SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For Quarter Ended September 30, 1994 Commission File Number 0-6350
FORUM GROUP, INC.
(Exact name of registrant as specified in its charter)
Indiana 61-0703072
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8900 Keystone Crossing, Suite 200
P.O. Box 40498
Indianapolis, Indiana 46240-0498
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 317-846-0700
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports)
and (2) has been subject to such filing requirements for the past 90
days:
Yes X No
----- -----
Indicate by check mark whether the registrant has filed all
documents and reports required to be filed by Sections 12, 13 or 15(d)
of the Securities Exchange Act of 1934 subsequent to the distribution
of securities under a plan confirmed by a court:
Yes X No
----- -----
The number of shares outstanding of the registrant's common stock
as of November 4, 1994 was 22,500,109.
<PAGE>
INDEX
FORUM GROUP, INC., AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION PAGE
- ----------------------------- ----
Item 1. Financial Statements (Without Audit)
Condensed consolidated balance sheets --
September 30 and March 31, 1994 3
Condensed consolidated statements of operations --
Three and six months ended September 30, 1994 and 1993 4
Condensed consolidated statements of cash flows --
Six months ended September 30, 1994 and 1993 5
Notes to condensed consolidated financial statements --
September 30, 1994 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II. OTHER INFORMATION
- --------------------------
Item 1. Legal Proceedings 16
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
- ----------
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<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
-----------------------------
FORUM GROUP, INC., AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Without Audit)
September 30, March 31,
1994 1994
------------- ------------
ASSETS (in thousands)
Property and equipment:
Land and improvements $ 47,319 $ 34,505
Buildings and leasehold improvements 245,078 176,209
Furniture and equipment 16,774 13,046
Project under construction (estimated
cost to complete $4,300) 1,042 -0-
----------- -----------
310,213 223,760
Less accumulated depreciation and amortization 15,106 11,600
----------- -----------
295,107 212,160
Investments:
Greenville Retirement Community, L.P. 3,493 3,614
Forum-NGH Operations-I, LLC 237 -0-
Forum Retirement Partners, L.P. -0- 12,420
Rancho San Antonio Retirement Housing
Corporation -0- 7,228
----------- -----------
3,730 23,262
----------- -----------
Cash and cash equivalents 34,270 18,331
Accounts receivable, less allowance for doubtful
accounts of $570 and $277 9,201 5,246
Notes, investments and other receivables 3,901 5,717
Management fees receivable 61 964
Restricted cash 13,668 9,992
Deferred costs and other assets, net 17,730 14,528
----------- -----------
Total Assets $ 377,668 $ 290,200
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Long-term debt, including $4,706 due
within one year $ 255,674 $ 205,094
Trade accounts payable 2,708 2,332
Other accrued expenses 15,782 12,523
Resident deposits and refundable resident fees 19,443 17,253
Deferred income 7,385 7,041
----------- -----------
Total Liabilities 300,992 244,243
Other partners' equity 18,406 1,673
Shareholders' equity:
Common stock, no par value - authorized 48,000
shares, issued 22,500 and 21,262 shares 63,928 58,773
Paid-in-capital 750 -0-
Accumulated deficit (6,408) (14,489)
----------- -----------
Total Shareholders' Equity 58,270 44,284
----------- -----------
$ 377,668 $ 290,200
=========== ===========
See Notes to Condensed Consolidated Financial Statements.
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<PAGE>
FORUM GROUP, INC., AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Without Audit)
Three Months Ended Six Months Ended
September 30, September 30,
------------------- -------------------
1994 1993 1994 1993
-------- -------- -------- --------
(in thousands except per share amounts)
Revenues:
Net operating revenues $ 36,188 $ 26,842 $ 62,931 $ 51,515
Management fees 508 147 1,603 250
Investment and other income 817 237 1,069 563
-------- -------- -------- --------
TOTAL REVENUES 37,513 27,226 65,603 52,328
-------- -------- -------- --------
Costs and expenses:
Operating expenses 23,998 18,207 42,188 36,772
Marketing, general and
administrative expenses 1,739 1,862 3,321 2,829
Litigation expense -0- 181 -0- 1,262
Depreciation 2,052 1,811 3,579 4,043
-------- -------- -------- --------
TOTAL COSTS AND EXPENSES 27,789 22,061 49,088 44,906
-------- -------- -------- --------
9,724 5,165 16,515 7,422
Interest expense (5,778) (4,466) (10,434) (8,880)
Gains from sales of cooperative
memberships 4,197 -0- 4,197 -0-
-------- -------- -------- --------
Income (loss) before minority
interests, income taxes and
extraordinary charge 8,143 699 10,278 (1,458)
Minority interests (138) 160 (197) 1,115
-------- -------- -------- --------
Income (loss) before income taxes
and extraordinary charge 8,005 859 10,081 (343)
Income taxes 2,000 -0- 2,000 -0-
-------- -------- -------- --------
Income (loss) before extraordinary
charge 6,005 859 8,081 (343)
Extraordinary charge -
early extinguishment of debt -0- 2 -0- (412)
-------- -------- -------- --------
NET INCOME (LOSS) 6,005 861 8,081 (755)
ACCUMULATED DEFICIT AT BEGINNING
OF PERIOD (12,413) (8,975) (14,489) (7,359)
-------- -------- -------- --------
ACCUMULATED DEFICIT AT END OF
PERIOD $ (6,408) $ (8,114) $ (6,408) $ (8,114)
======== ========= ======== =========
Average number of common and
common equivalent shares
outstanding 22,920 17,446 22,846 13,416
======== ======== ======== ========
Net income (loss) per common and
common equivalent share (primary
and fully diluted):
Income (loss) before
extraordinary charge $ 0.26 $ 0.05 $ 0.35 $ (0.03)
Extraordinary charge 0.00 0.00 0.00 (0.03)
-------- -------- -------- --------
Net income (loss) $ 0.26 $ 0.05 $ 0.35 $ (0.06)
======== ======== ======== ========
SEE Notes to Condensed Consolidated Financial Statements.
