<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT
Pursuant to Section 13 or 15(d)
of The Securities Exchange Act of 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
COMMISSION FILE NUMBER: 1-9302
FORUM RETIREMENT PARTNERS, L.P.
ORGANIZED IN DELAWARE I.R.S. NO.35-1686799
10400 FERNWOOD ROAD
BETHESDA, MD 20817
TELEPHONE: (301) 380-3000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE
Preferred Depository Units ON WHICH REGISTERED
Representing Preferred American Stock Exchange
Limited Partners' Interests
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10K or any
amendment to this form 10-K. [X]
There were 15,285,248 Preferred Depository Units outstanding as of March 14,
1997.
The aggregate market value of the voting stock held by non-affiliates of the
registrant (excluding units owned by the Registrant's General Partner or its
Affiliates) was $10,642,000 as of March 14, 1997.
There are 30 pages in this Report. The financial statement and exhibit indices
are located at pp. 29-30.
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PART I
FORWARD-LOOKING STATEMENTS
When used throughout this report, the words "believes", "anticipates", and
"expects", and similar expressions, are intended to identify forward-looking
statements. Such statements are subject to a number of risks and uncertainties
which could cause actual results to differ materially from those projected,
including: 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, and other risks
described from time to time in the Partnership's filings with the Securities and
Exchange Commission, including Exhibit 99 to this report. Given these
uncertainties, readers are cautioned not to place undue reliance on such
statements. The Partnership also undertakes no obligation to publicly release
the result of any revisions to these forward-looking statements that may be made
to reflect any future events or circumstances.
ITEM 1. BUSINESS.
Forum Retirement Partners, L.P. (the "Partnership") is a Delaware limited
partnership that was formed in 1986 to own retirement communities ("RC's")
originally developed or acquired by Forum Group, Inc. ("Forum Group"). Forum
Group beneficially owns 79.0% of the outstanding depository units representing
limited partners' interests in the Partnership ("Preferred Depository Units" or
"Units"). Forum Group is also the parent corporation of Forum Retirement, Inc.,
the general partner of the Partnership (the "General Partner").
The Partnership has initiated an expansion program relating to certain of
its properties in an effort to further improve the Partnership's results of
operations. Currently, four expansion projects have been completed, five
expansion projects are under construction and another five expansion projects
are in certain stages of active development or design. The four completed
projects increased the number of living and nursing units owned by the
Partnership by approximately 4% at a capital cost of $3.8 million. The ten
projects which are either under construction or are in certain stages of active
development or design are expected to increase the number of living and nursing
units owned by the Partnership by approximately 18% at a budgeted capital cost
of $17.3 million. Four of the five projects currently in development or design
are expected to begin construction by the end of 1997. The expansions are
designed to modify the uses of or add capacity to existing facilities without
incurring substantial land acquisition and common area build-out costs.
Certain expansions 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 such expansion on a timely basis, the expansion may be
delayed, reduced in scope or discontinued. The terms of the Partnership's
current long-term debt agreement restrict the Partnership from incurring
additional third-party financing (other than $1 million of equipment financing),
and prohibit the imposition of liens on the Partnership's assets. There can be
no assurance that a waiver can 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 program,
the Partnership does not expect to make distributions in respect of limited
partner units in the foreseeable future.
On March 18, 1997, Marriott International, Inc. ("Marriott International"),
which owns Forum Group, and Host Marriott Corporation, announced that they had
entered into a letter of intent providing for the sale of Forum Group to Host
Marriott Corporation, and for the transfer of the management of the Forum Group
retirement communities (including those owned by the Partnership) to a Marriott
International subsidiary, subject to receipt of required consents. The parties
announced that the sale is expected to be completed by the second quarter of
1997, but is subject to customary due diligence, documentation, approval by the
Board of Directors of Marriott International and Host Marriott Corporation; and
expiration or termination of the Hart-Scott-Rodino Antitrust Act waiting period
requirements.
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ITEM 2. PROPERTIES.
The Partnership (through an operating limited partnership in which the
Partnership is the 99% limited partner and the General Partner is the 1% general
partner) owns RC's in Delaware (4), Florida, New Mexico, South Carolina and
Texas (2) (collectively, the "Properties"). All of the Properties are managed by
Forum Group pursuant to a management agreement entered into in 1986 in
connection with the formation of the Partnership under which Forum Group acts as
manager (the "Management Agreement").
Seven of the nine RC's are comprised of an independent living component and
a nursing component, and each Property, except the Millcroft RC, also includes
an assisted living component. The Foulk Manor and Myrtle Beach Manor RC's each
consist of an assisted living component and a nursing component, but do not
contain an independent living component.
Independent living components contain a variety of accommodations, together
with amenities such as dining facilities, lounges, and game and craft rooms. All
residents of the independent living components are provided security, meals, and
housekeeping and linen service. Emergency healthcare service is available upon
demand 24 hours a day from on-site staff, and each independent living unit is
equipped with an emergency call system. The independent living components of the
Properties consist of apartments and, in the case of Foulk Manor North, villas.
Independent living unit residency fees presently range from $1,400 to $3,850 per
month, depending on the unit size and location of the RC. Each apartment and
villa resident enters into a residency agreement that may be terminated by the
resident on short notice. Although there can be no assurance that available
independent living units will be reoccupied as residency agreements expire or
are terminated, since 1988 at least 80% of the residents of the apartments and
villas have renewed their residency agreements from year to year.
Assisted living components provide a supportive environment that encourages
independent living. Residents have private or semiprivate suites, eat meals in a
private dining room, and are provided the added services of scheduled
activities, housekeeping and linen service, preventive health surveillance,
periodic health monitoring, assistance with activities of daily living, and
emergency care. The charge for a private assisted living suite presently ranges
from $62 to $165 per day.
Nursing components provide residents a full range of nursing care.
Residents have private or semiprivate rooms, and share communal dining and
social facilities. In most instances each resident of the independent living
component of a Property is entitled to priority admission in the assisted living
(if any) or nursing component. The charge for a private nursing room presently
ranges from $88 to $191 per day.
The Properties also provide ancillary healthcare services, including the
operation of an adult day care center on the premises of one RC.
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The following table indicates the name, location and current capacity for each
property:
<TABLE>
<CAPTION>
CAPACITY
----------------------------------------
INDEPENDENT ASSISTED TOTAL
LIVING LIVING NURSING UNITS
NAME AND LOCATION UNITS SUITES BEDS SUITES/BEDS
- ---------------------------------- ----------- ------- ------- -----------
<S> <C> <C> <C> <C>
The Forum at Lincoln Heights 151 30 60 241
San Antonio, Texas
Foulk Manor -0- 51 57 108
Wilmington, Delaware
Foulk Manor North 58 11 46 115
Wilmington, Delaware
Millcroft 62 -0- 100 162
Newark, Delaware
The Montebello on Academy 114 35 60 209
Albuquerque, New Mexico
The Montevista at Coronado 123 15 109 247
El Paso, Texas
Myrtle Beach Manor -0- 68 104 172
Myrtle Beach, South Carolina
The Park Summit of Coral Springs 204 17 35 256
Coral Springs, Florida
Shipley Manor 62 15 82 159
Wilmington, Delaware
</TABLE>
The overall average occupancy rate for the Properties for calendar year
1996 was 94.4%. The degree of utilization of each facility is dependent on many
factors. Occupancy rates may be adversely affected by the opening of newly
developed facilities and the expansion or renovation of competing facilities.
Expansion of the Properties may adversely impact occupancy during the
development and lease-up process.
