<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For Quarter Ended September 30,1996 Commission File Number 1-9302
FORUM RETIREMENT PARTNERS, L.P.
(Exact name of registrant as specified in its charter)
DELAWARE 35-1686799
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
11320 Random Hills Road, Suite 400
Fairfax, Virginia 22030
(Address of principal executive offices) (Zip Code)
703-277-7000
(Registrant's telephone number, including area code)
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
----------- ----------
1
<PAGE>
INDEX
FORUM RETIREMENT PARTNERS, L.P. AND SUBSIDIARY PARTNERSHIP
PART I. FINANCIAL INFORMATION PAGE
- ----------------------------- ----
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets --
September 30, 1996 and December 31, 1995 3
Condensed consolidated statements of operations --
Three and nine months ended September 30, 1996
and 1995 5
Condensed consolidated statement of partners' equity --
September 30, 1996 and December 31, 1995 6
Condensed consolidated statements of cash flows --
Nine months ended September 30, 1996 and 1995 7
Notes to condensed consolidated financial statements --
September 30, 1996 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
PART II. OTHER INFORMATION
- --------------------------
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Events 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
---------------------------------
FORUM RETIREMENT PARTNERS, L.P. AND SUBSIDIARY PARTNERSHIP
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- ------------
(in thousands)
<S> <C> <C>
ASSETS
------
Current Assets:
Cash and cash equivalents $ 4,293 $ 2,960
Accounts receivable, less allowances
for doubtful accounts of $232,000 and
$227,000, respectively 3,400 3,057
Other receivables -- 30
Restricted cash (note C) 4,860 4,154
Estimated third-party settlements 861 550
Inventory and prepaid expenses 259 639
Other current assets 77 75
-------- --------
TOTAL CURRENT ASSETS 13,750 11,465
-------- --------
Property and equipment:
Land 14,871 14,867
Buildings 102,119 99,293
Furniture and equipment 9,696 9,198
Construction in progress 1,463 1,478
-------- --------
128,149 124,836
Less accumulated depreciation and
amortization (30,518) (27,630)
-------- --------
Property and Equipment, net 97,631 97,206
-------- --------
Deferred costs, net of accumulated
amortization of $990,000 and
$714,000, respectively 1,663 1,939
-------- --------
TOTAL ASSETS $113,044 $110,610
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
3
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
----------------------------
FORUM RETIREMENT PARTNERS, L.P. AND SUBSIDIARY PARTNERSHIP
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- ------------
(in thousands)
<S> <C> <C>
LIABILITIES AND PARTNERS' EQUITY
--------------------------------
Current Liabilities:
Accounts payable and accrued expenses $ 2,918 $ 4,298
Amounts due to parent of general
partner and its affiliates (note D) 4,578 1,121
Resident deposits 1,233 1,266
Current portion of long-term debt 1,102 1,023
-------- --------
Total Current Liabilities 9,831 7,708
Deferred management fees due to parent
of general partner 15,780 15,780
Long-term debt, less current portion
payable within one year 47,147 47,984
-------- --------
TOTAL LIABILITIES 72,758 71,472
-------- --------
General partners' equity in subsidiary
partnership 240 229
Partners' Equity:
General Partner 506 495
Limited Partners (15,285 units issued
and outstanding) 39,540 38,414
-------- --------
TOTAL PARTNERS' EQUITY 40,046 38,909
-------- --------
TOTAL LIABILITIES AND PARTNERS' EQUITY $113,044 $110,610
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
4
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
---------------------------------
FORUM RETIREMENT PARTNERS, L.P. AND SUBSIDIARY PARTNERSHIP
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- ------------------
1996 1995 1996 1995
--------- -------- -------- --------
(in thousands except per share amounts)
<S> <C> <C> <C> <C>
Revenues:
Routine revenue $12,088 $10,949 $35,112 $32,517
Ancillary revenue 1,429 1,424 4,593 4,314
Other income 199 114 279 267
------- ------- ------- -------
TOTAL REVENUES 13,716 12,487 39,984 37,098
------- ------- ------- -------
Costs and expenses:
Routine expenses 8,609 7,977 24,541 23,334
Ancillary costs 1,317 1,172 3,845 3,512
Management fees to parent of
general partner 1,078 972 3,170 2,929
General and administrative 11 91 465 378
Litigation 12 17 128 85
Depreciation 990 912 2,888 2,693
Interest, including amounts to parent
of general partner of $6,000,
$7,000, $18,000 and $22,000,
reespectively 1,187 1,322 3,799 3,983
------- ------- ------- -------
TOTAL COSTS AND EXPENSES 13,204 12,463 38,836 36,914
------- ------- ------- -------
Income before general partner's interest
