to "purchase or carry" tax-exempt obligations, or shares of stock in a regulated
investment company that currently distributes exempt-interest dividends, is not
deductible. In Revenue Procedure 72-18, the Service has articulated its view
that a purpose to carry tax-exempt obligations will be inferred, unless rebutted
by other evidence, wherever the taxpayer owns tax exempt obligations and has
outstanding indebtedness which is neither directly connected with personal
expenditures nor incurred in connection with the active conduct of a trade or
business. The inference, the Revenue Procedure states, will be drawn even
though the indebtedness is incurred or continued to purchase or carry other
portfolio investments. A limited partner's interest, for this purpose, is
specifically designated to be a "portfolio investment." Therefore, in the case
of a Unitholder purchasing or owning tax-exempt obligations, the Service might
take the position that the Unitholder's allocable portion of any interest
incurred by the Partnership or the Affiliated Partnership on its borrowings, and
any interest on any borrowings by the Unitholder to finance investment in the
Partnership, should be viewed in whole or in part as incurred to enable the
Unitholder to purchase or carry the tax-exempt obligations and, therefore, that
the deduction of any such interest by the Unitholder should be disallowed in
whole or in part.
Alternative Minimum Tax on Individuals. The alternative minimum tax for
noncorporate taxpayers (which applies only to the extent greater than the
taxpayer's regular tax) was recently increased by the Revenue Reconciliation Act
of 1993 from 24% to a two-tier rate structure of 26% and 28%. The 26% rate
applies to the first $175,000 ($87,500 for married individuals filing separate
returns) of a taxpayer's excess of alternative minimum taxable income over an
exemption amount ($45,000 for a joint return or a surviving spouse, $33,750 for
an unmarried individual and $22,500 for a married individual filing separately)
and thereafter, the 28% rate applies. The exemptions are phased out above
certain alternative minimum taxable income levels. In general, alternative
minimum taxable income means the taxpayer's adjusted gross income reduced,
subject to certain limitations, by certain itemized deductions and qualified
interest, and increased by the taxpayer's items of tax preference. Among the
tax preference items taken into account in calculating alternative minimum
taxable income are the excess of accelerated depreciation over straight-line
depreciation (using alternative recovery periods) on real property and personal
property subject to lease and numerous other items. For purposes of calculating
tax preference items, straight-line depreciation on qualifying ACRS property is
determined by utilizing prescribed periods of years.
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The effect of the alternative minimum tax provisions will depend on the
investor's own tax situation and prospective investors are urged to consult
their tax advisors in this regard.
Alternative Minimum Tax on Corporations. A 20% alternative minimum tax for
corporations is applicable to an expanded tax base. If a corporation intends to
invest in the Preferred Depositary Units, it should consult with its tax
advisors with regard to the impact of the minimum tax upon the investment.
POSSIBLE LEGISLATIVE TAX CHANGES
There have been a number of proposals made in Congress and by the Treasury
Department and other government agencies for changes in the federal income tax
laws. In addition, the Service has proposed and may still be considering
changes in regulations and procedures, and numerous private interest groups have
lobbied for regulatory and legislative changes in federal income taxation. It
is likely that further proposals will be forthcoming or that previous proposals
will be revived in some form in the future. It is impossible to predict with
any degree of certainty what past proposals may be revived or what new proposals
may be forthcoming, the likelihood of adoption of any such proposals, the likely
effect of any such proposals upon investment in the Partnership, or the
effective date of any legislation which may derive from any such past or future
proposals. Potential investors are strongly urged to consider ongoing
developments in this uncertain area.
PARTNERSHIP TAX RETURN, TAX INFORMATION AND PENALTIES
The tax returns filed by the Partnership or the Affiliated Partnership may be
audited by the Service. Adjustments (if any) resulting from an audit may result
in audits of the limited partners' own returns and adjustments of non-
Partnership, as well as Partnership, income or loss.