MORTGAGES
On December 28, 1993 the Partnership entered into a loan agreement with
Nomura Asset Capital Corporation ("Nomura") pursuant to which Nomura provided
approximately $50,707,000 in new financing (the "Nomura Loan"). The proceeds of
the Nomura Loan were used to prepay the remaining balances of certain of the
Partnership bank debt scheduled to mature on December 31, 1993 and to prepay the
Partnership's split coupon first mortgage notes due July 1, 1996, to pay fees
and expenses related to the financing and to fund reserves. The Nomura Loan is
secured by first priority mortgages on the Partnership's Properties and by
security interests in substantially all of the Partnership's other assets. For a
description of the principal terms of the Nomura Loan, see Note 4 of Notes to
Consolidated Financial Statements under Item 8.
The principal amount outstanding under the Nomura Loan at December 31, 1996
was $48.0 million, which bears interest at 9.93% per annum. See "Item 1
- - Business" and Note 4 of Notes to Consolidated Financial Statements at Item 8
herein for additional information regarding the Nomura Loan.
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DEPRECIATION
The aggregate net federal tax basis of the Properties as of December 31,
1996 was $58.6 million for real property and $2.5 million for personal property.
SOURCES OF PAYMENT
The independent and assisted living components of the Properties receive
direct payment for resident occupancy solely on a private pay basis. The nursing
components of the Properties receive payment for resident care directly on a
private pay basis, including payment from private health insurance, and from
governmental reimbursement programs such as the federal Medicare program for
certain elderly and disabled residents, and state Medicaid programs for certain
financially qualified residents.
The following table indicates the approximate percentages of operating
revenues for each of the last five years derived by the Partnership from private
sources, and from Medicare and Medicaid:
<TABLE>
<CAPTION>
INDEPENDENT AND ASSISTED LIVING COMPONENTS
--------------------------------------------
SOURCE 1996 1995 1994 1993 1992
- ------ ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Private 100% 100% 100% 100% 100%
Medicare/Medicaid -0- -0- -0- -0- -0-
---- ---- ---- ---- ----
Total 100% 100% 100% 100% 100%
==== ==== ==== ==== ====
NURSING COMPONENTS
--------------------------------------------
SOURCE 1996 1995 1994 1993 1992
- ------ ---- ---- ---- ---- ----
Private 61% 65% 65% 69% 72%
Medicare/Medicaid 39% 35% 35% 31% 28%
---- ---- ---- ---- ----
Total 100% 100% 100% 100% 100%
==== ==== ==== ==== ====
TOTAL RC'S
--------------------------------------------
SOURCE 1996 1995 1994 1993 1992
- ------ ---- ---- ---- ---- ----
Private 79% 82% 82% 85% 86%
Medicare/Medicaid 21% 18% 18% 15% 14%
---- ---- ---- ---- ----
Total 100% 100% 100% 100% 100%
==== ==== ==== ==== ====
</TABLE>
Most private insurance carriers reimburse their policyholders, or make
direct payment to facilities, for covered services at rates established by the
facilities. Where applicable, the resident is responsible for any difference
between the insurance proceeds and the total charges. In certain states, Blue
Cross plans pay for covered services at rates negotiated with facilities. In
other states, Blue Cross plans are administered under contracts with facilities
providing for payment under formulae based on the cost of services. The Medicare
program also makes payment under a cost-based reimbursement formula. Under the
Medicaid program, each state is responsible for developing and administering its
own reimbursement formula.
Within the statutory framework of the Medicare and Medicaid programs, there
are substantial areas subject to administrative rulings, interpretations and
discretion which affect payments made under those programs. In addition, the
federal and state governments might reduce the funds available under those
programs in the future or require more stringent utilization of healthcare
facilities. Those measures could adversely affect the Partnership's future
revenues and, therefore, the value of the Properties.
Various legislative and industry groups are studying numerous healthcare
issues, including access, delivery, and financing of long-term healthcare, and
at any given time there are numerous federal and state legislative proposals
relating to the funding and reimbursement of healthcare costs. It is difficult
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to predict whether these proposals will be adopted or the form in which they
might be adopted, and no assurance can be given that any such legislation, if
adopted, would not have a material effect on the Partnership or the value of its
Properties.
REGULATION AND OTHER FACTORS
Healthcare facility operations are subject to federal, state, and local
government regulations. Facilities are subject to periodic inspection by state
licensing agencies to determine whether the standards necessary for continued
licensure are being maintained. In granting and renewing licenses, the state
agencies consider, among other things, buildings, furniture, and equipment;
qualifications of administrative personnel and staff; quality of care; and
compliance with laws and regulations relating to operation of facilities. State
licensure of a nursing facility is a prerequisite to certification for
participation in the Medicare and Medicaid programs. Requirements for licensure
of assisted living components are generally less comprehensive and stringent
than requirements for licensure of nursing facilities. Most states do not have
licensure requirements for the independent living components of RC's, except to
the extent that such independent living components are associated with the
provision of healthcare services. The Properties are presently in substantial
compliance with all applicable federal, state and local regulations with respect
to licensure requirements. However, because those requirements are subject to
change, there can be no assurance that the Properties will be able to maintain
their licenses upon a change in standards, and future changes in those standards
could necessitate substantial expenditures by the Partnership to comply
therewith.
COMPETITION
The Properties compete with facilities of varying similarity in the
respective geographical market areas in which the Properties are located.
Competing facilities are operated on a national, regional, and local basis by
religious groups and other nonprofit organizations, as well as by private
operators, some of which have substantially greater resources than the
Partnership. The independent living components of the Properties face
competition from all the various types of residential opportunities available to
the elderly. However, the number of RC's that offer on-premises healthcare
services is limited. The assisted living and nursing components of the
Properties compete with other assisted living and nursing facilities. Because
the target market segment of the Properties (i.e., full-service RC's) is
relatively narrow, the risk of competition may be higher than with some other
types of RC's, and assisted living and nursing facilities, developed in close
proximity to them.
Significant competitive factors for attracting residents to the independent
living components of the Properties include price, physical appearance, and
amenities and services offered. Additional competitive factors for attracting
residents to the assisted living and nursing components of the Properties
include quality of care, reputation, physician and nursing services available,
and family preferences. The Partnership believes that its RC's rate high in each
of these categories, except that its RC's are generally more expensive than
competing facilities.
INSURANCE
The Partnership maintains professional liability, comprehensive general
liability, and other typical insurance coverage on all its RC's. The Partnership
believes that its insurance is adequate in amount and coverage.
OPTION AGREEMENT
Pursuant to an option agreement (the "Option Agreement") entered into at
the time of the Partnership's formation, Forum Group has the option to purchase,
for a price equal to the appraised fair market value thereof, any RC which the
Partnership determines to sell. Accordingly, consummation of any transaction to
sell any of the Properties would be subject to, among other limitations, the
election of Forum Group not to exercise such option. Under the Option Agreement,
the Partnership has an option, subject to certain limitations and restrictions,
to purchase up to 15 additional RC's developed by Forum Group or any wholly
owned (or in certain circumstances partly owned) affiliate of Forum Group at the
lower of the appraised value of the RC or the sum of 115% of the costs incurred
in connection with development of the RC and an amount equal to net operating
losses incurred between completion and the purchase.
6
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EMPLOYEES
The Partnership has no employees. At March 7, 1997, Forum Group had
approximately 1,200 employees working on the premises of the Partnership's nine
RC's pursuant to the Management Agreement. Forum Group has informed the
Partnership that relations with those employees are good.
ITEM 3. 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, and a trial date has been
set for May 5, 1997. The General Partner intends to vigorously defend against
this litigation. The Partnership, in accordance with the Management Agreement,
reimbursed the General Partner for $88,000, $89,000 and $146,000 of litigation
costs relating to this claim in 1996, 1995 and 1994, respectively.
See "Item 7 - Management's Discussion and Analysis of Financial Condition
and Results of Operation" for further discussion of the Management Agreement.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted during the fourth quarter of 1996 to a vote of
security holders.