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<PAGE>
FORUM GROUP, INC., AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Without Audit)
Six Months Ended
September 30,
-------------------------
1994 1993
---------- ----------
(in thousands)
Cash flows from operating activities:
Net income (loss) $ 8,081 $ (755)
Adjustments to reconcile net income (loss)
to cash provided by operating activities:
Depreciation and amortization 3,579 3,837
Amortization of deferred financing costs 1,208 602
Other partners' and cooperative members'
interest in losses (earnings) of
consolidated companies 197 (1,115)
Net (income) losses of investments
accounted for using the equity
method (118) 73
Other accrued revenues and expenses (129) 472
Non-cash portion of extraordinary charge -0- 270
---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 12,818 3,384
---------- ----------
Cash flows from investing activities:
Additions to property and equipment (3,070) (1,004)
Net proceeds from sales of cooperative
memberships in Rancho San Antonio
Retirement Housing Corporation 8,713 (26)
Investment in Forum Retirement Partners, L.P.,
net of acquired cash of $4,872 (909) -0-
Purchase of Tiffany House (3,612) -0-
Purchase of other businesses (266) -0-
Notes, investments and other receivables 151 354
Other 331 (18)
---------- ----------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 1,338 (694)
---------- ----------
Cash flows from financing activities:
Proceeds from long-term debt 407 90,303
Payments on long-term debt (1,752) (98,395)
Proceeds from issuance of common stock
and warrants, net 5,155 20,000
Deferred financing and other costs (1,386) (15)
Proceeds from Forum Retirement, Inc.'s
tender of Forum Group common stock -0- 1,861
Net proceeds from sales of cooperative
memberships in Rancho San Antonio
Retirement Housing Corporation -0- 3,614
Distributions to other partners (155) (155)
Recapitalization and tender offer costs -0- (7,235)
Resident deposits 681 2,593
Net increase in restricted cash (1,167) (2,454)
---------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,783 10,117
---------- ----------
Net increase in cash and cash equivalents 15,939 12,807
Cash and cash equivalents at beginning of period 18,331 5,817
---------- ----------
Cash and cash equivalents at end of period $ 34,270 $ 18,624
========== ==========
See Notes to Condensed Consolidated Financial Statements.
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<PAGE>
FORUM GROUP, INC., AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Without Audit)
September 30, 1994
Note A - Basis of Presentation
- ------------------------------
The balance sheet at March 31, 1994 has been derived from the audited
financial statements at that date included in the Annual Report on Form
10-K of Forum Group, Inc. ("Forum Group") filed with the Securities and
Exchange Commission for the fiscal year ended March 31, 1994, as amended
(the "1994 10-K").
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to
Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not
include all the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included.
Operating results for the six-month period ended September 30, 1994 are
not necessarily indicative of the results that may be expected for the
fiscal year ending March 31, 1995. For further information, refer to
Forum Group's consolidated financial statements as of and for the year
ended March 31, 1994, and the footnotes thereto, included in the 1994
10-K.
Certain amounts in the fiscal year 1994 condensed consolidated financial
statements have been restated to conform to the fiscal year 1995
presentation.
Note B - Changes In Consolidation
- ---------------------------------
The assets, liabilities and financial results of Rancho San Antonio
Retirement Housing Corporation ("RSARHC"), a cooperative housing
corporation which owns The Forum at Rancho San Antonio ("Rancho San
Antonio"), a continuing care community in Cupertino, California, were
included in the consolidated financial statements of Forum Group through
July 31, 1993 since Forum Group owned a majority of RSARHC's cooperative
memberships. Effective August 1, 1993, due to continued sales of
cooperative memberships, Forum Group no longer owned in excess of 50% of
the memberships, and accordingly, the financial statements of RSARHC are
no longer included in Forum Group's consolidated financial statements.
Sales of cooperative memberships totalled $101,893,000 through September
30, 1994 and profits on these sales will be recognized using the cost
recovery method. Forum Group's continuing ownership interest in RSARHC
as the owner of 14.7% of the cooperative memberships at September 30,
1994 is accounted for on the cost method. Prior to June 1, 1994, Forum
Group's continuing ownership interest in RSARHC was accounted for on the
equity method. The assets, liabilities and financial results of Rancho
San Antonio Retirement Services, Inc., the wholly-owned subsidiary of
Forum Group which operates the healthcare and assisted living components
of Rancho San Antonio, have been included in the consolidated financial
statements of Forum Group for all periods presented.