The Code provides, in general, that the tax treatment of items of partnership
income, gain, loss, deduction and credit will be determined at the partnership
level in a single partnership proceeding rather than in separate proceedings
with each partner. Under these provisions, all of the partners may be bound by
Partnership level audit adjustments agreed to by the General Partner (whether as
general partner of the Partnership or of the Affiliated Partnership), or as
determined in a single Partnership level judicial proceeding. Any costs
incurred by the Partnership or the Affiliated Partnership in connection with an
audit or any related judicial or administrative proceeding could reduce any
anticipated yield on an investment in the Partnership. In addition, the Code
provides, in general, that (i) a partner must report a partnership item
consistent with its treatment on the partnership return, unless the partner
files a statement which identifies the inconsistency, and (ii) the statute of
limitations for adjustment of tax with respect to partnership items under the
partnership level proceedings will generally be three years from the date of
filing (or, if later, the last date for filing) the partnership return except in
specified circumstances.
The Code imposes an addition to tax on individuals, certain closely held
corporations and personal service corporations where the value of property or
the adjusted basis of property claimed on a return exceeds 200% of the amount
determined to be the correct value or adjusted basis. The addition to tax is
20% of the underpayment of tax which results from the overvaluation. (The
addition to tax is increased to 40% if the value or basis exceeds 400% of the
correct value or basis.) The General Partner does not anticipate that the
determinations of the value or adjusted basis of the Partnership's (or the
Affiliated Partnership's) property would give rise to an addition to tax.
The Code further imposes an addition to tax for a substantial understatement
of income tax equal to 20% of the amount of any underpayment attributable to the
understatement. "Understatement" means the excess of the amount of the tax
required to be shown on the return for the taxable year over the amount of tax
imposed which is shown on the return. A substantial understatement exists for
any taxable year if the amount of the understatement for the taxable year
exceeds the greater of (i) 10% of the tax required to be shown on the return and
(ii) $5,000 ($10,000 in the case of a corporation other than an S corporation or
a personal holding company). In the case of any item which is not attributable
to a tax shelter (as defined below), the amount of an understatement is reduced
by that portion of the understatement which is attributable to the tax treatment
of an item for which there is or was substantial authority, or an item with
respect to which the relevant facts were
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adequately disclosed on the tax return or an attached statement and for which
the taxpayer has a reasonable basis for the tax treatment of the disclosed item.
In the case of any item attributable to a tax shelter, the amount of the
understatement is reduced by that portion of the understatement which is
attributable to the tax treatment of an item for which there is or was
substantial authority and with respect to which the taxpayer reasonably believed
that the tax treatment of the item was more likely than not the proper
treatment. "Tax shelter" includes a partnership, arrangement or other
investment, if the principal purpose of the partnership, arrangement or other
investment is the avoidance or evasion of federal income tax. The General
Partner believes that the Partnership should not be treated as a tax shelter for
purposes of this provision.
NOMINEES HOLDING PREFERRED DEPOSITARY UNITS
Persons who hold an interest in the Partnership as a nominee for another
person are required to furnish to the Partnership (i) the name, address and
taxpayer identification number of the beneficial owners and the nominee; (ii)
whether the beneficial owner is (x) a person that is not a United States person,
(y) a foreign government, international organization or any wholly owned agency
or instrumentality of either of the foregoing, or (z) a tax-exempt entity; (iii)
the amount and description of Units held, acquired or transferred for the
beneficial owners; and (iv) certain information including the dates of
acquisitions and transfers, means of acquisitions and transfers, and acquisition
cost for purchases, as well as the amount of net proceeds from sales. Brokers
and financial institutions are required to furnish additional information,
including whether they are United States persons and certain information on
Units they acquire, hold or transfer for their own account. A penalty of $50
per failure (up to a maximum of $100,000 per calendar year) is imposed by the
Code for failure to report such information to the Partnership. The nominee is
required to supply the beneficial owner of the Units with the information
furnished to the Partnership.
PARTNERSHIP REGISTRATION WITH SERVICE
The Code generally requires the person principally responsible for organizing
certain defined investments to register the investment with the Service if, as
of the close of any of the first five taxable years of the investment, the
investment (i) satisfies a certain computed ratio of aggregate deductions and
credits to cash invested for any investor and (ii) is expected to reduce the
then-cumulative tax liability of any investor. The possible application of the
foregoing standards to the General Partner has resulted in the decision of the
General Partner to register the Partnership and the Affiliated Partnership.