in income of subsidiary partnership 512 24 1,148 184
General partner's interest of subsidiary
partnership 5 -- 11 1
------- ------- ------- -------
NET INCOME $ 507 $ 24 $ 1,137 $ 183
======= ======= ======= =======
General partner's interest in net income $ 5 $ --- $ 11 $ 2
======= ======= ======= =======
Limited partners' interest in net income $ 502 $ 24 $ 1,126 $ 181
======= ======= ======= =======
Average number of units outstanding 15,285 15,285 15,285 15,285
======= ======= ======= =======
Net income per unit $ 0.03 $ 0.00 $ 0.07 $ 0.01
======= ======= ======= =======
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
5
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
---------------------------------
FORUM RETIREMENT PARTNERS, L.P. AND SUBSIDIARY PARTNERSHIP
CONDENSED CONSOLIDATED STATEMENT OF PARTNERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
General Limited
Partner Partners
-------- ---------
(in thousands)
<S> <C> <C>
Balances at January 1, 1996 $ 495 $ 38,414
Net Income 11 1,126
------ --------
Balances at September 30, 1996 $ 506 $ 39,540
------ --------
Accumulated balances:
Capital contributions $1,173 $116,279
Offering costs (4) (6,715)
Cash distributions (255) (29,679)
Accumulated losses (408) (40,345)
------ --------
Balances at September 30, 1996 $ 506 $ 39,540
====== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
6
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
---------------------------------
FORUM RETIREMENT PARTNERS, L.P. AND SUBSIDIARY PARTNERSHIP
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------
1996 1995
------- -------
(in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,137 $ 183
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation of property and equipment 2,888 2,693
Amortization of deferred financing costs 276 269
Amounts due to parent of general
partner and its affiliates 3,513 (9)
Other accrued revenues and expenses, net (1,659) (41)
------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 6,155 3,095
------- -------
NET CASH USED IN INVESTING ACTIVITIES -
Additions to property and equipment (3,313) (2,121)
------- -------
Cash flows used in financing activities:
Reduction of long-term debt (758) (687)
Net increase in restricted cash (706) (1,051)
Payments on note payable to parent of general partner (45) (87)
Deferred loan costs --- (48)
------- -------
NET CASH USED IN FINANCING ACTIVITIES (1,509) (1,873)
------- -------
Net increase (decrease) in cash and 1,333 (899)
cash equivalents
Cash and cash equivalents at beginning of period 2,960 5,588
------- -------
Cash and cash equivalents at end of period $ 4,293 $ 4,689
======= =======
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
7
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
---------------------------------
FORUM RETIREMENT PARTNERS, L.P. AND SUBSIDIARY PARTNERSHIP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 1996
Note A - Basis of Presentation
- ------------------------------
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. The financial statements have been prepared using the
accounting policies described in the consolidated financial statements of Forum
Retirement Partners, L.P. and Subsidiary Partnership (the "Partnership")
included in the Partnership's Annual Report on Form 10-K for the year ended
December 31, 1995 (the "Annual Report"). The unaudited condensed consolidated
financial statements include all adjustments which are necessary, in the opinion
of management, to reflect fairly, in all material respects, the Partnership's
financial position and results of operations for the applicable periods. Certain
amounts in the 1995 consolidated financial statements have been reclassified to
conform to the 1996 presentation. Operating results for the three and nine
month periods ended September 30, 1996 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1996 and these
financial statements should be read in conjunction with the Partnership's Annual
Report.
Note B - Ownership Interest of the General Partner and its Affiliates
- -----------------------------------------------------------------------
Forum Retirement, Inc., a wholly-owned subsidiary of Forum Group, Inc. ("Forum
Group"), is the general partner of the Partnership (the "General Partner") and
owns a one percent interest in the Partnership and owns a one percent interest
in a subsidiary operating partnership in which the Partnership owns a ninety-
nine percent interest. The General Partner's interest in the subsidiary
operating partnership is reflected in the statements of operations as a
reduction of the income or loss of the Partnership. Forum Group beneficially
owns approximately 79.0% of the outstanding Preferred Depository Units (the
"Units") representing preferred limited partners' interests in the Partnership.