PART II
ITEM 5. MARKET FOR THE PARTNERSHIP'S COMMON EQUITY AND RELATED UNITHOLDER
MATTERS.
(a) Market Information. The principal United States market in which Units
are being traded is the American Stock Exchange (symbol: FRL).
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The high and low sales prices for Units for each full quarterly period
within the two most recent fiscal years, as reported in the consolidated
transaction reporting system, were as follows:
<TABLE>
<CAPTION>
1995 HIGH LOW
---- ---- -----
<S> <C> <C>
Quarter ended March 31, 1995 $2-1/2 2-1/16
Quarter ended June 30, 1995 $2-1/4 2-1/16
Quarter ended September 30, 1995 $2-3/8 1-7/8
Quarter ended December 31, 1995 $2-7/8 2-3/8
1996 HIGH LOW
---- ---- ----
Quarter ended March 31, 1996 $5 2-11/16
Quarter ended June 30, 1996 $4 3-1/4
Quarter ended September 30, 1996 $3-5/8 3-1/8
Quarter ended December 31, 1996 $3-3/4 3
</TABLE>
(b) Holders. The approximate number of record holders of Preferred
Depository Units as of March 5, 1997 was 397.
(c) Dividends. The Partnership has not made any distributions on Preferred
Depository Units for the last six years. The Partnership intends to invest its
excess cash flow in its expansion program and does not expect to make
distributions on Preferred Depository Units in the foreseeable future. There
necessarily can be no assurance as to whether or when, or at what level, any
future cash distributions to holders of Units will be made. See "Item 1 -
Business" for a discussion of possible cash needs for expansions of the
Partnership's RC's.
ITEM 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
--------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- --------- ---------
(IN THOUSANDS EXCEPT PER UNIT AMOUNTS)
<S> <C> <C> <C> <C> <C>
Total revenues $ 54,106 $ 50,136 $ 47,480 $ 44,176 $ 41,950
Income (loss) before
extraordinary charge 699 297 317 (1,762) (6,112)
Extraordinary charge - early extinguishment of debt -0- -0- -0- (2,917) -0-
Net income (loss) 699 297 317 (4,679) (6,112)
General Partners' interest in net income (loss) 7 3 3 (47) (61)
Limited Partners' interest in net income (loss) 692 294 314 (4,632) (6,051)
Average number of Units outstanding 15,285 15,285 15,285 10,317 8,785
Income (loss) per limited partner Unit:
Income (loss) before extraordinary charge 0.05 0.02 0.02 (0.17) (0.69)
Extraordinary charge -0- -0- -0- (0.28) -0-
Net income (loss) 0.05 0.02 0.02 (0.45) (0.69)
Total assets 112,558 110,610 111,163 110,480 109,767
Long-term obligations, less current portion 46,855 47,984 49,007 49,934 34,070
Partner's Equity 39,608 38,909 38,612 38,386 30,187
Cash distributions declared:
Per Unit --- --- --- --- ---
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Results Of Operations.
Introduction. At December 31, 1996 and 1995, the Partnership owned nine RC's,
all of which were managed by Forum Group. The Partnership reported net income of
$699,000 for the year ended December 31, 1996 compared to $297,000 for 1995.
Total revenues for the year ended December 31, 1996 increased $3,970,000, or
7.9%, to $54,106,000 compared to 1995. 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 suites and nursing beds, and 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.
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 approximately 6.8% from
1995 to 1996, with each of the nine RC's experiencing increases. Combined
average occupancy (calculated based on the number of units occupied during the
respective period) at the nine RC's was 94.4% for the twelve-month period ended
December 31, 1996, an increase of approximately 0.7% compared to the same period
in 1995. The increase was primarily the result of two RC's which experienced
occupancy increases of 4.0% and 2.0%, respectively, partially offset by two RC's
which experienced occupancy declines of 2.9% and 2.1%, respectively. These
occupancy declines were due primarily to the effect of recently opened
expansions at the respective RC's.
The Partnership has not made any distributions on its Units in the past six
years, due primarily to the increased level of expansion activity at several of
its communities. The Partnership believes that operating results can be
expected to improve as a result of the expansion program. Furthermore, the
Partnership believes that it can continue to sustain high levels of occupancy at
the RC's while enhancing operating margins and performance at its
RC's. There necessarily can be no assurance that operating results will
improve or as to whether or when, or at what levels, any distributions will be
made. Implementation of the Partnerships' expansion plan will negatively affect
the Partnership's levels of distributable cash, if any. See "Item 1- Business"
for a discussion of the Partnership's expansion efforts.
Twelve Months Ended December 31, 1996 and 1995. Routine and ancillary
revenues increased $3,913,000, or 7.9%, to $53,711,000 over the comparable
period last year. The revenue increase is primarily the result of increases in
residency fees and charges in the independent living, assisted living and
nursing components, occupancy increases at a majority of the RC's and the
favorable impact of recently opened expansion units at four RC's (two located in
Delaware, one which added five assisted living units in November 1995 and the
other which added fifteen assisted living units in October 1996; one located in
New Mexico, which increased its assisted living capacity by twenty units in
April 1996; and one located in South Carolina, which added nineteen healthcare
units in June 1996). Each of the nine RC's experienced revenue increases in
1996.
Routine expenses and ancillary costs increased $2,825,000, or 7.8%, to
$39,210,000 compared to the same period last year. The increased costs and
expenses resulted primarily from a generally higher level of nursing, therapy
healthcare and other staffing, increased occupancy at a majority of the RC's and
normal inflationary and other operational increases in other expenses. The
recently opened expansion units 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.
Additionally, a favorable adjustment to workers' compensation insurance costs of
$229,000 in 1995 contributed to the increase in costs on a period to period
comparative basis.
Adjusted for the non-comparable item noted above, Net Operating Income
("NOI"), calculated as routine and ancillary revenues ("operating revenues")
less routine and ancillary expenses ("operating expenses") and management fees,
increased $977,000, or 10.6%, to $10,200,000 and the operating margin (operating
revenues less operating expenses) as a percentage of operating revenues
increased from 26.5% in 1995 to 27.0% in 1996.
Management fees increased as a function of revenue. Depreciation and
amortization increased as a result of current and prior year additions to
property and equipment, including four recently opened expansions. Total
interest expense for the year ended December 31, 1996 decreased by $164,000
compared to total interest expense for 1995, due primarily to a reduction in the
principal amount of long-term debt and the capitalization of interest costs
related to the expansion programs. Pursuant to the terms of the Management
Agreement as 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 accruing after
January 1, 1994 have been 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
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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.
Twelve Months Ended December 31, 1995 and 1994 . After giving effect to
certain reclassifications made to conform to the 1996 presentation, routine and
ancillary revenues for the year ended December 31, 1995 increased $2,565,000, or
5.4%, to $49,798,000 compared to operating revenues for 1994. The revenue
increase is primarily the result of increases in residency fees and charges in
the independent living and assisted living component, higher than average
occupancy at a majority of the RC's, significant increases in the provision of
ancillary healthcare services and a favorable net Medicare settlement of $46,000
in 1995 and an unfavorable net Medicare settlement of $196,000 in 1994 for the
comparable period. These revenue increases were partially offset by a revenue
decrease at an RC which experienced a decrease in occupancy and relatively flat
residency fees and charges. A second RC also experienced a decline in occupancy
in 1995, but reflected increased revenues as a result of the provision of a
significantly higher level of ancillary services.