The Service has issued temporary regulations which require a statement be made
to all investors as follows:
You are acquiring an interest in Forum Retirement Partners, L.P. (the
"Partnership"), 8900 Keystone Crossing, Suite 200, Post Office Box 40498,
Indianapolis, Indiana 46240-0498, whose taxpayer identification number is 35-
1686799. The Code requires the Partnership and other entities to obtain a
registration number from the Internal Revenue Service pursuant to Section 6111
of the Internal Revenue Code and to provide such number to investors in such
programs. On behalf of the Partnership, the General Partner has obtained the
following such registration number from the Internal Revenue Service:
86351000160.
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_________________________
UNDER CURRENT TEMPORARY REGULATIONS, YOU MUST REPORT THIS REGISTRATION
NUMBER (AS WELL AS THE NAME AND TAXPAYER IDENTIFICATION NUMBER OF THE
PARTNERSHIP) TO THE INTERNAL REVENUE SERVICE ON FORM 8271, WHICH MUST BE
ATTACHED TO YOUR FEDERAL INCOME TAX WHEN YOU FILE SUCH RETURN.
ISSUANCE OF A REGISTRATION NUMBER DOES NOT INDICATE THAT THIS INVESTMENT OR
THE CLAIMED TAX BENEFITS HAVE BEEN REVIEWED, EXAMINED OR APPROVED BY THE
INTERNAL REVENUE SERVICE.
_________________________
Failure by a Unitholder to furnish the Partnership's registration number in
the manner as described in the statement above may result in a penalty of $250
per occurrence.
Current temporary regulations also require the transferor of interests in a
partnership which has obtained a registration number to retain certain
information concerning such a transfer. In order to relieve you (an investor)
of this requirement, the General Partner will retain such information in
connection with a transfer of your interest in the Partnership to any other
person, if you (a) furnish the General Partner at 8900 Keystone Crossing,
Suite 200, Post Office Box 40498, Indianapolis, Indiana 46240-0498, (i) that
person's name, address and taxpayer identification number, (ii) the date on
which you transferred your Preferred Units, and (iii) the number of Preferred
Units which you transferred to such person, and (b) provide a copy of this
notice to the person to whom you transfer your Units.
In addition, the Code requires that a list be maintained by the General
Partner containing the identity of each person who is sold an interest in a
partnership with respect to which registration is required under Code Section
6111 and such other information as required by regulations issued by the
Treasury Department. The list must be made available to the Service upon
request.
STATE AND LOCAL TAXES
In addition to the federal income tax consequences described above,
prospective purchasers of Preferred Depositary Units should consider potential
state and local tax consequences of investment in the Partnership and are urged
to consult their tax advisors in this regard. The rules of some states and
localities for computing and/or reporting taxable income may differ from the
federal rules. An investor's distributive share of the taxable income or loss
of the Partnership may be required to be included in determining its reportable
income for state or local tax purposes in the state or locality in which it is a
resident and in other states and localities from which the Partnership may
derive income. Those states or localities may require the filing of tax returns
by non-resident partners and impose a tax on nonresident partners determined
with reference to the pro rata share of Partnership income derived from sources
within the state or locality. To the extent that a non-resident Unitholder pays
tax to a state or locality by virtue of the Partnership's operations within that
state or locality, the Unitholder may be entitled to a deduction or credit
against tax owed to its state or locality of residence with respect to the same
income. Each investor is advised to consult its tax advisor as to the state and
local taxes which may be payable in connection with an investment in the
Partnership.
The Partnership will advise each Unitholder of its share of income or loss to
be reported to each of the states in which the Partnership makes investments.
The Partnership may be required to withhold state taxes from distributions to
the Unitholder in some instances.
GENERAL
THE FOREGOING ANALYSIS IS NOT INTENDED AS A SUBSTITUTE FOR CAREFUL TAX
PLANNING, PARTICULARLY SINCE THE INCOME TAX CONSEQUENCES OF AN INVESTMENT IN THE
PARTNERSHIP ARE COMPLEX AND WILL NOT BE THE SAME FOR ALL TAXPAYERS.
