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 June 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 August 9, 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 --
June 30 and March 31, 1994 3
Condensed consolidated statements of operations --
Three months ended June 30, 1994 and 1993 4
Condensed consolidated statements of cash flows --
Three months ended June 30, 1994 and 1993 5
Notes to condensed consolidated financial statements --
June 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 15
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
- - ----------
-2-
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
-----------------------------
FORUM GROUP, INC., AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Without Audit)
June 30, March 31,
1994 1994
------------- ------------
(in thousands)
ASSETS
------
Property and equipment:
Land and improvements $ 34,518 $ 34,505
Buildings and leasehold improvements 176,516 176,209
Furniture and equipment 13,251 13,046
----------- -----------
224,285 223,760
Less accumulated depreciation and amortization 13,103 11,600
----------- -----------
211,182 212,160
Investments:
Forum Retirement Partners, L.P. 12,403 12,420
Greenville Retirement Community, L.P. 3,649 3,614
Rancho San Antonio Retirement Housing
Corporation 558 7,228
Other 55 0
----------- -----------
16,665 23,262
----------- -----------
Cash and cash equivalents 33,865 18,331
Accounts receivable, less allowance for doubtful
accounts of $359 and $277 5,990 5,246
Notes, investments and other receivables 4,175 5,717
Management fees receivable 972 964
Restricted cash 10,510 9,992
Deferred costs and other assets, net 13,794 14,528
----------- -----------
$ 297,153 $ 290,200
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Liabilities:
Long-term debt, including $3,718 due
within one year $ 204,463 $ 205,094
Trade accounts payable 2,070 2,332
Accrued expenses 12,304 12,523
Resident deposits and refundable resident fees 17,782 17,253
Deferred income 7,364 7,041
----------- -----------
Total Liabilities 243,983 244,243
Other partners' equity 1,655 1,673
Shareholders' equity:
Common stock, no par value - authorized 48,000
shares, issued 22,500 and 21,262 shares 63,928 58,773
Accumulated deficit (12,413) (14,489)
----------- -----------
Total Shareholders' Equity 51,515 44,284
----------- -----------
$ 297,153 $ 290,200
=========== ===========
See Notes to Condensed Consolidated Financial Statements.
-3-
<PAGE>
FORUM GROUP, INC., AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Without Audit)
Three Months Ended
June 30,
-------------------------
1994 1993
----------- -----------
(in thousands except
per share amounts)
Revenues:
Net operating revenues $ 26,743 $ 24,673
Management fees 1,094 103
Investment and other income 253 325
----------- -----------
TOTAL REVENUES 28,090 25,101
----------- -----------
Costs and expenses:
Operating expenses 19,083 18,565
General and administrative expenses 688 967
Litigation expense 0 1,080
Depreciation 1,527 2,232
----------- -----------
TOTAL COSTS AND EXPENSES 21,298 22,844
----------- -----------
6,792 2,257
Interest expense (4,656) (4,414)
----------- -----------
Income (loss) before minority interests
and extraordinary charge 2,136 (2,157)
Minority interests (60) 956
----------- -----------
Income (loss) before extraordinary charge 2,076 (1,201)
Extraordinary charge - early extinguishment
of debt 0 (415)
----------- -----------
NET INCOME (LOSS) 2,076 (1,616)
ACCUMULATED DEFICIT AT BEGINNING OF PERIOD (14,489) (7,359)
----------- -----------
ACCUMULATED DEFICIT AT END OF PERIOD $ (12,413) $ (8,975)
=========== ===========
Average number of common and common equivalent
shares outstanding 22,764 9,320
=========== ===========
Net (income) loss per common and common
equivalent share (primary and fully diluted):
Income (loss) before extraordinary charge $ 0.09 $ (0.13)
Extraordinary charge 0.00 (0.04)
----------- -----------
Net income (loss) $ 0.09 $ (0.17)
=========== ===========
See Notes to Condensed Consolidated Financial Statements.