After giving effect to certain reclassifications made to conform to the
1996 presentation, routine and ancillary expenses for the year ended December
31, 1995 increased $2,726,000, or 8.1%, to $36,385,000 compared to those
combined expenses for the same period of 1994. The higher costs and expenses
resulted primarily from the increased provision of ancillary healthcare
services, higher levels of average occupancy at seven of the nine RC's and
normal inflationary and other operational increases in other expenses. The
higher occupancy rates principally impact the costs associated with the higher
level of nursing, therapy, housekeeping and dining services required by these
residents. Additionally, favorable adjustments to workers' compensation
insurance costs of $229,000 and $786,000 in 1995 and 1994, respectively,
contributed to the increase in costs on a period-to-period comparative basis.
Adjusted for the non-comparable items noted above, and for certain
reclassifications made to conform to the 1996 presentation, Net Operating Income
("NOI"), calculated as routine and ancillary revenues ("operating revenues")
less routine and ancillary expenses ("operating expenses") and management fees,
decreased $40,000 or .4% to $9,177,000 and the operating margin (operating
revenues less operating expenses) as a percentage of operating revenues
decreased from 27.5% in 1994 to 26.4% in 1995. The operating performance of the
Partnership was adversely affected by the significant under-performance at a
certain RC which experienced only marginal increases in residency fees and
charges while experiencing a decrease in occupancy. Excluding the effect of
this RC, operating margins as a percentage of operating revenues increased from
27.7% in 1994 to 28.4% in 1995.
Management fees increased as a function of revenue. Depreciation and
amortization increased as a result of current and prior year additions to
property and equipment. Total interest expense for the year ended December 31,
1995 decreased by $123,000 compared to total interest expense for 1994, due
primarily to a reduction in the principal amount of long-term debt.
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
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 Nomura Loan 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 be
able to avoid being taxed as a corporation for federal income tax purposes.
FINANCIAL CONDITION
Liquidity And Capital Resources. At December 31, 1996, the Partnership
had cash and cash equivalents of $6,199,000, accounts receivable of $3,210,000,
other current assets of $4,081,000 and current liabilities of $10,079,000. The
Partnership believes that it has adequate liquidity to meet its foreseeable
working capital requirements.
The Partnership has initiated an expansion program relating to certain of
its Properties in an effort to further improve the Partnership's results of
operations. Currently, four expansion projects have been completed, five
expansion projects are under construction and another five expansion projects
are in certain stages of active development or design. The four completed
projects increased the number of living and nursing units owned by the
Partnership by approximately 4% at a capital cost of $3.8 million. The ten
projects which are either under construction or are in certain stages of active
development or design are expected to increase the number of living and nursing
units owned by the Partnership by approximately 18% at a budgeted capital cost
of $17.3 million. Four of the five projects currently in development or design
are expected to begin construction by the end of 1997. The expansions are
designed to modify the uses of or add capacity to existing facilities without
incurring substantial land acquisition and common area build-out costs. Certain
expansions will require additional regulatory approvals.
10
<PAGE>
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 such expansion on a timely basis, the expansion may be
delayed, reduced in scope or discontinued. The terms of the Partnership's
current long-term debt agreement restrict the Partnership from incurring
additional third-party financing (other than $1 million of equipment financing),
and prohibit the imposition of liens on the Partnership's assets. There can be
no assurance that a waiver can 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 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 cost and availability of any required financing, the
timing with respect to obtaining any such financing, 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 and whether operating costs are higher or lower than anticipated.
As discussed above, 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 being 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 $3,259,000 more cash during the year ended
December 31, 1996 than during 1995 due to an increase in amounts due to parent
of General Partner and its affiliates for the funding of payroll and certain
other payables, an increase in depreciation expense due to current and prior
year additions to property and equipment, including the recent opening of four
expansion projects, and a decrease in certain other current assets, partially
offset by an increase in accounts and other receivables. The amounts due to
parent of General Partner and its affiliates are to be reimbursed on a current
basis.
Investing activities used $441,000 more cash during the year ended December
31, 1996 than during 1995, due principally to the increase in expansion and
renovation activity at several of the RC's funded by cash from operating
activities.
Financing activities provided $3,049,000 more cash during the year ended
December 31, 1996 than during 1995, due principally to a decrease in restricted
cash. This decrease resulted from the release of restricted funds held in
segregated escrow accounts controlled by the collateral agent as required by the
Nomura Loan. Such funds were released to reimburse the Partnership for payments
made out of the Partnership's unrestricted cash for certain capital
expenditures, insurance premiums and real estate taxes.
Operating activities provided $1,057,000 less cash during the year ended
December 31, 1995 than during 1994 due principally to the timing of payments of
management fees and amounts due to parent of General Partner and its affiliates
as well as an increase in accrued revenues and expenses, net.
Investing activities used $2,133,000 more cash during the year ended
December 31, 1995 then during 1994, due principally to the significant increase
in expansion and renovation activity at several of the RC's funded by cash from
operating activities.
Financing activities used $326,000 more cash during the year ended December
31, 1995 then during 1994, due principally to an increase in restricted cash
which resulted from the establishment of additional fixed asset, insurance and
real estate tax reserve funds during 1995.
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.
New Accounting Standards. On January 1, 1996, the Partnership adopted
Statement of Financial Accounting Standard (SFAS) No. 121, "Accounting for the
Improvement of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of",
with no material effect on the Company's financial statements.
11
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The following consolidated financial statements are filed under this Item:
<TABLE>
<CAPTION>
PAGE(S)
-------
<S> <C>
Independent Auditors' Reports 13
Consolidated Balance Sheets - December 31, 1996 and 1995 15
Consolidated Statements of Operations - Years ended December 31, 1996, 1995 and 1994 16
Consolidated Statements of Partners' Equity - Years ended December 31, 1996, 1995 and 1994 17
Consolidated Statements of Cash Flows - Years ended December 31, 1996, 1995 and 1994 18
Notes to Consolidated Financial Statements 19
</TABLE>
12
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Partners
FORUM RETIREMENT PARTNERS, L.P.:
We have audited the accompanying consolidated balance sheet of Forum Retirement
Partners, L.P. and subsidiary partnership (the "Partnership") as of December 31,
1996 and the related consolidated statements of operations, partners' equity and
cash flows for the year then ended. These consolidated financial statements and
the schedule referred to below are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these consolidated
financial statements and schedule based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Forum Retirement
Partners, L.P. and subsidiary partnership as of December 31, 1996 and the
results of its operations and its cash flows for the year then ended in
conformity with generally accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the consolidated
financial statements taken as a whole. The schedule is presented for purposes of
complying with the Securities and Exchange Commission rules and is not part of
the consolidated financial statements. This schedule has been subjected to the
auditing procedures applied in the audit of the consolidated financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the consolidated
financial statements taken as a whole.
/s/ Arthur Andersen LLP
- -----------------------
Arthur Andersen LLP
Washington, D.C.