ACCORDINGLY, PROSPECTIVE PURCHASERS OF PREFERRED DEPOSITARY UNITS ARE STRONGLY
ADVISED TO CONSULT
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THEIR TAX ADVISORS WITH SPECIFIC REFERENCE TO THEIR OWN TAX SITUATIONS. THE
COST OF CONSULTATION COULD, DEPENDING ON THE AMOUNT THEREOF, MATERIALLY DECREASE
ANY ANTICIPATED YIELD ON THE INVESTMENT.
PLAN OF DISTRIBUTION
The Preferred Depositary Units offered pursuant to the Subscription Offering
are being offered by the Partnership directly to Eligible Holders. The
Partnership has not employed any brokers, dealers or underwriters in connection
with the solicitation or exercise of Subscription Privileges in the Subscription
Offering, and no commissions, fees or discounts will be paid in connection with
the Subscription Offering. Certain officers and other employees of the General
Partner may solicit responses from Eligible Holders, but such officers and other
employees will not receive any commissions or compensation for such services
other than their normal employment compensation.
The Partnership will pay the fees and expenses of American Stock Transfer &
Trust Company, as Subscription Agent, and has also agreed to indemnify the
Subscription Agent from any liability which it may incur in connection with the
Subscription Offering.
SUBSCRIPTION AGENT
The Company has appointed American Stock Transfer & Trust Company as
Subscription Agent for the Subscription Offering. The Subscription Agent's
address, which is the address to which Notices of Exercise and payment of the
Subscription Price should be delivered, is:
AMERICAN STOCK TRANSFER & TRUST COMPANY
40 WALL STREET, 46TH FLOOR
NEW YORK, NEW YORK 10005
ATTENTION: REORGANIZATION DEPARTMENT
The Partnership will pay the fees and expenses of American Stock Transfer &
Trust Company, and has also agreed to indemnify American Stock Transfer & Trust
Company from any liability which it may incur in connection with the
Subscription Offering.
EXPERTS
The consolidated financial statements and financial schedules of the
Partnership for the three years ended December 31, 1992, included in the 1992
Form 10-K and incorporated by reference herein, have been audited by KPMG Peat
Marwick, independent auditors. The consolidated financial statements and
financial statement schedules audited by KPMG Peat Marwick have been
incorporated herein by reference in reliance upon the report of KPMG Peat
Marwick and on their authority as experts in accounting and auditing. The
report of KPMG Peat Marwick covering such consolidated financial statements and
schedules, dated February 12, 1993, contains an explanatory paragraph that
states that the Partnership was required to make a $12.5 million principal
payment on the Bank Debt by March 31, 1993. The report states that if the
Partnership was unable to make such payment and the agreement relating to the
Bank Debt was not amended, the Bank Debt would have been in default and the
lender could have demanded payment. The report also states that the uncertainty
of the resolution of this matter raised substantial doubt about the
Partnership's ability to continue as a going concern. During March 1993, the
credit agreement relating to the Bank Debt was amended to extend the maturity
date thereof from March 31, 1993 to December 31, 1993. The consolidated
financial statements and financial statement schedules do not include any
adjustments that might have resulted from the outcome of this uncertainty.
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LEGAL OPINIONS
Certain legal matters relating to Preferred Depositary Units are being passed
upon for the Partnership by Jones, Day, Reavis & Pogue. Additionally, the
description of federal income tax consequences contained in this Prospectus
under the caption "Federal Income Tax Considerations" is based upon the opinion
of Jones, Day, Reavis & Pogue.
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================================================================================
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS, AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE PARTNERSHIP. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE
PREFERRED DEPOSITARY UNITS OFFERED BY THIS PROSPECTUS, NOR DOES IT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE PREFERRED DEPOSITARY
UNITS BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION.