-4-
<PAGE>
FORUM GROUP, INC., AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Without Audit)
Three Months Ended
June 30,
-------------------------
1994 1993
---------- ----------
(in thousands)
Cash flows from operating activities:
Net income (loss) $ 2,076 $ (1,616)
Adjustments to reconcile net income (loss)
to cash provided by operating activities:
Depreciation and amortization 1,527 2,233
Amortization of deferred financing costs 580 141
Other partners' and cooperative members'
interest in losses (earnings)
of consolidated companies 60 (956)
Net (income) losses of investments accounted
for using the equity method 82 (95)
Other accrued revenues and expenses 806 1,161
Non-cash portion of extraordinary charge 0 270
---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 5,131 1,138
---------- ----------
Cash flows from investing activities:
Additions to property and equipment (525) (391)
Net proceeds from sales of investment in
Rancho San Antonio Retirement Housing Corporation 6,554 0
Notes, investments and other receivables 104 130
Other 47 37
---------- ----------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 6,180 (224)
---------- ----------
Cash flows from financing activities:
Proceeds from long-term debt 203 90,282
Payments on long-term debt (843) (97,521)
Proceeds from issuance of common stock
and warrants, net 5,156 20,000
Deferred financing and other costs (227) (9)
Proceeds from cooperative memberships 0 2,575
Distribution to other partners (77) (77)
Recapitalization and tender offer costs 0 (5,729)
Resident deposits 529 1,001
Net increase in restricted cash (518) (1,454)
---------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 4,223 9,068
---------- ----------
Net increase in cash and cash equivalents 15,534 9,982
Cash and cash equivalents at beginning of period 18,331 5,723
---------- ----------
Cash and cash equivalents at end of period $ 33,865 $ 15,705
========== ==========
See Notes to Condensed Consolidated Financial Statements.
-5-
<PAGE>
FORUM GROUP, INC., AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Without Audit)
June 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 (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 three-month period ended June 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.
Note B - Change In Consolidation
- - --------------------------------
The assets, liabilities and financial results of Rancho San Antonio
Retirement Housing Corporation ("RSARHC"), a cooperative 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 $96,500,000 through June 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 18.8% of the cooperative memberships at June 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.
Note C - Investments
- - --------------------
Forum Group has a 43.2% beneficial interest in Forum Retirement Partners,
L.P. ("FRP"), a publicly-traded limited partnership which owns nine
retirement communities. In addition, Forum Group is the parent company of
FRP's general partner and has a long-term management contract with
-6-
<PAGE>
FORUM GROUP, INC., AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Without Audit)
June 30, 1994 (continued)
FRP. Summary financial information for FRP as of and for the three months
ended June 30, 1994 is as follows (in thousands):
Net property $ 97,625
Other assets 14,127
---------
111,752
Less liabilities 73,125
---------
Net assets $ 38,627
=========
Revenues $ 11,439
Costs and expenses 11,404
---------
Net income $ 35
=========
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 three months ended June 30, 1994 is
as follows (in thousands):
Net property $ 20,423
Other assets 939
---------
21,362
Less liabilities 22,409
---------
Net deficit $ 1,047
=========
Revenues $ 1,613
Costs and expenses 1,400
---------
Net income $ 213
=========
-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 THREE MONTHS ENDED
June 30, 1994
Results Of Operations
- - ---------------------
Forum Group operates (i) 10 retirement communities, including one
community owned by a nonprofit Arizona corporation, and one nursing
facility, owned or leased directly or indirectly by Forum Group (the
"Owned Communities") , (ii) four retirement communities owned by
partnerships which are not wholly owned by Forum Group but which are
consolidated for financial reporting purposes (the "Consolidated
Partnership Communities"), (iii) 11 retirement communities owned by
entities which are not consolidated for financial reporting purposes (the
"Unconsolidated Communities"), including nine communities owned by FRP,
one owned by GRP, and one owned by RSARHC (which 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 other entities'
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:
Three Months Ended June 30, 1994
--------------------------------
Consolidated
Owned Rancho Partnership Corporate
Communities San Antonio Communities Operations Totals
Net ----------- ----------- ----------- ---------- ------
Operating
Revenues $18,967 $ 1,079 $ 6,673 $ 24 $26,743
Operating
Expenses 12,740 1,061 4,080 1,202 19,083
General and
Administra-
tive Expense 0 0 16 672 688
Litigation
Expense 0 0 0 0 0
Depreciation 1,009 0 513 5 1,527
Interest
Expense 3,045 20 1,230 361 4,656
-8-
<PAGE>
FORUM GROUP, INC., AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
Three Months Ended June 30, 1993
--------------------------------
Consolidated
Owned Rancho Partnership Corporate
Communities San Antonio Communities Operations Totals
Net ----------- ----------- ----------- ---------- ------
Operating
Revenues $16,870 $ 1,500 $ 6,123 $ 180 $24,673
Operating
Expenses 12,306 1,720 3,921 618 18,565
General and
Administra-
tive Expense 0 0 6 961 967
Litigation
Expense 0 0 0 1,080 1,080
Depreciation 963 763 499 7 2,232
Interest
Expense 653 533 1,000 2,228 4,414
Owned Communities. Net operating revenues for the three months ended
June 30, 1994 increased by $2,097,000 (12%), from $16,870,000 to
$18,967,000, as compared to the same period of the previous year. This
increase was primarily attributable to favorable changes in occupancy,
increased utilization of ancillary healthcare services and increases in
residency fees and charges. Combined occupancy increased from 91% at
June 30, 1993 to 94% at June 30, 1994. Operating expenses, including
general and administrative expenses and depreciation (collectively,
"Total Operating Expenses"), for the three months ended June 30, 1994 at
the Owned Communities increased by $480,000 (4%), from $13,269,000 to
$13,749,000, as compared to the same period of the previous year. This
increase was primarily attributable to the increase in occupancy,
increased utilization of ancillary healthcare services and normal
inflationary increases, as partially offset by a reduction of $239,000
due to a change in the estimate of workers compensation premiums. Net
Operating Income, comprised of operating revenue less Total Operating
Expenses, for the three months ended June 30, 1994 at the Owned
Communities increased by $1,617,000, from $3,601,000 to $5,218,000, as
compared to the same period of the previous year. Exclusive of the
impact of the change in workers compensation premium estimate discussed
above, this increase constitutes 66% of the increase in net operating
revenues for the quarter, which is indicative of the degree of
incremental operating income that results from increased occupancy.