Note C - Restricted Cash
- ----------------------------------------
<TABLE>
<CAPTION>
Restricted cash is summarized as follows:
September 30, December 31,
1996 1995
----------- -----------
<S> <C> <C>
Debt service reserve fund $ 487,000 $ 487,000
Fixed asset reserve fund 1,466,000 1,066,000
Real estate tax reserve fund 869,000 837,000
Insurance reserve fund 638,000 486,000
---------- ----------
3,460,000 2,876,000
Resident security deposits 1,400,000 1,278,000
---------- ----------
$4,860,000 $4,154,000
========== ==========
</TABLE>
8
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
---------------------------------
FORUM RETIREMENT PARTNERS, L.P. AND SUBSIDIARY PARTNERSHIP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
September 30, 1996
The debt service, fixed asset, insurance and real estate tax reserve funds
consist of monies transferred into segregated escrow accounts out of revenues
generated by the Partnership, pursuant to the Partnership's secured loan
facility. These funds are periodically disbursed by the collateral agent to pay
for debt service, capital expenditures, insurance premiums and real estate taxes
relating to the secured property. Resident security deposits are amounts paid
by retirement community residents that are repayable to the resident upon
departure from the retirement community. In some cases, to ensure prompt
payment, the Partnership utilizes its unrestricted cash to pay for capital
expenditures, insurance premiums, real estate taxes and resident security
deposits and is thereafter reimbursed for such payments out of funds held in the
appropriate escrow account.
The liabilities corresponding to the uses of restricted cash are payable within
one year or, in the case of resident security deposits, are payable on demand
upon departure of the resident from the retirement community.
Note D - Amounts Due to Parent of General Partner and its Affiliates
- --------------------------------------------------------------------
Pursuant to the terms of the Management Agreement in effect since the
Partnership's formation in 1986, management fees (based on the Partnership's
gross operating revenues) payable to Forum Group for all periods prior to 1994
have been deferred. Fees occurring after January 1, 1994 are paid quarterly, in
arrears.
In March 1996, a subsidiary of Marriott International, Inc. ("Marriott")
acquired Forum Group. Beginning in July 1996, Marriott has funded certain
operating expenses and expansion and renovation costs of the Partnership on
behalf of Forum Group. All such fundings are to be reimbursed to Marriott by
the Partnership on a current basis out of the Partnership's cash flow.
9
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
---------------------------------
FORUM RETIREMENT PARTNERS, L.P. AND SUBSIDIARY PARTNERSHIP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
September 30, 1996
Amounts due to parent of general partner and its affiliates is summarized as
follows:
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------ -----------
<S> <C> <C>
Due to Forum Group, Inc.:
Management fees $1,082,000 $1,032,000
Other 196,000 89,000
---------- ----------
1,278,000 1,121,000
---------- ----------
Due to Marriott International, Inc.:
Accounts payable 1,592,000 --
Payroll 855,000 --
Expansion and renovation costs 679,000 --
Other 174,000 --
---------- ----------
3,300,000 --
---------- ----------
$4,578,000 $1,121,000
========== ==========
</TABLE>
Note E - Commitments and Contingencies
- --------------------------------------
On January 24, 1994, The Russell F. Knapp Revocable Trust (the "Plaintiff")
filed a complaint (the "Iowa Complaint") in the United States District Court for
the Northern District of Iowa (the "Iowa Court") against the General Partner
alleging breach of the Partnership Agreement, breach of fiduciary duty, fraud,
insider trading, and civil conspiracy/aiding and abetting. The Plaintiff
subsequently amended the Iowa Complaint, adding Forum Group as a defendant. The
Iowa Complaint is a derivative action seeking recovery of damages and other
relief on behalf of, and not from, the Partnership. The Iowa Complaint alleged,
among other things, that the Plaintiff holds a substantial number of Units, that
the Board of Directors of the General Partner is not comprised of a majority of
independent directors as required by the Partnership Agreement and as allegedly
represented in the Partnership's 1986 Prospectus for its initial public
offering, and that the General Partner's Board of Directors has approved and/or
acquiesced to an 8% management fee charged by Forum Group under the Management
Agreement. The Iowa Complaint further alleged that the "industry standard" for
such fees is 4%, thereby resulting in an "overcharge" to the Partnership
estimated by the Plaintiff at $1.8 million per annum beginning in 1994. The
Plaintiff sought the restoration of certain former directors to the Board of
Directors of the General Partner and the removal of certain other Directors from
the Board, an injunction prohibiting the payment of an 8% management fee, and
unspecified compensatory and punitive damages. On April 3, 1995, the Iowa Court
entered an order dismissing the Iowa Complaint on jurisdictional grounds.