________________________________________
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
AVAILABLE INFORMATION....................... 2
INFORMATION INCORPORATED BY REFERENCE....... 2
PROSPECTUS SUMMARY.......................... 3
RISK FACTORS................................ 11
THE PARTNERSHIP............................. 15
THE RECAPITALIZATION........................ 16
USE OF PROCEEDS............................. 19
PRO FORMA FINANCIAL INFORMATION............. 19
CASH DISTRIBUTION POLICY.................... 23
THE SUBSCRIPTION OFFERING................... 24
BUSINESS AND PROPERTIES OF THE PARTNERSHIP.. 27
DESCRIPTION OF PREFERRED DEPOSITARY UNITS... 35
SUMMARY OF PARTNERSHIP AGREEMENT............ 38
FEDERAL INCOME TAX CONSIDERATIONS........... 45
PLAN OF DISTRIBUTION........................ 62
SUBSCRIPTION AGENT.......................... 62
EXPERTS..................................... 62
LEGAL OPINIONS.............................. 63
</TABLE>
================================================================================
================================================================================
5,064,150
PREFERRED DEPOSITARY UNITS
FORUM RETIREMENT
PARTNERS, L.P.
____________________
PROSPECTUS
____________________
JANUARY 7, 1994
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Estimated expenses in connection with the issuance and distribution of
Preferred Depositary Units being registered are as follows:
<TABLE>
<CAPTION>
<S> <C>
SEC registration fee......................... $ 3,493
Blue Sky fees and expenses................... 10,000
Printing, mailing and distribution expenses.. 50,000
Legal fees and expenses...................... 200,000
Accounting fees and expenses................. 25,000
Subscription Agent's fees and expenses....... 10,000
Miscellaneous................................ 25,507
--------
Total..................................... $324,000
========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under Delaware law, a limited partnership has the power to indemnify and hold
harmless any partner or other person from and against any and all claims and
demands whatsoever, subject to any standards and restrictions in the partnership
agreement. The Partnership Agreement provides that the Partnership will
indemnify the General Partner and its affiliates, directors, officers, employees
and agents, and persons serving on behalf of the Partnership in similar
capacities with other entities, against liabilities, costs and expenses
(including legal fees and expenses) incurred by the indemnified persons in
connection with litigation or threatened litigation as a result of its status as
the general partner of the Partnership or an affiliate, director, officer, agent
or employee of the General Partner, including without limitation, liabilities
under federal or state securities laws, if the indemnified person acted in good
faith and in a manner it believed in good faith to be in, or not opposed to, the
best interests of the Partnership and, with respect to a criminal proceeding,
had no reasonable cause to believe its conduct unlawful and the indemnified
person's conduct did not constitute willful misconduct. Any indemnification
under these provisions will be limited to the assets of the Partnership.
The Partnership is authorized to purchase insurance against liabilities
asserted against and expenses incurred by the foregoing persons in connection
with the Partnership's activities, whether or not the Partnership would have the
power to indemnify those persons against those liabilities under the provisions
described above. The Partnership has purchased such insurance.
Under Delaware law, the General Partner may indemnify its directors, officers,
employees and other individuals against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement in connection with specified
actions, suits, or proceedings, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation -- a
"derivative action") if they acted in good faith and in a manner they reasonably
believed to be in or not opposed to the best interests of the General Partner
and, with respect to any criminal action or proceeding, had no reasonable cause
to believe their conduct was unlawful. A similar standard of care is applicable
in the case of a derivative action, except that indemnification only extends to
expenses (including attorneys' fees) incurred in connection with defense or
settlement of such an action and Delaware law requires court approval before
there can be any indemnification of expenses where the person seeking
indemnification has been found liable to the General Partner.
The General Partner's Certificate of Incorporation provides that any and all
persons that the General Partner has the power to indemnify under Delaware law
will be indemnified by the General Partner to the full extent authorized by
Delaware law, as it may be amended or supplemented, from and against any and all
expenses, liabilities or other matters covered thereby.
II-1
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The General Partner has entered into indemnification agreements with each of
its directors. These indemnification agreements provide for, among other
things, (i) the indemnification by the General Partner of the indemnitees
thereunder to the extent permitted by Delaware law, (ii) the advancement of
attorneys' fees and other expenses, and (iii) the establishment, upon approval
by the Board of Directors of the General Partner, of trusts or other funding
mechanisms to fund the General Partner's indemnification obligations thereunder.