Forum Retirement Partners, L.P. ("FRP") is a publicly-traded limited
partnership which owns nine retirement communities. Forum Group is the
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<PAGE>
FORUM GROUP, INC., AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Without Audit)
September 30, 1994
parent company of FRP's general partner and has a long-term management
agreement with FRP. In addition, Forum Group has a substantial
beneficial interest in FRP. Prior to August 1, 1994, this beneficial
interest was less than 50%, and Forum Group's investment in FRP was
accounted for on the equity method. Forum Group's beneficial interest in
FRP was 56.4% effective August 1, 1994. Accordingly, as of that date,
the assets, liabilities and financial results of FRP were included in the
consolidated financial statements of Forum Group. The following pro
forma amounts summarize the effect on the condensed consolidated
statements of operations for the six months ended September 30, 1994 and
1993, as if Forum Group's beneficial interest in FRP was 56.4% on April
1, 1993:
Six Months Ended
September 30,
----------------
1994 1993
------ ------
(in thousands except
per share amounts)
Total revenues $84,095 $73,923
======= =======
Net income $10,507 $ 816
======= =======
Net income per
common and common
equivalent share $ 0.46 $ 0.06
====== ======
Note C - Investments
- --------------------
Forum Group has a 50% beneficial interest in Greenville Retirement
Community, L.P. ("GRP"), a limited partnership which owns the Stonegates
retirement community in Wilmington, Delaware. Summary financial
information for GRP as of and for the six months ended September 30, 1994
is as follows (in thousands):
Net property $ 20,308
Other assets 1,187
---------
21,495
Less liabilities 22,756
---------
Net deficit $ 1,261
=========
Revenues $ 3,240
Costs and expenses 2,780
---------
Net income $ 460
=========
Forum Group has entered into a co-investment agreement with National
Guest Homes, L.L.C. ("NGH"), a developer of assisted living facilities
targeted toward middle-income senior citizens. Forum Group's investment
in projects under construction is included in the consolidated financial
statements of Forum Group. Forum Group's investment in Forum - NGH
Operations - I, L.L.C. ("NGH Operations"), a manager of assisted living
facilities, is accounted for on the equity method.
-7-
<PAGE>
FORUM GROUP, INC., AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
AS OF AND FOR THE SIX MONTHS ENDED
September 30, 1994
Results Of Operations
- ---------------------
Forum Group operates (i) 10 retirement communities owned or leased
directly or indirectly by Forum Group, one community owned by a nonprofit
corporation, and one nursing facility owned by Forum Group (the "Owned
Communities"), (ii) 13 retirement communities owned by partnerships which
are not wholly owned by Forum Group but which are consolidated for
financial reporting purposes, including the nine communities owned by FRP
(the "Consolidated Partnership Communities"), and (iii) 2 retirement
communities owned by entities (GRP and RSARHC) which are not consolidated
for financial reporting purposes (the "Unconsolidated Communities").
RSARHC was consolidated for financial reporting purposes prior to July
31, 1993 (See Note B of the Notes to Condensed Consolidated Financial
Statements). The periods in which the financial results of the
consolidated components of Rancho San Antonio are included in the
financial statements of Forum Group are not comparable. Consequently,
Rancho San Antonio is presented separately below in order to present a
comparable disclosure of the Owned Communities' financial results.
Certain summary financial information for the Owned Communities, Rancho
San Antonio, the Consolidated Partnership Communities, and other
corporate operations ("Corporate Operations") is presented below:
Six Months Ended September 30, 1994
-----------------------------------
Consolidated
Owned Rancho Partnership Corporate
Communities San Antonio Communities Operations Totals
----------- ----------- ----------- ---------- ------
Net
Operating
Revenues $39,030 $ 2,242 $21,617 $ 42 $62,931
Operating
Expenses 25,663 2,111 13,893 521 42,188
Marketing,
General and
Administra-
tive Expense 39 0 64 3,218 3,321
Litigation
Expense 0 0 0 0 0
Depreciation 2,034 0 1,511 34 3,579
Interest
Expense 6,205 43 3,419 767 10,434
-8-
<PAGE>
FORUM GROUP, INC., AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
Six Months Ended September 30, 1993
-----------------------------------
Consolidated
Owned Rancho Partnership Corporate
Communities San Antonio Communities Operations Totals
----------- ----------- ----------- ---------- ------
Net
Operating
Revenues $35,733 $ 2,748 $12,623 $ 411 $51,515
Operating
Expenses 25,386 3,015 8,009 362 36,772
Marketing,
General and
Administra-
tive Expense 0 0 12 2,817 2,829
Litigation
Expense 0 0 0 1,262 1,262
Depreciation 1,941 879 1,000 223 4,043
Interest
Expense 1,383 707 2,004 4,786 8,880
Owned Communities. Net operating revenues for the three and six months
ended September 30, 1994 increased by $1,200,000 (6%), from $18,863,000
to $20,063,000, and by $3,297,000 (9%), from $35,733,000 to $39,030,000,
respectively, as compared to the same periods of the previous year.