March 26, 1997
13
<PAGE>
INDEPENDENT AUDITORS' REPORT
- ----------------------------
The Partners
Forum Retirement Partners, L.P.:
We have audited the accompanying consolidated balance sheet of Forum Retirement
Partners, L.P. and subsidiary partnership as of December 31, 1995 and the
related consolidated statements of operations, partners' equity and cash flows
for each of the years in the two-year period ended December 31, 1995. In
connection with our audits of the consolidated financial statements, we also
have audited the financial statement schedule of valuation and qualifying
accounts for the two-year period ended December 31, 1995. These consolidated
financial statements and financial statement schedule are the responsibility of
the Partnership's management. Our responsibility is to express an opinion on
these consolidated financial statements and financial statement schedule based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the acounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Forum Retirement
Partners, L.P. and subsidiary partnership as of December 31, 1995 and the
results of their operations and their cash flows for each of the years in the
two-year period ended December 31, 1995 in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
/s/ KPMG Peat Marwick LLP
- -------------------------
KPMG Peat Marwick LLP
Indianapolis, Indiana
February 9, 1996, except as to note 7,
which is as of March 25, 1996
14
<PAGE>
FORUM RETIREMENT PARTNERS, L.P. AND SUBSIDIARY PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS 1996 1995
--------- -------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 6,199 2,960
Accounts receivable, less allowance for doubtful
accounts of $420 and $227, respectively 3,210 3,057
Other receivables 419 30
Restricted cash (note 2) 2,663 4,154
Estimated third-party settlements 684 550
Inventory and prepaid expenses 229 639
Other current assets 86 75
-------- -------
TOTAL CURRENT ASSETS 13,490 11,465
-------- -------
Property and equipment:
Land and land improvements 14,871 14,867
Buildings 103,496 99,293
Furniture and equipment 9,955 9,198
Construction in progress 941 1,478
-------- -------
129,263 124,836
Less accumulated depreciation 31,723 27,630
-------- -------
NET PROPERTY AND EQUIPMENT 97,540 97,206
-------- -------
Deferred financing costs, net of accumulated
amortization of $1,125 and $714, respectively 1,528 1,939
-------- -------
$112,558 110,610
======== =======
LIABILITIES AND PARTNERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 1,129 1,023
Accounts payable and accrued expenses 3,476 4,298
Amounts due to parent of general partner and its affiliates (note 3) 4,242 1,121
Resident deposits 1,232 1,266
-------- -------
TOTAL CURRENT LIABILITIES 10,079 7,708
Long-term debt, less current portion (note 4) 46,855 47,984
Deferred management fees due to parent of general partner 15,780 15,780
-------- -------
TOTAL LIABILITIES 72,714 71,472
-------- -------
General partner's equity in subsidiary partnership 236 229
Partners' equity:
General partner 502 495
Limited partners (15,285 units issued and outstanding) 39,106 38,414
-------- -------
TOTAL PARTNERS' EQUITY 39,608 38,909
-------- -------
$112,558 110,610
======== =======
Commitments and contingencies (note 5)
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
15
<PAGE>
FORUM RETIREMENT PARTNERS, L.P. AND SUBSIDIARY PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS EXCEPT PER UNIT AMOUNTS)
<TABLE>
<CAPTION>
1996 1995 1994
-------- ------ ------
<S> <C> <C> <C>
Revenues:
Routine revenue $47,917 43,921 42,362
Ancillary revenue 5,794 5,877 4,871
Other income 395 338 247
------- ------ ------
TOTAL REVENUES 54,106 50,136 47,480
------- ------ ------
Costs and expenses:
Routine expenses 33,774 31,617 29,783
Ancillary costs 5,436 4,768 3,876
Management fees to parent of general partner 4,301 3,961 3,767
General and administrative 611 512 714
Litigation 88 89 146
Depreciation 4,093 3,630 3,491
Interest, including amounts to parent of general
partner of $23, $28 and $38, respectively 5,097 5,261 5,384
------- ------ ------
TOTAL COSTS AND EXPENSES 53,400 49,838 47,161
------- ------ ------
INCOME BEFORE GENERAL PARTNER'S
INTEREST IN INCOME OF SUBSIDIARY PARTNERSHIP 706 298 319
General partner's interest in income of subsidiary
partnership 7 1 2
------- ------ ------
NET INCOME $ 699 297 317
======= ====== ======
General partner's interest in net income $ 7 3 3
======= ====== ======
Limited partners' interest in net income $ 692 294 314
======= ====== ======
Average number of limited partner units outstanding 15,285 15,285 15,285
======= ====== ======
NET INCOME PER LIMITED PARTNER UNIT $0.05 0.02 0.02
======= ====== ======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
16
<PAGE>
FORUM RETIREMENT PARTNERS, L.P. AND SUBSIDIARY PARTNERSHIP
CONSOLIDATED STATEMENTS OF PARTNERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
GENERAL LIMITED
PARTNER PARTNERS
-------- ---------
<S> <C> <C>
Balances at December 31, 1993 $ 490 37,896
Offering costs (1) (90)
Net income 3 314
------ -------
Balances at December 31, 1994 492 38,120
Net income 3 294
------ -------
Balances at December 31, 1995 495 38,414
Net income 7 692
------ -------
Balances at December 31, 1996 $ 502 39,106
====== =======
Accumulated balances:
Capital contributions $1,173 116,279
Offering costs (4) (6,715)
Cash distributions (255) (29,679)
Accumulated losses (412) (40,779)
------ -------
Balances at December 31, 1996 $ 502 39,106
====== =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
17
<PAGE>
FORUM RETIREMENT PARTNERS, L.P. AND SUBSIDIARY PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995 1994
-------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 699 297 317
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation of property and equipment 4,093 3,630 3,491
Amortization of deferred financing costs 411 362 352
Amounts due to parent of general partner and its affiliates 3,166 47 732
Accrued revenues and expenses, net (1,357) (174) 42
Other 231 (178) 107
------- ------ ------
NET CASH PROVIDED BY OPERATING ACTIVITIES 7,243 3,984 5,041
------- ------ ------
Net cash used in investing activities -
Additions to property and equipment (4,427) (3,986) (1,853)
------- ------ ------
Cash flows provided by (used in) financing activities:
Reduction of long-term debt (1,023) (927) (773)
Payments on note payable to parent of general partner (45) (121) (176)
Deferred financing costs --- (49) (293)
Offering costs --- --- (152)
Net decrease (increase) in restricted cash 1,491 (1,529) (906)
------- ------ ------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 423 (2,626) (2,300)
------- ------ ------
Net increase (decrease) in cash and cash equivalents 3,239 (2,628) 888
Cash and cash equivalents at beginning of year 2,960 5,588 4,700
------- ------ ------
Cash and cash equivalents at end of year $ 6,199 2,960 5,588
======= ====== ======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
18
<PAGE>
FORUM RETIREMENT PARTNERS, L.P. AND SUBSIDIARY PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Forum Retirement Partners, L.P. and a subsidiary partnership (the
"Partnership") own nine retirement communities ("RCs") which were acquired
from Forum Group, Inc. ("Forum Group"). Forum Group was engaged to manage,
and continues to manage, the RCs for the Partnership.
The general partner of the Partnership, a wholly owned subsidiary of
Forum Group, receives 1% of all distributions of net cash flow until the
limited partners receive cumulative distributions equal to a 12% cumulative
annual return on the initial offering price. Thereafter, the general partner
is to receive 30% of all distributions of net cash flow.
On February 19, 1991, Forum Group commenced reorganization proceedings
under Chapter 11 of the United States Bankruptcy Code, and on April 2, 1992,
Forum Group's plan of reorganization was confirmed by the Bankruptcy Court.
In February 1993, the Partnership and Forum Group entered into a settlement
agreement disposing of certain claims which arose during the reorganization
proceedings. As part of that settlement, the Partnership received a cash
payment of $125,000 and 63,612 shares of Forum Group common stock which were
sold in August 1993 for $230,000, resulting in a gain of $130,000.
To facilitate the refinancing of its long-term debt, the Partnership
and Forum Group entered into a Recapitalization Agreement (the
"Recapitalization Agreement") in October 1993, which provided for, among
other things, an immediate infusion of $13.1 million of equity into the
Partnership by a wholly owned subsidiary of Forum Group. The Partnership
applied the $13.1 million of proceeds to the partial prepayment of the
outstanding principal balance of the secured bank credit agreement that was
to mature on December 31, 1993. To repay the remaining amount due on the
secured bank credit agreement and other indebtedness of the Partnership, on
December 28, 1993, the Partnership obtained $50.7 million in new mortgage
financing (see note 4).
In order that the other limited partners' interests are not diluted as
a result of the Recapitalization Agreement, in January 1994, the Partnership
offered all of the other limited partners the right to purchase 0.74 of a
Partnership unit for each unit owned on October 18, 1993, at $2.00 per unit.