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
-9-
<PAGE>
FORUM GROUP, INC., AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
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 months ended June 30, 1994 decreased by $421,000, from
$1,500,000 to $1,079,000, as compared to the same period of the previous
year. Occupancy of the consolidated components of Rancho San Antonio
increased from 61% at June 30, 1993 to 87% at June 30, 1994. Total
Operating Expenses for the consolidated components of Rancho San Antonio
for the three month period decreased by $1,422,000, from $2,483,000 to
$1,061,000, as compared to the same period of the previous year. Net
Operating Income for the consolidated components of Rancho San Antonio
for the three month period ended June 30, 1994 increased by $1,001,000,
from a loss of $983,000 to income of $18,000, as compared to the same
period of the previous year.
Consolidated Partnership Communities. Net operating revenues for the
three months ended June 30, 1994 increased by $550,000 (9%), from
$6,123,000 to $6,673,000, as compared to the same period of the previous
year. This increase was primarily attributable to increased occupancy,
increased utilization of ancillary healthcare services, and increases in
residency fees and charges. Combined occupancy increased from 89% at
June 30, 1993 to 91% at June 30, 1994. Total Operating Expenses for the
Consolidated Partnership Communities for the three months ended June 30,
1994 increased by $183,000 (4%), from $4,426,000 to $4,609,000, as
compared to the same periods of the previous year. This increase was
primarily attributable to the increase in occupancy, increased
utilization of ancillary healthcare services and to normal inflationary
increases. Net Operating Income for the Consolidated Partnership
Communities for the three months ended June 30, 1994 increased by
$367,000, from $1,697,000 to $2,064,000, as compared to the same period
of the previous year. This increase constitutes 67% of the increase in
net operating revenues for the three months ended June 30, 1994, which is
indicative of the degree of incremental profits that result from
increased occupancy.
Corporate Operations. Revenues for the three months ended June 30, 1994
decreased $156,000, from $180,000 to $24,000, compared to the same period
of the previous year. Revenues are primarily comprised of rental income
from certain residential units of Rancho San Antonio ($166,000 and
$1,000, respectively) and a change in the estimate of amounts
reimbursable to third party payors from prior years for sold operations
($23,000). Operating expenses ($1,202,000), general and administrative
expenses ($672,000) and depreciation ($5,000) for the three months ended
June 30, 1994 increased by $293,000 as compared to the same period of the
previous year. This change reflects the absence of the FRP future
service liability income recognition of $198,000 due to recognizing FRP's
management fee income, increased costs associated with Rancho San Antonio
of $221,000 and increased home office staff ($75,000), net of decreases
in contract services ($168,000), legal ($30,000) and other general and
administrative expenses ($3,000). Marketing and unoccupied residential
expenses of Rancho San Antonio allocated to Forum Group were $664,000 and
$483,000 for the quarter ended June 30, 1994 and 1993, respectively.
Corporate Operations includes the unallocated interest expense of
corporate debt ($361,000).