These increases were primarily attributable to favorable changes in
occupancy, increased utilization of ancillary healthcare services and
increases in residency fees and charges. Combined occupancy increased
from 92% at September 30, 1993 to 94% at September 30, 1994. Operating
expenses, including marketing, general and administrative expenses and
depreciation (collectively, "Total Operating Expenses") at the Owned
Communities for the three and six months ended September 30, 1994
decreased by $71,000 (1%), from $14,058,000 to $13,987,000, and increased
by $409,000 (1%), from $27,327,000 to $27,736,000, respectively, as
compared to the same periods of the previous year. These increases were
primarily attributable to increases in occupancy, increased utilization
of ancillary healthcare services and normal inflationary increases, as
partially offset by reductions of $303,000 and $454,000, respectively,
due to a change in the estimate of workers compensation premiums. Net
Operating Income, comprised of operating revenue less Total Operating
Expenses, at the Owned Communities for the three and six months ended
September 30, 1994 increased by $1,271,000, from $4,805,000 to
$6,076,000, and by $2,888,000, from $8,406,000 to $11,294,000,
respectively, as compared to the same periods of the previous year.
Exclusive of the impact of the change in workers compensation premium
estimate discussed above, these increases constitute 81% and 74%,
respectively, of the increases in net operating revenues for the three
and six month periods, which is indicative of the degree of incremental
operating income that results from increased occupancy.
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<PAGE>
FORUM GROUP, INC., AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
Rancho San Antonio. Due to the change in financial statement
presentation discussed above in Note B of the Notes to Condensed
Consolidated Financial Statements, the financial results of Rancho San
Antonio are not comparable between fiscal periods. Therefore, no
discussion of variances regarding Rancho San Antonio is presented. Net
operating revenues for the consolidated components of Rancho San Antonio
for the three and six months ended September 30, 1994 decreased by
$85,000, from $1,248,000 to $1,163,000, and by $506,000, from $2,748,000
to $2,242,000, respectively, as compared to the same periods of the
previous year. Occupancy of the consolidated components of Rancho San
Antonio increased from 84% at September 30, 1993 to 90% at September 30,
1994. Total Operating Expenses for the consolidated components of Rancho
San Antonio for the three and six month periods decreased by $245,000,
from $1,295,000 to $1,050,000, and by $1,783,000, from $3,894,000 to
$2,111,000, respectively, as compared to the same periods of the previous
year. Net Operating Income for the consolidated components of Rancho San
Antonio for the three and six month periods ended September 30, 1994
increased by $276,000, from a loss of $163,000 to income of $113,000, and
by $1,277,000, from a loss of $1,146,000 to income of $131,000, as
compared to the same periods of the previous year.
Consolidated Partnership Communities. Due to the change in financial
statement presentation regarding consolidation of the FRP Communities
discussed above in Note B of the Notes to Condensed Consolidated
Financial Statements, the financial results of the Consolidated
Partnership Communities are not comparable between fiscal periods.
Therefore, no discussion of variances regarding the Consolidated
Partnership Communities is presented. Net operating revenues for the
three and six months ended September 30, 1994 increased by $8,444,000
(130%), from $6,500,000 to $14,944,000, and by $8,994,000 (71%), from
$12,623,000 to $21,617,000, respectively, as compared to the same periods
of the previous year. Combined occupancy of the Consolidated Partnership
Communities increased from 92% at September 30, 1993 to 94% at September
30, 1994. Total Operating Expenses for the Consolidated Partnership
Communities for the three and six months ended September 30, 1994
increased by $6,264,000 (136%), from $4,595,000 to $10,859,000, and by
$6,447,000 (71%), from $9,021,000 to $15,468,000, respectively, as
compared to the same periods of the previous year. Net Operating Income
for the Consolidated Partnership Communities for the three and six months
ended September 30, 1994 increased by $2,180,000, from $1,905,000 to
$4,085,000, and by $2,547,000, from $3,602,000 to $6,149,000,
respectively, as compared to the same periods of the previous year.
Corporate Operations. Changes in corporate operations were not material
to Forum Group's results of operations for the three and six months ended
September 30, 1994.
Unconsolidated Communities. Forum Group's equity in the earnings of
unconsolidated entities is reflected as other revenues. Forum Group's
equity in the earnings of FRP improved from $27,000 and $57,000 for the
three and six months ended September 30, 1993, to $122,000 and $71,000
for the three and six months ended September 30, 1994, respectively.
Forum Group's equity in the losses of the unconsolidated component of
Rancho San Antonio improved from $273,000 for the three and six months
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<PAGE>
FORUM GROUP, INC., AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
ended September 30, 1993 to $-0- and $111,000 for the three and six
months ended September 30, 1994, respectively. Due to the changes in
financial statement presentation regarding FRP and Rancho San Antonio
discussed above in Note B of the Notes to Condensed Consolidated
Financial Statements, the equity adjustments for those entities are not
comparable between fiscal periods. Forum Group's equity in the earnings
of GRP improved from $78,000 and $144,000 for the three and six months
ended September 30, 1993, to $107,000 and $187,000 for the three and six
months ended September 30, 1994, respectively. Forum Group's equity in
the losses of Forum - NGH Operations - I, L.L.C. for the three and six
months ended September 30, 1994 was $28,000.
Consolidated Marketing, General and Administrative Expenses. For the
three and six months ended September 30, 1994, consolidated marketing,
general and administrative expenses increased by $483,000, from
$1,256,000 to $1,739,000, and by $492,000, from $2,829,000 to $3,321,000,
respectively, as compared to the comparable periods in fiscal 1994.
These increases are primarily attributable to (i) the absence of the FRP
future service liability income recognition due to recognizing FRP's
management fee income, (ii) increased costs associated with Rancho San
Antonio, and (iii) increased home office staff.