Proceeds from the exercise of these rights were used to repurchase 1,994,189
units from the wholly owned subsidiary of Forum Group at $2.00 per unit. The
Partnership incurred costs of $91,000 and $253,000 in 1994 and 1993,
respectively, as a result of the offering.
In September 1995, Forum Group commenced a tender offer for any and
all outstanding units not already owned by it at $2.83 per unit. The tender
offer was completed in December 1995, with 2,644,724 units being purchased.
Forum Group owned 79.0% of the Partnership at December 31, 1996 and 1995.
On February 15, 1996, Forum Group, Marriott International, Inc, and a
subsidiary thereof (collectively "Marriott") entered into an Agreement and
Plan of Merger (the "Merger Agreement"). Pursuant to the Merger Agreement,
Marriott completed a tender offer for the shares of Forum Group on March 23,
1996 and currently owns 100% of the outstanding common stock of Forum Group.
19
<PAGE>
FORUM RETIREMENT PARTNERS, L.P. AND SUBSIDIARY PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Principles of Consolidation
The consolidated financial statements include the accounts of the
Partnership and its affiliated operating partnership in which the
Partnership has a 99% limited partner's interest and the general partner of
the Partnership owns the remaining 1% interest. The effects of all
significant intercompany accounts and transactions have been eliminated in
consolidation.
Cash
Cash and cash equivalents include cash and highly liquid investments
with a maturity of three months or less.
Inventory and Prepaid Expenses
Inventory consists primarily of supplies used in the care of residents
and are stated at the lower of cost (first-in, first-out method) or market.
Prepaid expenses consist primarily of prepaid insurance costs and are
expensed ratably over the terms of the policies.
Property and Equipment
Property and equipment are carried at cost and include capitalized
interest of $247,000 and $99,000 at December 31, 1996 and 1995,
respectively. Depreciation is computed on the straight-line method. Deferred
Costs
Financing costs are amortized into interest expense on the straight-
line method over the term of the related loan agreement.
Revenues
Routine revenue is generated from monthly charges for independent
living units and daily charges for assisted living suites and nursing beds,
and is recognized monthly based on the terms of the residents' agreements.
Advance payments received for services are deferred until the services are
provided. Ancillary revenue is generated on a "fee for service" basis for
supplementary items requested by residents, and are recognized as the
services are provided.
Revenues include amounts estimated by management to be reimbursable by
Medicare, Medicaid and other third party payor agreements. During the year
ended December 31, 1996, revenue from Medicare and Medicaid respresented 14%
and 7%, respectively, of total revenue. Reimbursement arrangements are
subject to audit and retroactive adjustment. Provisions are made for
potential adjustments that may result. To the extent those provisions vary
from settlements, revenues are charged or credited when the adjustments
become final. Changes in the estimate of amounts reimbursable by third party
payors from prior years resulted in the recognition of $107,000, $261,000
and $210,000 of additional revenue for 1996, 1995 and 1994, respectively.
20
<PAGE>
FORUM RETIREMENT PARTNERS, L.P. AND SUBSIDIARY PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Income Taxes
As partnerships, the allocated share of income or loss for the year is
includable in the income tax returns of the partners; accordingly, income
taxes are not reflected in the accompanying consolidated financial
statements.
The tax basis of the Partnership's assets are approximately
$21,500,000 less than the basis reported for financial statement purposes,
primarily due to the carryover tax basis of the affiliated operating
partnerships and differences in tax reporting methods.
Per Unit Data
The net income per unit is based on the limited partners' interest in
the net income divided by the average number of limited partner units
outstanding.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassifications
Certain amounts in the 1995 and 1994 financial statements have been
reclassified to conform with the 1996 presentation.
(2) RESTRICTED CASH
Restricted cash is summarized as follows:
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
------------------- -----------------
<S> <C> <C>
Debt service reserve fund $ 487,000 487,000
Fixed asset reserve fund 246,000 1,066,000
Real estate tax reserve fund 510,000 837,000
Insurance reserve fund --- 486,000
------------------- -----------------
1,243,000 2,876,000
Resident security deposits 1,420,000 1,278,000
------------------- -----------------
$2,663,000 4,154,000
=================== =================
</TABLE>
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.
21
<PAGE>
FORUM RETIREMENT PARTNERS, L.P. AND SUBSIDIARY PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(3) 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.
Amounts due to the parent of the General Partner and its affiliates is
summarized as follows:
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
----------------- -----------------
<S> <C> <C>
Due to Forum Group, Inc.:
Management fees $1,130,000 1,032,000
Other 512,000 89,000
----------------- -----------------
1,642,000 1,121,000
----------------- -----------------
Due to Marriott International, Inc.:
Accounts payable 1,313,000 0
Payroll 1,246,000 0
Other 41,000 0
----------------- -----------------
2,600,000 0
----------------- -----------------
$4,242,000 1,121,000
================= =================
</TABLE>
(4) LONG-TERM DEBT
On December 28, 1993, the Partnership entered into a mortgage loan
agreement for $50,707,000, and the proceeds were used to retire the split coupon
mortgage notes, including the yield maintenance premium, and the bank credit
facility and to pay related fees and expenses of $775,000. The mortgage loan
requires monthly payments of principal (based on a 20-year amortization) and
interest at 9.93% per annum to maturity on January 1, 2001. The loan agreement
prohibits prepayment for three years and requires payment of a yield maintenance
premium, as defined, if prepaid thereafter. Additional principal payments are
required if the debt service coverage ratio, as defined, is below specified
levels. The loan is secured by all of the Partnership's RCs. Scheduled principal
payments on the mortgage loan as of December 31, 1996 are $1,129,000 in 1997,
$1,247,000 in 1998, $1,376,000 in 1999, $1,520,000 in 2000 and $42,712,000 in
2001.
Amounts due to parent of general partner include long-term debt of $291,000
and $336,000 at December 31, 1996 and 1995, respectively, with a blended
interest rate of 7.2% and maturities in varying amounts through January 31,
2004.
Interest paid during 1996, 1995 and 1994 totaled $4,833,000, $4,946,000 and
$4,679,000, respectively.
(5) COMMITMENTS AND CONTINGENCIES
In connection with the formation of the Partnership, the Partnership
entered into a long-term management agreement with Forum Group which
requires fees of 8% of gross operating revenues. Through December 31, 1993,
the agreement provided for the deferral of the payment of the fees if net
cash flow was not adequate to make certain distributions to limited
partners. Since cash flow was not adequate to make the distributions, the
$15,780,000 of management fees earned
22
<PAGE>
FORUM RETIREMENT PARTNERS, L.P. AND SUBSIDIARY PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
since formation of the Partnership through December 31, 1993 was deferred.
The Partnership also reimbursed Forum Group for general and administrative
costs incurred on behalf of the Partnership, which amounted to $180,000 in
1996, 1995 and 1994.
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, and a trial date has been set for May 5,
1997. The General Partner intends to vigorously defend against this
litigation. The Partnership, in accordance with the Management Agreement,
reimbursed the General Partner for $88,000, $89,000 and $146,000 of
litigation costs relating to this claim in 1996, 1995 and 1994,
respectively.
(6) FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures
About Fair Value of Financial Instruments," requires disclosure of the fair
value of all financial assets and liabilities for which it is practicable to
estimate. Fair value is defined in the Statement as the amount at which the
instrument could be exchanged in a current transaction between willing
parties, other than in a forced or liquidation sale. The Partnership
believes the carrying amount of its financial instruments (excluding
property indebtedness) approximates their fair value due to the relatively
short maturity of these instruments. There is no quoted market value
available for any of the Partnership's instruments. Property indebtedness,
with a carrying amount of $47,984,000, at December 31, 1996, has been
calculated to have a fair value of $49,802,000 by discounting the scheduled
loan payments to maturity using rates that are believed to be currently
available for debt of similar terms and maturities. Due to restrictions of
transferability and prepayment, previously modified debt terms and other
property specific competitive conditions, the Partnership may be unable to
refinance the indebtedness to obtain such calculated debt amounts reported.