Under Indiana law, Forum Group may indemnify its directors, officers,
employees and other individuals, including any person serving at the request of
Forum Group as a director of another corporation, against judgments, amounts
paid in settlement, penalties, fines and reasonable expenses incurred in
specified actions, suits or proceedings, whether civil, criminal, administrative
or investigative, if they acted in good faith and in a manner they reasonably
believed to be in or, in certain circumstances, not opposed to the best
interests of Forum Group and, with respect to any criminal proceeding, had
reasonable cause to believe their conduct was lawful or had no reasonable cause
to believe their conduct was unlawful.
Under Forum Group's Restated Articles of Incorporation, directors, officers,
employees and other individuals, including any person serving at the request of
Forum Group as a director of another corporation, may be indemnified against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement in connection with specified actions, suits or proceedings, whether
civil, criminal, administrative, or investigative (other than a derivative
action) if they acted in good faith and in a manner they reasonably believed to
be in or, in certain circumstances, not opposed to the best interests of Forum
Group and, with respect to any criminal action or proceeding, had no reasonable
cause to believe their conduct was unlawful. A similar standard of care is
applicable in the case of a derivative action, except that indemnification only
extends to expenses (including attorneys' fees) incurred in connection with
defense or settlement of such an action.
As authorized by Indiana law and Forum Group's Restated Articles of
Incorporation, Forum Group has entered into indemnification agreements with each
of the directors of the General Partner. The indemnification agreements provide
for, among other things, (i) the indemnification by Forum Group of the
indemnitees thereunder to the extent permitted by Indiana law and Forum Group's
Restated Articles of Incorporation, (ii) the advancement of attorneys' fees and
other expenses, and (iii) the establishment, upon approval by the Board of
Directors of Forum Group, of trusts or other funding mechanisms to fund Forum
Group's indemnification obligations thereunder.
Under Indiana law and Forum Group's Restated Articles of Incorporation, Forum
Group has the power to purchase and maintain insurance on behalf of directors,
officers, employees and other persons, including any person serving at the
request of Forum Group as a director of another corporation, against any
liability asserted against them and incurred by them in any such capacity or
arising out of their status as such, whether or not Forum Group would have the
power to indemnify them against such liability. Forum Group has purchased such
insurance, which covers the directors of the General Partner in certain limited
circumstances.
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<CAPTION>
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ITEM 16. EXHIBITS
2(1) Option Agreement (MLP), dated December 29, 1986, among
Forum Group, the Partnership and Operations*
2(2) Recapitalization Agreement (incorporated by reference to
Exhibit 10(1) to the Partnership Current Report on Form
8-K, dated October 12, 1993 (the "October 1993 Form 8-K"))
2(3) Letter Agreement, dated December 14, 1993, by and among
Forum Group, Forum A/H and the Partnership*
4(1) Partnership Agreement*
4(2) Amendment to Partnership Agreement, dated as of February
24, 1992*
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <S>
4(3) Amendment to Partnership Agreement,
dated October 6, 1993 (incorporated by reference to Exhibit
4(1) to the October 1993 Form 8-K)
4(4) Amended and Restated Agreement of Limited Partnership,
dated as of December 31, 1986, of Forum Health Partners I-A
L.P. ("Health Partners")*
4(5) Amended and Restated Agreement of Limited Partnership,
dated as of December 31, 1986, of Foulk Manor Associates,
L.P. ("Associates")*
4(6) Amended and Restated Agreement of Limited Partnership,
dated as of December 31, 1986, of Operations*
5(1) Opinion of Jones, Day, Reavis & Pogue, regarding legality
of the securities being registered*
8(1) Opinion of Jones, Day, Reavis & Pogue regarding certain tax
matters*
10(1) Management Agreement*
10(2) First Amendment to Management Agreement, dated as of June
29, 1989*
10(3) Second Amendment to Management Agreement, dated as of
September 29, 1989*
10(4) Third Amendment to Management Agreement, dated as of May
27, 1992*
10(5) Fourth Amendment to Management Agreement, dated as of
November 9, 1993*
10(6) Depositary Agreement, dated as of December 29, 1986, among
the Partnership, the General Partner, limited partners and