Management Fees. For the three and six months ended September 30, 1994,
management fee income increased by $361,000, from $147,000 to $508,000
and by $1,353,000, from $250,000 to $1,603,000, respectively. These
increases are primarily attributable to the recognition of management fee
income (i) due from FRP for periods subsequent to December 31, 1993 but
prior to August 1, 1994 (see Note B of the Notes to Condensed
Consolidated Financial Statements), and (ii) due from RSARHC for periods
subsequent to July 31, 1993. Pursuant to the terms of the management
agreement between Forum Group and FRP, management fees for periods prior
to December 31, 1993 have been deferred, and have not been recognized as
income by Forum Group.
Investment and Other Income. For the three and six months ended
September 30, 1994, investment and other income increased $580,000, from
$237,000 to $817,000, and $506,000, from $563,000 to $1,069,000,
respectively, as compared to the comparable periods of fiscal 1994.
These increases are primarily attributable to (i) increases in investment
income ($168,000 and $280,000 for the three and six month periods,
respectively), and (ii) increases in Forum Group's equity in the earnings
of unconsolidated entities ($368,000 and $191,000, respectively) which
are discussed above as Unconsolidated Communities.
Litigation Expenses. During the six months ended September 30, 1993,
expenses of $1,262,000 were incurred in conjunction with certain
litigation related to Forum Group's June, 1993 recapitalization (the "FGI
Recapitalization").
Depreciation. For the three and six months ended September 30, 1994,
consolidated depreciation expense increased by $241,000 and decreased by
$464,000, respectively, compared to the comparable periods in the
previous year. These changes reflect the August 1, 1994 consolidation of
FRP and fixed asset additions over the last twelve months, as offset by
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<PAGE>
FORUM GROUP, INC., AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
RSARHC no longer being a consolidated entity.
Interest Expense. Interest expense attributable to the Owned
Communities, Consolidated Partnership Communities and Corporate
Operations increased by $1,463,000, from $4,292,000 to $5,755,000, and by
$2,218,000, from $8,173,000 to $10,391,000, during the three and six
months ended September 30, 1994, respectively. These changes are
primarily attributable to the consolidation of FRP and changes in average
borrowing costs.
Gains From Sales of Cooperative Memberships. During the three and six
months ended September 30, 1994, $4,197,000 of pre-tax gains were
recognized from the sales of memberships in RSARHC (the "RSA Gains"). As
RSA Gains are generated solely from the initial sale of memberships in
RSARHC, and as the number of available initial memberships is finite,
these gains are of a non-recurring nature and there can be no assurance
as to the timing or amount of future RSA Gains.
Minority Interests. The increases of $298,000 and $1,312,000 in the
minority interests' elimination for the three and six months,
respectively, ended September 30, 1994 compared to the same period of the
prior fiscal year, resulted primarily from improved operating results and
a change in the method of accounting for Forum Group's minority ownership
of RSARHC (see Note B of the Notes to Condensed Consolidated Financial
Statements).
Income Taxes. On April 1, 1993, Forum Group adopted Financial Accounting
Standards No. 109, Accounting for Income Taxes, and has reported the
cumulative effect of that change in the method of accounting for income
taxes in the March 31, 1994 and September 30, 1994 condensed consolidated
financial statements.
As of September 30, 1994, income tax loss carryforwards for tax purposes
were estimated to be approximately $20,000,000 after the application of
certain loss carryforward limitations resulting from a second change in
ownership within two years of Forum Group's reorganization. These tax
loss carryforwards will expire in varying amounts through fiscal year
2009. For financial reporting purposes, the future benefit of tax loss
carryforwards arising prior to the reorganization is reported as
additional paid-in-capital.
During the quarter and six months ended September 30, 1994, the condensed
consolidated statements of operations contained a provision for income
taxes of $2,000,000, including $750,000 related to the benefit of pre-
organization tax loss carryforwards which was added to paid-in-capital.
Extraordinary Charge. During the six months ended September 30, 1993 an
extraordinary charge of $412,000 was recorded to reflect expenses
related to the early extinguishment of debt in conjunction with the FGI
Recapitalization.
Net Income/Loss Per Share. The three and six months ended September 30,
1994 produced net income of $6,005,000 ($0.26 per share of common stock
of Forum Group ("Common Share")) and $8,081,000 ($0.35 per Common Share),
-12-
<PAGE>
FORUM GROUP, INC., AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
respectively, compared to net income of $861,000 ($0.05 per Common Share)
and a net loss of $755,000 ($0.06 per Common Share), respectively, for
the three and six months ended September 30, 1993. Net income of the
current quarter and six-month period was favorably affected by non-
recurring pre-tax gains of $4,197,000 ($0.14 per Common Share) from the
sales of cooperative memberships in RSARHC, which has 85% of its
memberships sold. The prior year six-month period was adversely affected
by litigation expense of $1,262,000 ($0.09 per Common Share), and an
extraordinary charge due to the early extinguishment of debt of $412,000
($0.03 per Common Share). Without these three items, net income for the
current six-month period would have been $0.21 per Common Share compared
to $0.06 per Common Share for the six-month period of the prior fiscal
year.
All per share data are based upon the weighted average number of common
and common equivalent shares outstanding for the relevant periods.