Although the Plaintiff filed a notice of appeal of the Iowa Court's ruling, it
subsequently dismissed this appeal.
10
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
---------------------------------
FORUM RETIREMENT PARTNERS, L.P. AND SUBSIDIARY PARTNERSHIP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
September 30, 1996
On June 15, 1995, the Plaintiff filed a complaint (the "Indiana Complaint") in
the United States District Court for the Southern District of Indiana (the
"Indiana Court") against the General Partner and Forum Group seeking essentially
the same relief. The defendants moved to dismiss the Indiana Complaint for
failure to state a claim for which relief could be granted and, in response, on
December 11, 1995 the Plaintiff amended the Indiana Complaint.
The defendants moved to dismiss the amended complaint on similar grounds, and on
May 17, 1996, the Indiana Court ruled on the defendant's motion by dismissing
without prejudice two of the four counts contained in the amended complaint,
namely the counts for alleged insider trading and civil conspiracy/aiding and
abetting. The litigation is currently in the discovery stage. The General
Partner intends to vigorously defend against this litigation.
11
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
-------------------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
FORUM RETIREMENT PARTNERS, L.P. AND SUBSIDIARY PARTNERSHIP
September 30, 1996
Forward-Looking Statements
- --------------------------
Statements in this report which are not strictly historical are "forward-
looking" and are subject to a number of risks and uncertainties which affect the
Partnership's business. These uncertainties, which include competition with
other retirement communities, the balance between supply of and demand for
retirement communities, the Partnership's ability to timely effect its planned
expansion program on current and anticipated terms, including sufficiency of
cash flow from operations to finance the expansion (or the availability of
borrowings if necessary) and timely receipt of zoning and other governmental
approvals, potential changes in Medicaid and/or Medicare reimbursement levels or
criteria, potential changes in the regulatory environment applicable to
retirement communities and related healthcare services and the effect of
national and regional economic conditions, are described from time to time in
the Partnership's filings with the Securities and Exchange Commission, including
Exhibit 99.1 to this report.
Results of Operations
- ---------------------
Three Months Ended September 30, 1996 and 1995. As of September 30, 1996 and
- -----------------------------------------------
1995, the Partnership owned nine retirement communities ("RC's"), all of which
were managed by Forum Group. The Partnership reported net income of $507,000
for the three month period ended September 30, 1996 compared to net income of
$24,000 for the same period in 1995. Total revenues for the three month period
ended September 30, 1996 increased $1,229,000, or 9.8%, to $13,716,000 compared
to the same period last year. Total revenues consist primarily of routine
service and ancillary service revenues. Routine service revenues are generated
from monthly charges for independent living units and daily charges for assisted
living units and nursing beds which are recognized monthly based on the terms of
the residents' agreements. Ancillary service revenues are generated on a "fee
for service" basis for supplementary items requested by residents and are
recognized as the services are provided. Combined average occupancy (calculated
based on the number of units occupied during the respective period) at the nine
RC's was 94.7% for the three month period ended September 30, 1996, an increase
of approximately 0.5% compared to the same period in 1995.
The combined average monthly rental rate per occupied unit (calculated using
revenue generated from the respective rental components and excluding non-rental
revenues and prior period adjustments) increased 7.4% for the three month period
ended September 30, 1996 compared to the same period in 1995, with eight of the
nine communities experiencing increases.