23
<PAGE>
FORUM RETIREMENT PARTNERS, L.P. AND SUBSIDIARY PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(7) EMPLOYEE BENEFIT PLAN
Effective April 1, 1993, Forum Group established a defined contribution
profit sharing plan, including features under Section 401(K) of the Internal
Revenue Code, which will provide retirement benefits to its eligible
employees. The Partnership reimburses Forum Group for contributions to the
plan for participants employed at the RCs. Effective in the third quarter of
1996, participation in the Forum Group plan ceased and employees now
participate in a plan maintained by Marriott International. The Partnership
has expensed $33,000, $57,000 and $43,000 in 1996, 1995 and 1994,
respectively, relating to its portion of employee contributions under these
plans.
<TABLE>
<CAPTION>
(8) QUARTERLY FINANCIAL DATA (UNAUDITED)
(in thousands, except per unit amounts)
1996
------------------------------------------------
FIRST SECOND THIRD FOURTH FISCAL
QUARTER QUARTER QUARTER QUARTER YEAR
------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales $13,021 $13,167 $13,517 $14,006 $53,711
Net operating income 2,920 2,716 2,513 2,051 10,200
Net income (loss) 374 256 507 (438) 699
Income (loss) per limited partner unit 0.03 0.02 0.03 (0.03) 0.05
1995
------------------------------------------------
FIRST SECOND THIRD FOURTH FISCAL
QUARTER QUARTER QUARTER QUARTER YEAR
------------------------------------------------
Sales $12,088 $12,370 $12,373 $12,967 $49,798
Net operating income 2,316 2,488 2,252 2,396 9,452
Net income 6 153 24 114 297
Income per limited partner unit 0.00 0.01 0.00 0.01 0.02
</TABLE>
Sales is defined as routine and ancillary revenues and net operating income is
defined as sales less routine expenses, ancillary costs and management fees to
parent of general partner.
(9) SUBSEQUENT EVENTS
On March 18, 1997, Marriott International, Inc. ("Marriott
International"), which owns Forum Group, and Host Marriott Corporation,
announced that they had entered into a letter of intent providing for the
sale of Forum Group to Host Marriott Corporation, and for the transfer of
the management of the Forum Group retirement communities (including those
owned by the Partnership) to a Marriott International subsidiary, subject
to receipt of required consents. The parties announced that the sale is
expected to be completed by the second quarter of 1997, but is subject to
customary due diligence, documentation, approval by the Boards of Directors
of Marriott International and Host Marriott Corporation, and expiration
or termination of the Hart-Scott-Rodino Antitrust Act waiting period
requirements.
24
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
On May 8, 1996, the Board of Directors of the General Partner, acting on
behalf of the Partnership, engaged Arthur Andersen LLP ("Arthur Anderson") to
replace KPMG Peat Marwick LLP ("Peat Marwick") as independent auditors for the
Partnership. The decision to change auditors arose in connection with a change
in control of the Partnership following the acquisition of the parent of the
General Partner by Marriott International in March 1996. Arthur Andersen is the
independent auditor for Marriott International.
Peat Marwick's reports on the financial statements of the Partnership for
the fiscal years ended December 31, 1995 and 1994 did not contain an adverse
opinion or a disclaimer of opinion and such reports were not qualified or
modified as to uncertainty, audit scope or accounting principles. During the
fiscal years ended December 31, 1995 and 1994 and the interim period ended
March 31, 1996, (i) there were no disagreements with the former auditors on any
matter of accounting principles or practices, financial statement disclosure or
auditing scope or procedure, which disagreements, if not resolved to the
satisfaction of the former auditors, would have caused them to make reference in
connection with their report to the subject matter of disagreement and (ii)
there were no "reportable events" (as defined in Regulation S-K Item 304).
The Partnership has provided Peat Marwick with a copy of the disclosures
it is making in this Item 9. Peat Marwick has furnished the Partnership with a
letter addressed to the Securities and Exchange Commission stating that it
agrees with the statements made by the Partnership in this Item 9. The
Partnership has filed a copy of Peat Marwick's letter as Exhibit 16 to this
report.
25
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE PARTNERSHIP.
The following table lists the names and ages of all current directors and
executive officers of the General Partner; all positions and offices with the
General Partner held by each such person; each such person's term of office as a
director or an executive officer, and the period during which he has served as
such; and each such person's business experience for the past five years. The
directors of the General Partner serve as such until their successors are
elected and qualified. The executive officers of the General Partner serve at
the pleasure of the Board of Directors of the General Partner.
NAME, PRINCIPAL OCCUPATION SERVED
AND BUSINESS EXPERIENCE SINCE AGE
- ----------------------- ------- ---
Directors:
Paul E. Johnson, Jr./1/ March 1996 49
Mr. Johnson is Chairman of the Board and President of the General Partner, and
President of the Senior Living Services Division of Marriott International.
Mr. Johnson joined Marriott Corporation in 1983 in Corporate Financial
Planning & Analysis. In 1987, he was promoted to Group Vice President of
Finance and Development for the Marriott Service Group and later assumed
responsibility for real estate development for Marriott Senior Living
Services. During 1989, he served as Vice President and General Manager of
Marriott's Travel Plazas division. Mr. Johnson subsequently served as Vice
President and General Manager of Marriott Family Restaurants from December
1989 through 1991. In October 1991, he was appointed as Executive Vice
President and General Manager of Marriott Senior Living Services, and in June
1996 he was appointed to his present position.
John F. Sexton 1993 64
Mr. Sexton is a director of the General Partner; Chairman, Evans-McKinsey
Company, a financial consulting firm, since 1993, theretofore Chief Financial
Officer, Lomas Financial Corporation since prior to 1989; director of
Americana Hotels and Realty Corp.; Chairman and Director of Mutual Equity
Mortgage.
James C. Leslie 1993 40
Mr. Leslie is President, Chief Operating Officer and a director of The
Staubach Company, positions he has held since March 1996 and October 1982,
respectively. Mr. Leslie was Chief Financial Officer of The Staubach Company
from 1982 to January 1992, at which time he became President of Staubach
Financial Services, a position he held until February 1996. Mr. Leslie is
also President and a board member of Wolverine Holding Company, and serves on
the boards of Columbus Realty Trust, FM Properties, Inc., Wyndham Hotel
Corporation and the North Texas Chapter of the Arthritis Foundation. Mr.
Leslie is a certified public accountant.
- --------------
(1) Mr. Johnson was appointed to fill the vacancy created by the resignation
of Mr. McNamara on March 25, 1996.
26
<PAGE>
NAME, PRINCIPAL OCCUPATION SERVED
AND BUSINESS EXPERIENCE SINCE AGE
- ----------------------- ------- ---
William J. Shaw March 1996 51
Mr. Shaw is a Vice President of the General Partner. Effective March 31,
1997, Mr. Shaw became President and Chief Operating Officer of Marriott
International. He joined Marriott Corporation in 1974, was Corporate
Controller in 1979 and a Vice President in 1982. In 1985, he assumed
responsibility for Marriott Corporation's Tax Department and Risk Management
department and was elected Senior Vice President - Finance. In 1986, Mr. Shaw
was elected Senior Vice President - Finance and Treasurer of Marriott
Corporation. He was elected Executive Vice President of Marriott Corporation
and promoted to Chief Financial Officer in April 1988. Mr. Shaw was elected
President of the Marriott Service Group in February 1992, which now comprises
Marriott's Contract Services Group. In October 1993, he was appointed
Executive Vice President of Marriott International.