-10-
<PAGE>
FORUM GROUP, INC., AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
Unconsolidated Communities. Forum Group's equity in the earnings of FRP,
which is reflected as other revenues, decreased from revenue of $30,000
for the three months ended June 30, 1993 to a charge of $51,000 for the
three months ended June 30, 1994. This decrease primarily reflects Forum
Group's equity method recognition of FRP's management fee expense, as
partially offset by improved occupancy and operating performance at the
nine retirement communities owned by FRP and managed by Forum Group.
Forum Group's equity in the earnings of GRP, which is also reported as
other revenues, increased from $65,000 for the three months ended June
30, 1993 to $80,000 for the three months ended June 30, 1994. Forum
Group's equity in the losses of the unconsolidated component of Rancho
San Antonio for the three months ended June 30, 1994 was $111,000.
Consolidated General and Administrative Expenses. For the three months
ended June 30, 1994, consolidated general and administrative expenses
decreased by $279,000, from $967,000 to $688,000, compared to the
comparable period in fiscal 1994. This decrease is primarily
attributable to (i) decreases in certain contract services and legal
expenses, and (ii) the reclassification of certain headquarters human
resource expenses from the general and administrative category to the
operations category.
Management Fees. For the three months ended June 30, 1994, management
fee income increased by $991,000, from $103,000 to $1,094,000. This
increase is primarily attributable to the recognition of management fee
income (i) due from FRP for periods subsequent to December 31, 1993, 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.
Litigation Expenses. During the three months ended June 30, 1993,
expenses of $1,080,000 were incurred in conjunction with certain
litigation related to Forum Group's June, 1993 recapitalization (the "FGI
Recapitalization").
Depreciation. For the three months ended June 30, 1994, consolidated
depreciation expense decreased by $705,000 compared to the comparable
period in the previous year. This decrease is primarily attributable to
RSARHC no longer being a consolidated entity, as partially offset by
additional fixed asset additions over the past twelve months.
Interest Expense. Interest expense attributable to the Owned
Communities, Consolidated Partnership Communities and Corporate
Operations increased by $755,000, from $3,881,000 to $4,636,000, during
the three months ended June 30, 1994. This change is primarily
attributable to changes in average borrowing costs.
Minority Interests. The decrease of $1,016,000 in the minority
interests' elimination for the three months ended June 30, 1994 compared
to the same period of the prior fiscal year, resulted 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).
-11-
<PAGE>
FORUM GROUP, INC., AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
Extraordinary Charge. During the three months ended June 30, 1993 an
extraordinary charge of $415,000 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 months ended June 30, 1994 produced
net income of $2,076,000 ($0.09 per share of common stock of Forum Group
("Common Share")) compared to net losses of $1,616,000 ($0.17 per Common
Share) for the three months ended June 30, 1993. The three month period
ended June 30, 1993 was adversely affected by $1,080,000 ($0.12 per
Common Share) of expenses related to certain litigation related to the
FGI Recapitalization and an extraordinary charge of $415,000 ($0.04 per
Common Share) related to the early extinguishment of debt.
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 the FGI
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 the FGI Recapitalization, including the Investors' Tender
Offer, the Investors acquired approximately 71.7% of the outstanding
Common Shares. For a more thorough discussion of the FGI
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 which
was incurred pursuant to the FGI Recapitalization, (ii) pay expenses
totalling approximately $10,366,000, $7,427,000 of which related to the
purchase of an interest rate cap agreement from a financial institution
(the "Interest Rate Cap Agreement"), and (iii) pay prepayment premiums
totalling approximately $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 4.3%. The interest rate is effectively capped at
8.925% per annum by the Interest Rate Cap Agreement.
As a result of the above-described transactions, Forum Group's long term
debt as of June 30, 1994 was as set forth below (in thousands):
-12-
<PAGE>
FORUM GROUP, INC., AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
Forum Group, Inc. (Owned Communities and Corporate Operations):
Refinancing Loan $ 92,898
Senior Subordinated Notes 10,000
Mortgages and Capitalized Leases 22,985
Other 2,794
--------
Total Owned Communities and Corporate Operations (1) 128,677
Consolidated Partnership Communities (2) 75,786
--------
Total $204,463
========
(1) Excludes (i) indebtedness aggregating $4,454,000 of GRP, $557,000 of
which is recourse to Forum Group.
(2) These obligations are non-recourse to Forum Group.
Liquidity And Capital Resources. At June 30, 1994, Forum Group had cash
and cash equivalents of $33,865,000, accounts receivable of $5,990,000
and notes, investments and other receivables of $4,175,000. 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 July 5, 1994 Forum Group announced that it had entered into a co-
investment agreement with National Guest Homes, L.L.C. ("NGH"), a
developer and manager of assisted living facilities targeted toward
middle-income senior citizens. Under the terms of the agreement, over a
period of up to 10 years, Forum Group would have the right 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.