Financial Condition
- -------------------
Recapitalization. In June, 1993 Forum Group consummated a substantial
recapitalization pursuant to a series of agreements and modifications
thereto (collectively, the "Acquisition Agreement") with a group of
investors (the "Investors"). Pursuant to the Acquisition Agreement, the
Investors commenced a tender offer on July 27, 1993 whereby the Investors
offered to purchase Common Shares from shareholders of Forum Group (other
than Forum Group) for $3.62 per share (the "Investors' Tender Offer").
As a result of this recapitalization, including the Investors' Tender
Offer, the Investors acquired approximately 71.7% of the outstanding
Common Shares. For a more thorough discussion of this recapitalization,
see the 1994 10-K.
On February 1, 1994 proceeds of a refinancing loan (the "Refinancing
Loan") of $93,301,000 were used to (i) retire certain indebtedness
incurred pursuant to Forum Group's recapitalization, (ii) pay expenses
totalling approximately $10,366,000, including $7,427,000 related to the
purchase of an interest rate cap agreement from a financial institution
(the "Interest Rate Cap Agreement"), and (iii) pay premiums, related to
the prepayment of certain senior subordinated notes, totalling
$3,000,000. The Refinancing Loan requires monthly payments of principal
based on a 25 year amortization to maturity on February 1, 2001, and
bears interest at a floating rate equal to the 30 day LIBOR rate plus
4.18%. The interest rate is effectively capped at 8.805% per annum by the
Interest Rate Cap Agreement.
-13-
<PAGE>
FORUM GROUP, INC., AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
As a result of the above-described transactions, Forum Group's long term
debt as of September 30, 1994 was as set forth below (in thousands):
Forum Group, Inc. (Owned Communities and Corporate Operations):
Refinancing Loan $ 92,628
Senior Subordinated Notes 10,000
Mortgages and Capitalized Leases 22,919
Other 4,453
--------
Total Owned Communities and Corporate Operations (1) 130,000
Consolidated Partnership Communities (2) 125,674
--------
Total $255,674
========
(1) Excludes indebtedness aggregating $4,260,000 of GRP, $533,000 of
which is recourse to Forum Group.
(2) These obligations are non-recourse to Forum Group.
Liquidity And Capital Resources. At September 30, 1994, Forum Group had
cash and cash equivalents of $34,270,000, accounts receivable of
$9,201,000 and notes, investments and other receivables of $3,901,000.
Forum Group intends to seek to grow through the acquisition of additional
properties and other assets, and believes that its liquidity and the
capital resources available to it are adequate to meet its foreseeable
working capital and strategic growth requirements.
On September 15, 1994, Forum Group entered into an acquisition loan
facility (the "Acquisition Facility") with Nomura Asset Capital
Corporation ("Nomura") providing for up to $100 million in new debt
financing (the "Acquisition Loan"), the proceeds of which would be used,
together with equity to be provided by Forum Group, to fund the
acquisitions of skilled nursing home, assisted living and other senior
housing properties, and associated fees and capital reserves. Under the
Acquisition Facility, Nomura will advance $2.00 of debt financing for
each $1.00 of equity capital invested by Forum Group, which equity is
presently expected to be obtained from liquid assets, future offering of
additional Common Shares to shareholders (including the Investors), cash
from operations (including cash from sales of memberships in existing
RCs, primarily Rancho San Antonio), or a combination of the foregoing.
During the 24-month period in which amounts can be drawn under the
Acquisition Loan (the "Funding Period"), Forum Group has the right,
subject to the satisfaction of certain conditions, to convert the
indebtedness thereunder to seven-year debt under either a fixed or
floating interest rate structure. During such period, Forum Group may
repay such indebtedness using proceeds from other financing sources, if
any such financing becomes available on more favorable terms. Absent
conversion or refinancing, interest on the Acquisition Loan is payable
monthly in arrears at LIBOR plus 3.35%, exclusive of servicing costs.
Forum Group has an option permitting it to increase the borrowings
against the properties acquired if, at the end of 24 months after the
initial closing of the Acquisition Loan, the debt service coverage
computed on a trailing 12-month basis exceeds certain thresholds, in
which event the increased borrowings could be used to fund Forum Group's
-14-
<PAGE>
FORUM GROUP, INC., AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
growth or for other corporate purposes. There can be no assurance that
any acquisitions will be completed or, if so, as to the timing or terms
thereof. Moreover, Nomura's obligation to provide financing under the
Acquisition Facility is subject to a number of conditions, and there can
be no assurance that such conditions will be satisfied.
On July 5, 1994 Forum Group announced that it had entered into a co-
investment agreement with NGH. Under the terms of this agreement, Forum
Group has the right during the next 10 years to provide or arrange for up
to $250 million in debt or equity capital to develop assisted living
projects, expected to be built for approximately $5 million per project.
The projects would be managed by NGH Operations. Pursuant to the terms
of this co-investment agreement, NGH has one project (located in Austin,
Texas) currently under construction, and has two other projects (located
in Houston, Texas and Indianapolis, Indiana) in the preliminary stages of
development.
Forum Group is continuing a detailed feasibility study of the possible
expansion of certain of its properties in an effort to further increase
operating income. A preliminary study has identified several attractive
expansion opportunities, which could increase the number of living units
owned by Forum Group. Any expansion would likely modify the uses of, or
add capacity to, existing facilities without incurring substantial land
acquisition and common area build-out costs. Any significant expansion
may require Forum Group to modify existing financing and obtain
regulatory approvals.