Routine and ancillary revenues for the three month period ended September 30,
1996 increased $1,144,000, or 9.2%, to $13,517,000 over the comparable period in
1995. The revenue increase is primarily attributable to increases in residency
fees and charges in the independent living, assisted living and nursing
components, occupancy increases at certain RC's and the
12
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
---------------------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
(continued)
FORUM RETIREMENT PARTNERS, L.P. AND SUBSIDIARY PARTNERSHIP
September 30, 1996
favorable impact of recently opened expansions at three communities, one located
in Delaware which added five assisted living units in November 1995, one located
in New Mexico which added twenty assisted living units in April 1996 and one
located in South Carolina which added nineteen healthcare units in June 1996.
Routine expenses and ancillary costs for the three month period ended September
30, 1996 increased $777,000, or 8.5%, to $9,926,000 compared to the same period
in 1995. The increased costs and expenses resulted primarily from a generally
higher level of nursing, therapy healthcare and other staffing, increased
occupancy at certain RC's and normal inflationary and other operational
increases in other expenses. The additional units resulting from the opening of
the three expansion programs and the higher occupancy rates at certain other
RC's principally impacted the costs associated with the higher level of nursing,
therapy, housekeeping and dining services required by the residents at the RC's.
Net Operating Income ("NOI") calculated as routine and ancillary revenues
("operating revenues") less routine and ancillary expenses ("operating
expenses") and management fees increased $261,000, or 11.6%, to $2,513,000 and
the operating margin (operating revenues less operating expenses) as a
percentage of operating revenues increased from 26.1% for the three month period
ended September 30, 1995 to 26.6% for the comparable period in 1996.
Management fees increased as a function of revenue. Depreciation and
amortization increased as a result of the opening of three expansion projects
and other current and prior year additions to property and equipment. Total
interest expense for the three months ended September 30, 1996 decreased by
$135,000 compared to total interest expense for the same period in 1995 due to a
reduction in the principal amount of long-term debt and the capitalization of
interest costs related to the expansion programs which the Partnership has
initiated at certain of its properties.
Nine Months Ended September 30, 1996 and 1995. The Partnership reported net
- ----------------------------------------------
income of $1,137,000 for the nine month period ended September 30, 1996 compared
to net income of $183,000 for the same period in 1995. Total revenues for the
nine month period ended September 30, 1996 increased $2,886,000, or 7.8% to
$39,984,000 compared to the same period last year. Combined average occupancy
at the nine RC's was 94.4% for the nine month period ended September 30, 1996,
an increase of 0.6% compared to the same period in 1995. The combined average
monthly rental rate per occupied unit increased 5.2% for the nine month period
ended September 30, 1996 compared to the same period in 1995.
Routine and ancillary revenues for the nine months ended September 30, 1996
increased $2,874,000, or 7.8% to $39,705,000 over the comparable period in 1995.
The revenue increase is primarily attributable to increases in residency fees
and charges in the independent living, assisted living and nursing components,
occupancy increases at certain RC's, increases in the provision of therapy and
other ancillary healthcare services, a favorable net Medicare settlement of
$107,000
13
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
---------------------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
(continued)
FORUM RETIREMENT PARTNERS, L.P. AND SUBSIDIARY PARTNERSHIP
September 30, 1996
in the second quarter of 1996 and an unfavorable net Medicare settlement of
$190,000 in the first quarter of 1995. The increase in revenues was also due to
the opening of expansion programs at three RC's which added five assisted living
units in November 1995, twenty assisted living units in April 1996 and nineteen
healthcare units in June 1996, respectively.
Routine expenses and ancillary costs for the nine months ended September 30,
1996 increased $1,540,000, or 5.7% to $28,386,000 compared to the same period in
1995. The increased costs and expenses resulted primarily from a generally
higher level of nursing and therapy healthcare and other staffing, increased
occupancy at certain RC's, the increased provision of ancillary healthcare
services and normal inflationary and other operational increases in other
expenses. The additional units resulting from the opening of the three
expansion programs and the higher occupancy rates at certain other RC's
principally impacted the costs associated with the higher level of nursing,
therapy, housekeeping and dining services required by the residents at the RC's.
Adjusted for the 1996 and 1995 net Medicare settlements previously noted, NOI
increased $796,000, or 11.0% to $8,042,000 and the operating margin as a
percentage of operating revenues increased from 27.5% for the nine month period
ended September 30, 1995 to 28.3% for the comparable period in 1996.
Management fees increased as a function of revenue. Depreciation and
amortization expense increased as a result of the opening of three expansion
projects and other current and prior year additions to property and equipment.