Forum Group is currently conducting 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.
Forum Group has also entered into a commitment letter agreement (the
"Acquisition Commitment") 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 purchase price for
acquisitions of skilled nursing home, assisted living and other senior
housing properties. Under the acquisition facility, Nomura would 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 units in existing RCs, primarily Rancho San Antonio),
-13-
<PAGE>
FORUM GROUP, INC., AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
or a combination of the foregoing. During the 24-month period in which
amounts could be drawn to finance acquisitions under the Acquisition
Loan, Forum Group would have 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 could also repay such indebtedness using
proceeds from other financing sources, if any such financing becomes
available on more favorable terms. Forum Group would have an option that
would permit 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 exceeded certain thresholds, in which event the increased
borrowings, like any increased borrowings under the Refinancing Loan,
could be used to fund Forum Group's 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. The Acquisition
Commitment is subject to the negotiation of definitive documentation and
certain conditions. Moreover, Nomura's obligation to provide financing
under the acquisition facility, if completed, will be subject to a number
of conditions, and there can be no assurance that such conditions will be
satisfied.
Cash Flow. Operating activities for the three months ended June 30, 1994
provided $5,131,000 of cash compared to $1,138,000 of cash provided by
operating activities during the three months ended June 30, 1993, due
principally to significantly improved operating results.
Investing activities provided $6,180,000 of cash during the three months
ended June 30, 1994, compared to $224,000 of cash used by investing
activities during the three months ended June 30, 1993, due principally
to proceeds from the sales of memberships in RSARHC.
Financing activities provided $4,223,000 of cash during the three months
ended June 30, 1994, compared to $9,068,000 of cash provided by financing
activities during the comparable period of 1993, due principally to the
impact of the FGI Recapitalization.
-14-
<PAGE>
PART II. OTHER INFORMATION
FORUM GROUP, INC., AND SUBSIDIARIES
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
have been notified in writing of the terms of the settlement and that a
hearing to determine whether such settlement should be approved is
-15-
<PAGE>
PART II. OTHER INFORMATION
FORUM GROUP, INC., AND SUBSIDIARIES
(continued)
scheduled to be held on August 29, 1994.
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 has appealed the Bankruptcy Court's decision.
Knapp Litigation. On January 24, 1994, the Russell F. Knapp
Revokable Trust (the "Knapp Trust") instituted an action in the United
States District Court for the Northern District of Iowa against Forum
Retirement, adding Forum Group as a defendant on March 17, 1994,
alleging, among other things, that (i) the Knapp Trust holds a
substantial number of Forum Partners' publicly traded limited partnership
units, (ii) the Board of Directors of Forum Retirement is not comprised
-16-
<PAGE>
PART II. OTHER INFORMATION
FORUM GROUP, INC., AND SUBSIDIARIES
(continued)
of a majority of independent directors as required by Forum Partners'
partnership agreement and as allegedly represented in Forum Partners'
1986 Prospectus for its initial public offering, (iii) the allegedly
improper composition of the Board of Directors of Forum Retirement is a
consequence of actions by Forum Group, (iv) Forum Retirement's Board of
Directors has approved and/or acquiesced in 8% management fees being
charged by Forum Group under its management agreement with Forum
Partners, whereas the complaint alleges that the "industry standard" for
management fees of the type at issue is 4%, thereby resulting in an
alleged "overcharge" to Forum Partners estimated by the Knapp Trust at
$1.8 million per annum, beginning in 1994, and (v) as a consequence of
the allegedly improper composition of the Board of Directors of Forum
Retirement, Forum Group and Forum Retirement have breached Forum
Partners' partnership agreement and securities laws, and failed to
discharge fiduciary duties. The Knapp Trust is seeking the restoration
of certain former directors to the Board of Directors of Forum Retirement
and the removal of certain other directors from that Board of Directors
of Forum Retirement, an injunction prohibiting the payment of 8%
management fees and unspecified compensatory and punitive damages. Forum
Group believes that there are substantial defenses to the claims asserted
by the Knapp Trust and intends vigorously to defend against such claims;
however, there necessarily can be no assurance as to the ultimate outcome
of these proceedings.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- - ----------------------------------------
(a) Exhibits:
---------
None
(b) Reports on Form 8-K:
--------------------
None
-17-
<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: August 12, 1994 By: /s/ Paul A. Shively
--------------------------------
Paul A. Shively
Senior Vice President and Treasurer
-18-
<PAGE>