On August 31, 1994, Forum Group purchased the real property, health care
contracts, and certain personal property associated with Tiffany House
("Tiffany"), a congregate care facility comprising 104 assisted living
units located in Fort Lauderdale, Florida, for a purchase price of
$3,600,000. Tiffany will be managed by the former owner through at least
December 31, 1994. In addition, Forum Group is concluding the
acquisition of a company which manages five retirement communities.
Cash Flow. Operating activities for the six months ended September 30,
1994 provided $12,818,000 of cash compared to $3,384,000 of cash provided
by operating activities during the comparable period of 1993, due
principally to improved operating results and the previously disclosed
changes in consolidation.
Investing activities provided $1,338,000 of cash during the six months
ended September 30, 1994, compared to $694,000 of cash used by investing
activities during the comparable period of 1993, due principally to
proceeds from the sales of memberships in RSARHC, partially offset by
additions to property and equipment, the purchase of Tiffany and the
investment in NGH Operations.
Financing activities provided $1,783,000 of cash during the six months
ended September 30, 1994, compared to $10,117,000 of cash provided by
financing activities during the comparable period of 1993, due
principally to the impact of the FGI Recapitalization.
-15-
<PAGE>
PART II, OTHER INFORMATION
FORUM GROUP, INC. AND SUBSIDIARIES
SEPTEMBER 30, 1994
Item 1. Legal Proceedings.
- ------- ------------------
Forum/Classic Claims. On April 29, 1993, Forum/Classic, L.P.
("Forum Classic"), Dalfort Corporation ("Dalfort"), Diamond Investments,
Ltd. and Morris Weiser (collectively, the "Forum/Classic Plaintiffs")
filed suit in the Superior Court of Marion County, Indiana, against Forum
Group, the persons who then comprised the Board (the "Director
Defendants"), and certain of the FGI Investors (collectively, the
"Investor Defendants"). The Forum/Classic Plaintiffs alleged, among
other things, that the Director Defendants breached their fiduciary
duties by entering into the Acquisition Agreement (as originally in
effect) and that the Investor Defendants knowingly participated in such
alleged breaches of fiduciary duties. The Forum/Classic Plaintiffs
further alleged that Forum Group breached an alleged contract to enter
into certain transactions proposed by Forum/Classic and Dalfort and that
the Investor Defendants induced such breach and interfered with an
alleged business relationship between Forum/Classic and Dalfort and Forum
Group. The Forum/Classic Plaintiffs sought on behalf of themselves and
alleged other similarly situated shareholders, various forms of relief,
including injunctive relief, compensatory damages, recovery of attorneys'
fees and expenses. On June 4, 1993, the presiding court entered an order
(the "Order") enjoining the defendants from taking action to consummate
the Non-Liquidity Transaction but otherwise permitting the defendants to
proceed with the transactions contemplated by the Acquisition Agreement,
provided that it was modified to provide for the Liquidity Transaction.
The court also concluded that (i) the decision by the Forum Group's Board
of Directors to enter into the agreement in principle relating to the
1993 Recapitalization was made in good faith after reasonable
investigation, the agreement in principle was conclusively presumed to be
valid, and Forum Group was bound thereby and (ii) no contract existed
between Forum Group and Forum/Classic or Dalfort. On June 11, 1993, the
Forum/Classic Plaintiffs filed a motion (the "Contempt Motion") to find
Forum Group and the Investor Defendants in contempt of the Order. The
court denied the Contempt Motion but it amended the Order to clarify that
the Liquidity Transaction had to provide for the payment of $3.62 per
Common Share without adjustment. The Forum/Classic Plaintiffs appealed
the Order, which appeal was dismissed on procedural grounds. On May 24,
1994, the Forum/Classic Plaintiffs requested permission from the trial
court to file a supplemental complaint alleging, among other things, that
certain aspects of the Agreement in Principle and the Acquisition
Agreement were unlawful and that the Director Defendants breached their
fiduciary duties in entering into and consummating the transaction with
the Investor Defendants and seeking compensatory and punitive damages
Pursuant to a letter agreement, dated June 8, 1994, the Forum/Classic
Plaintiffs have agreed, subject to obtaining all necessary court
approvals and the execution of all necessary documentation, to a
dismissal with prejudice of all claims against all defendants in the
above-described litigation in return for the payment and reimbursement of
a portion, not to exceed $500,000, of the Forum/Classic Plaintiffs'
attorneys' fees. On July 9, 1994, the parties to this litigation filed a
stipulation of settlement with the court. Pursuant to the stipulation,
Forum Group's shareholders were notified in writing of the terms of the
settlement. Following a hearing on August 29, 1994, the trial court
approved the settlement and issued its order dismissing the claims.
-16-
<PAGE>
PART II, OTHER INFORMATION
FORUM GROUP, INC. AND SUBSIDIARIES
SEPTEMBER 30, 1994
(continued)
Pursuant to the settlement agreement, the Forum/Classic Plaintiffs, Forum
Group and the Investor Defendants have executed the stipulation of
settlement and Forum Group has paid the Forum/Classic Plaintiffs
$500,000. One director defendant has declined to execute the stipulation
because of a dispute with another director defendant.