assignees holding depositary receipts and Manufacturers
Hanover Trust Company ("Manufacturers")* 10(7) Assignment
of Depositary Agreement from Manufacturers to American Stock
Transfer & Trust Company, dated January 1, 1992*
10(8) Nomura Loan Agreement and related documents and
instruments, each dated as of December 28, 1993*
13(1) Annual Report on Form 10-K for the fiscal year ended
December 31, 1992, (filed with the Commission on March 30,
1993)*
13(2) Quarterly Report on Form 10-Q for the quarter ended
September 30, 1993, (filed with the Commission on November
4, 1993)*
23(1) Consent of KPMG Peat Marwick
23(2) Consent of Jones, Day, Reavis & Pogue (included in Exhibits
5(1) and 8(1))*
24(1) Powers of Attorney*
99(1) Form of Notice of Exercise of Subscription Privilege*
</TABLE>
II-3
<PAGE>
<TABLE>
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99(2) Form of Letter to Unitholders*
99(3) Form of Letter to Brokers, Dealers, Commercial
Banks, Trust Companies and Other Nominees*
99(4) Form of Letter to Clients for use by Brokers,
Dealers, Commercial Banks, Trust Companies and
Other Nominees*
99(5) Form of Subscription Agent Agreement*
</TABLE>
- --------------------
* Previously filed
ITEM 17. UNDERTAKINGS
(1) The Partnership undertakes to send to each transactions with the
Unitholder at least on an annual basis a statement General Partner or of any
its affiliates, and of fees, commissions, compensation and other benefits paid,
or accrued to the General Partner or its affiliates for the fiscal year
completed, showing the amount paid or accrued to each recipient and the services
performed.
(2) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Partnership pursuant to the foregoing provisions, or otherwise, the Partnership
has been advised that, in the opinion of the Commission, the indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against those
liabilities (other than payment by the Partnership of expenses incurred or paid
by a director, officer or controlling person of the Partnership in the
successful defense of any action, suit or proceeding) is asserted by a director,
officer or controlling person in connection with the securities being
registered, the Partnership will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether indemnification by it is against
public policy as expressed in the Securities Act, and will be governed by the
final adjudication of that issue.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Partnership
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-2 and has duly caused this Amendment No. 3 to
Registration Statement on Form S-2 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Indianapolis, State of
Indiana on the date indicated on the cover page of this Amendment No. 3.
FORUM RETIREMENT PARTNERS, L.P.
By: FORUM RETIREMENT, INC.,
General Partner
By: /s/ John H. Sharpe
----------------------------
John H. Sharpe,
Secretary
Pursuant to the requirements of the Securities Act of 1933, this Amendment No.
3 to Registration Statement on Form S-2 has been signed by the following persons
in the capacities indicated on the date indicated on the cover page of this
Amendment No. 3:
Signature Title
--------- -----
DONALD J. McNAMARA* Chairman of the Board and President
- ----------------------------- (Principal Executive Officer)
Donald J. McNamara
PAUL A. SHIVELY* Vice President
- ----------------------------- (Principal Financial and Accounting Officer)
Paul A. Shively
JAMES C. LESLIE* Director
- -----------------------------
James C. Leslie
JOHN F. SEXTON* Director
- -----------------------------
John F. Sexton
* The undersigned, by signing his name hereto, does sign and execute this
Amendment No. 3 to Registration Statement on Form S-2 pursuant to powers of
attorney executed by the above-named officers and directors and filed
herewith.
By: /s/ John H. Sharpe
----------------------------
John H. Sharpe,
Attorney-in-Fact
II-5
<PAGE>
[KPMG Peat Marwick Letterhead]
The Partners
FORUM RETIREMENT PARTNERS, L.P.:
We consent to the use of our reports incorporated herein by reference and to the
reference to our firm under the heading "Experts" in the prospectus.
Our report dated February 12, 1993 contains an explanatory paragraph that states
that the Partnership's secured bank credit agreement requires a $12.5 million
principal payment by March 31, 1993 and that if the Partnership is unable to
make this payment and the agreement is not amended, the loan will be in default
and the lender may demand payment, which raises a substantial doubt about the
Partnership's ability to continue as a going concern. The consolidated
financial statements and financial statement schedules do not include any
adjustment that might result from the outcome of this uncertainty.
/s/ KPMG Peat Marwick
Indianapolis, Indiana
January 4, 1994