Total interest expense for the nine months ended September 30, 1996 decreased by
$184,000 compared to total interest expense for the same period in 1995 due to a
reduction in the principal amount of long-term debt and the capitalization of
interest costs related to the expansion programs which the Partnership has
initiated at certain of its properties.
Pursuant to the terms of the Management Agreement in effect since the
Partnership's formation in 1986, management fees (based on the Partnership's
gross operating revenues) payable to Forum Group for all periods prior to 1994
have been deferred. Fees occurring after January 1, 1994 are paid on a current
basis. 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 changes in
management fees payable resulting from variations in revenue levels, the current
payment of such fees for periods after January 1, 1994 had a comparable impact
on the Partnership's operating and net income as compared to prior periods,
although it did affect the Partnership's cash position commencing in 1994.
Income Taxes. 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 publicly traded partnerships in existence prior to December 18, 1987.
On August 8, 1988 the General Partner was authorized by the limited
14
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
---------------------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
(continued)
FORUM RETIREMENT PARTNERS, L.P. AND SUBSIDIARY PARTNERSHIP
September 30, 1996
partners to do all things deemed necessary or desirable to insure that the
Partnership is not treated as a corporation for federal income tax purposes.
Alternatives available to avoid corporate taxation after 1998 include: (i)
selling or otherwise disposing of all or substantially all of the Partnership's
assets pursuant to a plan of liquidation and (ii) converting the Partnership
into a real estate investment trust or other type of legal entity. Such actions
are prohibited or restricted under the Partnership's current financing and may
require the granting of a waiver by the lender thereunder. There can be no
assurance that any such waiver would be granted. There can be no assurance that
the Partnership will avoid being taxed as a corporation for federal income tax
purposes.
Financial Condition
- -------------------
Liquidity and Capital Resources. At September 30, 1996, the Partnership had
cash and cash equivalents of $4,293,000, accounts receivable of $3,400,000,
other current assets of $6,057,000 and current liabilities of $9,831,000. The
Partnership believes that it has adequate liquidity to meet its foreseeable
working capital requirements.
The Partnership has initiated an expansion program at some of its properties to
improve the Partnership's operating results. Currently, four projects have been
completed (one in October 1996) and seven projects are under construction or are
in certain stages of active development. Three more projects are expected to
begin subsequent to 1997. The four completed projects increased the number of
living and nursing units owned by the Partnership by approximately 4% at a total
expected capital cost of $3.8 million. The seven projects which are either
under construction or are in certain stages of active development are expected
to increase the number of living and nursing units owned by the Partnership by
approximately 12% at a budgeted capital cost of $12.2 million. The three
additional projects not yet begun are expected to increase the Partnership's
number of units by an additional 5% at an expected capital cost of $4.4 million.
The expansion program is designed to modify the uses of or add capacity to
existing facilities without incurring substantial land acquisition and common
area build-out costs. The projects that have not yet commenced will require
additional regulatory approvals.
The Partnership presently intends to finance this expansion program from the
Partnership's cash flow from operations. If cash flow from operations is
insufficient to complete the expansion program on a timely basis, the expansion
program may be delayed, reduced in scope or discontinued. The Partnership's
long-term debt agreement prohibits the Partnership from incurring additional
third-party financing (other than $1 million of equipment financing) and
prohibits the imposition of liens on the Partnership's assets. There is no
assurance that a waiver could be obtained from the lender to permit any third-
party financing, or whether, when and on what terms any such financing may be
available. As a result of the capital required to fund the expansion
15
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
---------------------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
(continued)
FORUM RETIREMENT PARTNERS, L.P. AND SUBSIDIARY PARTNERSHIP
September 30, 1996
program, the Partnership does not expect to make distributions in respect of
limited partner units in the foreseeable future.
The implementation of the expansion program and its impact on the value of an
investment in the Partnership is subject to a number of variables, including
without limitation the amount and timing of cash flow from operations to fund
the expansion, the ability to obtain required zoning variances and permits from
local governmental authorities and the timing thereof, whether development and
construction costs are higher or lower than anticipated, whether newly added
living units are occupied faster or slower than anticipated and whether
operating costs are higher or lower than anticipated.
The management fee payable to Forum Group of $15,780,000 for all periods from
the formation of the Partnership in 1986 to December 31, 1993 was deferred.