Maddock Litigation. On May 7, 1992, Charles S. Maddock, a resident
of Stonegates, a condominium RC in Greenville, Delaware, instituted an
action against Greenville Retirement Community, L.P. ("GRP"), the
developer and managing agent of, and owner of the service units (i.e.,
nursing, kitchen and dining facilities) at, Stonegates, in the Court of
Chancery of the State of Delaware in and for New Castle County ("State
Court Action"). Forum Group is the sole general partner of, and the
owner of a 50% beneficial interest in, GRP. Forum Group is also the
operator and manager of Stonegates pursuant to an operation and
management agreement with GRP under which, inter alia, GRP delegated to
Forum Group all of GRP's duties and responsibilities as managing agent of
Stonegates. Mr. Maddock alleges that (i) GRP violated the condominium
declaration and plan by using two condominium apartment units for a sales
office, a dining room and a healthcare unit, by moving the door to the
nursing facility, and by purportedly reserving other condominium
apartment units for persons requiring assisted living care; (ii) GRP
failed to pay its share of condominium common expenses; (iii) GRP
violated its obligation to operate and maintain Stonegates according to
the highest standards achievable consistent with its overall plan for
Stonegates, and otherwise violated its management agreement with the
condominium council; (iv) there is no justification for GRP's right to
appoint three of the five members of the condominium council; and (v)
GRP's option to repurchase condominium units, as well as the requirement
that a condominium unit owner be a party to a residence agreement with
GRP, are unreasonable restraints on alienation of property. By way of
prayer for relief, Mr. Maddock seeks that (i) GRP be required to restore
the two condominium apartment units to their former use, and to bear all
costs of the initial change of use and the restoration; (ii) GRP be
enjoined from reserving condominium apartment units for persons requiring
assisted living care; (iii) GRP be required to account for and pay its
share of condominium common expenses; (iv) the management agreement
between the condominium council and GRP, and the operation and management
agreement between GRP and Forum Group, be terminated; (v) GRP's right to
appoint three of the five members of the condominium council be declared
invalid; and (vi) GRP's option to repurchase condominium units, as well
as the requirement that a condominium unit owner be a party to a
residence agreement with GRP, be declared invalid. On August 21, 1992,
Forum Group instituted an action in the Bankruptcy Court (the "Bankruptcy
Court Action") alleging that the relief requested in the State Court
Action effectively asserts a claim against Forum Group, the assertion of
which is barred under the terms of the Reorganization Plan, and
requesting injunctive relief preventing the further prosecution of the
State Court Action. On September 17, 1993, the Bankruptcy Court issued
an order permanently enjoining Mr. Maddock from pursuing the State Court
Action. Mr. Maddock appealed the Bankruptcy Court's decision, and on
August 30, 1994, the appeals court vacated the injunction and remanded
-17-
<PAGE>
PART II, OTHER INFORMATION
FORUM GROUP, INC. AND SUBSIDIARIES
SEPTEMBER 30, 1994
(continued)
the matter to the Bankruptcy Court for further proceedings. The
Bankruptcy Court has scheduled a hearing on the matter on December 13,
1994.
Item 4. Submission of Matters to a Vote of Security Holders.
- ------- ----------------------------------------------------
(a) The annual meeting of stockholders of Forum Group (the "Annual
Meeting") was held on September 13, 1994.
(b) The stockholders voted on the following items at the Annual
Meeting:
(i) The stockholders approved the election of the following
persons to serve as directors until the next annual meeting
of stockholders of Forum Group: Robert A. Whitman, Peter
P. Copses, Daniel A. Decker, James E. Eden, Asher O.
Pacholder, William G. Petty, Jr., Antony P. Ressler,
D. Ellen Shuman, Eric B. Siegel, Merlin C. Spencer, and
George D. Woodard. 16,425,013 Common Shares were voted at
the Annual Meeting, all of which were voted in favor of the
election of each of the foregoing persons.
(ii) The stockholders also (i) approved the following amendments
to Forum Group's Articles of Incorporation: (a) the
deletion of certain provisions which prohibit the issuance
of nonvoting securities; (b) an amendment relating to the
indemnification of directors and officers of Forum Group;
and (c) an amendment relating to the definition of
"Continuing Directors", (ii) approved an Equity Incentive
Plan for officers and employees of Forum Group; and (iii)
ratified the appointment of KPMG Peat Marwick LLP as
independent accountants to examine the consolidated
financial statements of Forum Group for the fiscal year
ending March 31, 1995. 16,425,013 Common Shares voted in
favor of the foregoing matters; none voted against or
abstained.
Item 6. Exhibits and Reports on Form 8-K.
- ------- ---------------------------------
Exhibits:
None.
Reports on Form 8-K:
None.
-18-
<PAGE>
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FORUM GROUP, INC.
Date: November 9, 1994 By: \s\ Paul A. Shively
-------------------------------
Paul A. Shively
Senior Vice President and Treasurer
-19-
<PAGE>
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<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1995
<PERIOD-END> SEP-30-1994
<CASH> 34,270
<SECURITIES> 0
<RECEIVABLES> 9,771
<ALLOWANCES> 570
<INVENTORY> 0
<CURRENT-ASSETS> 47,433
<PP&E> 310,213
<DEPRECIATION> 15,106
<TOTAL-ASSETS> 377,668
<CURRENT-LIABILITIES> 23,196
<BONDS> 255,674
<COMMON> 58,270
0
0
<OTHER-SE> 18,406
<TOTAL-LIABILITY-AND-EQUITY> 377,668
<SALES> 0
<TOTAL-REVENUES> 65,603
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