Management fees for periods after December 31, 1993 are paid quarterly, in
arrears. Deferred management fees are payable to Forum Group out of proceeds of
sales and refinancings after making distributions of those proceeds in an amount
sufficient to (i) meet limited partners' tax liabilities, (ii) repay limited
partners' capital contributions, and (iii) pay a 12% cumulative, simple annual
return on limited partners' unrecovered capital contributions. Deferred
management fees become immediately due and payable in the event that the
Management Agreement is terminated, which may occur under certain conditions
including, but not limited to, if Forum Retirement, Inc. is removed as the
General Partner and 80% in interest of the limited partners vote to terminate
such agreement. The Partnership is unable to predict when or if management fees
deferred prior to January 1, 1994 will become payable.
Operating activities provided $3,060,000 more cash during the nine months ended
September 30, 1996 than during the comparable period in 1995 due principally to
increases in both net income as discussed previously and in amounts due to
parent of general partner and its affiliates for the funding of payroll and
expansion costs and certain other payables. All such fundings are to be
reimbursed on a current basis. These increases were partially offset by
decreases in certain accounts payable and accrued expenses.
Investing activities used $1,192,000 more cash during the nine months ended
September 30, 1996 than during the comparable period in 1995 due principally to
the significant increase in expansion and renovation activity at several of the
RC's funded by cash from operating activities and by an affiliate of the parent
of the general partner.
Financing activities used $364,000 less cash during the nine months ended
September 30, 1996 than during 1995 due principally to the release of restricted
cash held by the loan servicer for the reimbursement of certain amounts paid by
the Partnership out of unrestricted cash.
Inflation. Management does not believe that inflation has had a material effect
on net income. To the extent possible, increased costs are recovered through
increased residency fees and charges.
16
<PAGE>
PART II. OTHER INFORMATION
---------------------------
FORUM RETIREMENT PARTNERS, L.P. AND SUBSIDIARY PARTNERSHIP
September 30, 1996
Item 1. Legal Proceedings
- --------------------------
On January 24, 1994, The Russell F. Knapp Revocable Trust (the "Plaintiff")
filed a complaint (the "Iowa Complaint") in the United States District Court for
the Northern District of Iowa (the "Iowa Court") against the General Partner
alleging breach of the Partnership Agreement, breach of fiduciary duty, fraud,
insider trading, and civil conspiracy/aiding and abetting. The Plaintiff
subsequently amended the Iowa Complaint, adding Forum Group as a defendant. The
Iowa Complaint is a derivative action seeking recovery of damages and other
relief on behalf of, and not from, the Partnership. The Iowa Complaint alleged,
among other things, that the Plaintiff holds a substantial number of Units, that
the Board of Directors of the General Partner is not comprised of a majority of
independent directors as required by the Partnership Agreement and as allegedly
represented in the Partnership's 1986 Prospectus for its initial public
offering, and that the General Partner's Board of Directors has approved and/or
acquiesced to an 8% management fee charged by Forum Group under the Management
Agreement. The Iowa Complaint further alleged that the "industry standard" for
such fees is 4%, thereby resulting in an "overcharge" to the Partnership
estimated by the Plaintiff at $1.8 million per annum beginning in 1994. The
Plaintiff sought the restoration of certain former directors to the Board of
Directors of the General Partner and the removal of certain other Directors from
the Board, an injunction prohibiting the payment of an 8% management fee, and
unspecified compensatory and punitive damages. On April 3, 1995, the Iowa Court
entered an order dismissing the Iowa Complaint on jurisdictional grounds.
Although the Plaintiff filed a notice of appeal of the Iowa Court's ruling, it
subsequently dismissed this appeal.
On June 15, 1995, the Plaintiff filed a complaint (the "Indiana Complaint") in
the United States District Court for the Southern District of Indiana (the
"Indiana Court") against the General Partner and Forum Group seeking essentially
the same relief. The defendants moved to dismiss the Indiana Complaint for
failure to state a claim for which relief could be granted and, in response, on
December 11, 1995 the Plaintiff amended the Indiana Complaint.
The defendants moved to dismiss the amended complaint on similar grounds, and on
May 17, 1996, the Indiana Court ruled on the defendant's motion by dismissing
without prejudice two of the four counts contained in the amended complaint,
namely the counts for alleged insider trading and civil conspiracy/aiding and
abetting. The litigation is currently in the discovery stage. The General
Partner intends to vigorously defend against this litigation.
17
<PAGE>
PART II. OTHER INFORMATION (continued)
---------------------------------------
FORUM RETIREMENT PARTNERS, L.P. AND SUBSIDIARY PARTNERSHIP
September 30, 1996
Item 2. Changes in Securities
- ------------------------------
None.
Item 3. Defaults Upon Senior Securities
- -----------------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders
- -------------------------------------------------------------
None.
Item 5. Other Events
- -----------------------
None.
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits
Exhibit No. Description
99.1 Forward-Looking Statements
(b) Reports on Form 8-K
None.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 RETIREMENT PARTNERS, L.P.,
A Delaware limited partnership
BY: Forum Retirement, Inc., its general partner
-------------------------------------------
Date: November 14, 1996 By: /s/ Terrence P. Morrow
- ----------------------- ----------------------------
Terrence P. Morrow
Vice-President and Treasurer
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 4,293
<SECURITIES> 0
<RECEIVABLES> 3,632
<ALLOWANCES> 232
<INVENTORY> 0
<CURRENT-ASSETS> 13,750
<PP&E> 128,149
<DEPRECIATION> 30,518
<TOTAL-ASSETS> 113,044
<CURRENT-LIABILITIES> 9,831
<BONDS> 47,147
0
0
<COMMON> 0
<OTHER-SE> 40,046
<TOTAL-LIABILITY-AND-EQUITY> 113,044
<SALES> 0
<TOTAL-REVENUES> 39,984
<CGS> 0
<TOTAL-COSTS> 38,836
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,799
<INCOME-PRETAX> 1,137
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,137
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,137
<EPS-PRIMARY> .07
<EPS-DILUTED> .07
</TABLE>
<PAGE>
EXHIBIT 99.1
IMPORTANT FACTORS REGARDING
FORWARD-LOOKING STATEMENTS
The following factors, among others, could cause actual results to differ
materially from those contained in forward-looking statements made in this
report and presented elsewhere by management from time to time. Reference is
also made to uncertainties discussed in the following portions of the
Partnership's annual report on Form 10-K for the fiscal year ended December 31,
1995: (a) the subsections entitled "Sources of Payment", "Regulation and Other
Factors" and "Competition" in Item 2, within the "PROPERTIES" section, which
describe (i) the federal and state governmental involvement and discretion in
the funding and payment of Medicare and Medicaid payments that comprise a
significant portion of the Partnership's revenues, (ii) the federal, state and
local governmental regulation of healthcare facilities, including the
requirements of continued licensure, and (iii) the competitive conditions faced
by the Partnership, and (b) Item 7, "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
Competition: The profitability of retirement communities is subject to general
economic conditions, competition, the desirability of particular locations, the
relationship between supply of and demand for senior living facilities, and
other factors. The Partnership's retirement communities are generally located
in markets that contain numerous competitors, and the continued success of the
Partnership's retirement communities in their respective markets will be
dependent, in large part, upon those facilities' ability to compete in such
areas as access, location, quality of accommodations, amenities, specialized
services and rate structure.
Facility Expansion: The timing and success of the planned expansion of the
Partnership's existing retirement communities is dependent upon a number of
factors, including without limitation the amount and timing of cash flow from
operations to fund the expansion, the ability to obtain required zoning
variances and permits from local governmental authorities and the timing
thereof, whether development and construction costs are higher or lower than
anticipated, whether construction is completed faster or slower than
anticipated, whether newly added living units are occupied faster or slower than
anticipated, whether rental rates for additional living units are higher or
lower than anticipated, and whether operating costs are higher or lower than
anticipated.
Availability of Financing: The Partnership presently intends to finance the
planned expansion of its existing retirement communities out of the
Partnership's cash flow from operations. If cash flow from operations is
insufficient to complete such expansion on a timely basis, the expansion may be
delayed, reduced in scope or discontinued. The Partnership's long-term
financing agreement prohibits the Partnership from incurring additional third-
party financing (other than $1 million of equipment financing) and prohibits the
imposition of liens on the Partnership's assets. There can be no assurance that
a waiver could be obtained from the lender to permit any third-party
financing, or whether, when and on what terms any such financing may be
available.
20