Terrence P. Morrow March 1996 49
Mr. Morrow is Treasurer and a Vice President of the General Partner. Mr. Morrow
is Senior Vice President of Finance for Marriott Senior Living Services with
responsibility for the Accounting, Finance and Information Systems functions
of the Business. Mr. Morrow has worked for Marriott since 1970 and has been
in his current job since 1990. Previously, he was Vice President of Marriott
Suites and Vice President of Internal Audit for Marriott Corporation. Mr.
Morrow also spent 17 years in the Hotel Division where he held positions as a
Hotel Controller, Regional Controller and Vice President Area Controller.
Lawrence B. Murphy March 1996 39
Mr. Murphy is a Vice President of the General Partner. Mr. Murphy joined
Marriott in 1983 and served in various capacities in its Lodging Division,
including Vice President of Rooms Operations, Vice President of Service
Development and General Manager, until March 1995 when he joined the Senior
Living Services Division as Vice President for Operations.
See "Item 1--Business" for a discussion of a change in control of Forum
Group that occurred on March 25, 1996, and a letter of intent entered into on
March 17, 1997 relating to a proposed transaction that, if consummated, would
result in a change in control of Forum Group.
The Partnership Agreement provides that the Board of Directors of the General
Partner shall at all times contain a majority of individuals each of whom is an
Independent Director. The Partnership Agreement defines an "Independent
Director" as a person who is not (i) a director, officer or employee of, (ii) a
holder of 1% or more of the capital stock of, or (iii) an Affiliate of, the
General Partner or any of its affiliates. Vacancies of Independent Directors are
filled by the remaining Independent Director(s).
The certificate of incorporation of the General Partner requires that a
majority of the Board of Directors of the General Partner consist at all times
of individuals who are each an Independent Director. The certificate of
incorporation defines an "Independent Director" to be a person meeting the same
test set forth in the Partnership Agreement; except that, for so long as the
Nomura Loan remains outstanding, the Board of Directors of the General Partner
shall contain a majority of individuals each of whom (i) is not, and during the
immediately preceding five years has not been, a director (other than a director
of the General Partner), officer or employee of Forum Group or any of its
subsidiaries or Affiliates, and (ii) does not have, and has not had during the
immediately preceding five years, any ownership interest in the General Partner,
Forum Group or any other subsidiary or Affiliate thereof. The certificate of
incorporation provides that any vacancy on the Board created by the removal or
withdrawal of an Independent Director shall be filled by an Independent Director
selected by the remaining Independent Directors, and if there are none, by the
shareholders of the General Partner.
27
<PAGE>
Messrs. Leslie and Sexton are Independent Directors under each of the
foregoing definitions. See "Item 3 - Legal Proceedings" for a discussion of
certain litigation challenging the constitution of the Board of Directors of the
General Partner and the Management Agreement entered into in 1986 in connection
with the formation of the Partnership.
ITEM 11. EXECUTIVE COMPENSATION.
No cash or other compensation is paid to any officer of the General Partner
for services rendered in any capacity to the Partnership and its affiliated
operating partnership.
Messrs. Sexton and Leslie are compensated for all services as a director at
the rate of $18,000 per year, payable quarterly in advance, plus $1,500 for each
board or committee meeting attended in person and $1,000 per meeting attended
telephonically. In addition, if Mr. Sexton or Mr. Leslie serve as a committee
chairman, he will receive $250 per substantive discussion of such committee.
Mr. Johnson will receive no compensation for his service as a director. Until
his resignation in March 1996, Mr. McNamara was compensated for all services as
a director at the rate of $15,000 per year, payable quarterly in advance.
In addition to amounts payable to Forum Group under the Management Agreement,
Forum Group and the General Partner are entitled to the reimbursement of various
amounts and to indemnification for certain costs and losses under the Management
Agreement and the Partnership Agreement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
(a) Security Ownership of Certain Beneficial Owners. The following table
shows the numbers and percentages of Units owned beneficially on March 5, 1997
by any person known to the Partnership to be the beneficial owner of more than
5% of the issued and outstanding units. Each person has sole voting and
investment power as to the Units beneficially owned by that person. In addition
to the Units beneficially owned by it, Forum Group beneficially owns the General
Partner's 1% general partnership interest.
UNITS
---------------------------
NAME AND ADDRESS OF PERCENT OF
BENEFICIAL OWNER NUMBER TOTAL
---------------- ---------- ----------
Forum Group, Inc. (1) 12,072,515 79.0%
10400 Fernwood Road
Bethesda, MD 20817
(1) Consists of Units owned by the General Partner and by another wholly owned
subsidiary of Forum Group. Forum Group is a wholly owned subsidiary of Marriott
International.
(b) Security Ownership of Management. None of the directors or officers of
the General Partner beneficially owns any Units, except insofar as they may be
deemed beneficially to own Units owned by Forum Group or its affiliates.
Changes in Control. See "Item 1- Business" for a discussion of a change of
control of Forum Group that occurred on March 25, 1996, and a letter of intent
entered into on March 17, 1997 relating to a proposed transaction that, if
consummated, would result in a change in control of Forum Group.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Under the Management Agreement, for fiscal 1996, Forum Group received (i)
management fees of $4,301,000, (ii) reimbursement of $180,000 for direct
expenses incurred on behalf of the Partnership, and for office expenses,
salaries, compensation expenses, administrative expenses and other expenses
necessary or appropriate to the conduct of the business of, and allocable to,
the Partnership, and (iii) reimbursement of $88,000 of litigation costs (see
Item 3, Legal Proceedings). Forum Group is the parent company of the General
Partner, and beneficially owns 79.0% of the Units.
Beginning in July 1996, Marriott International has funded certain operating
expenses and expansion and renovation costs of the Partnership on behalf of
Forum Group, the manager of the Partnership's RC's. All such fundings are
reimbursed to Marriott International by the Partnership on a current basis out
of the Partnership's cash flow.
At December 31, 1996, deferred management fees payable to Forum Group under
the Management Agreement totaled approximately $15,780,000. See "Item 1 -
Partnership Recapitalization" and Item 7 of Part I of this Report for a
discussion of the Management Agreement.
28
<PAGE>
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Documents Filed as Part of Report. The following documents are filed
as a part of this report:
1. FINANCIAL STATEMENTS:
The following consolidated financial statements of the Partnership and its
affiliated operating partnership are filed under Item 8 of this report:
<TABLE>
<CAPTION>
PAGE(S)
-------
<S> <C>
Independent Auditors' Reports.................................................................. 13
Consolidated Balance Sheets - December 31, 1996 and 1995...................................... 15
Consolidated Statements of Operations - Years ended December 31, 1996, 1995 and 1994.......... 16
Consolidated Statements of Partners' Equity - Years ended December 31, 1996, 1995 and 1994.... 17
Consolidated Statements of Cash Flows - Years ended December 31, 1996, 1995 and 1994.......... 18
Notes to Consolidated Financial Statements.................................................... 19
2. FINANCIAL STATEMENT SCHEDULES:
The following other financial statement schedule is filed pursuant to
this item:
PAGE(S)
------
Schedule II- Valuation and Qualifying Accounts................................................ F-1
</TABLE>
All other schedules for which provision is made in Regulation S-X are not
required under the related instruction or are inapplicable, and have therefore
been omitted.
3. EXHIBITS:
Exhibit 2(1): Option Agreement (MLP), dated December 29, 1986, by and among
Forum Group, the Partnership and Operations (incorporated by reference to
Exhibit 2(1) to Registration Statement Number 33-71498 dated November 10,
1993 (the "1993 Form S-2")............................................. N/A
Exhibit 2(2): Recapitalization Agreement, dated October 6, 1993, between Forum
Group and the Partnership (incorporated by reference to Exhibit 10(1) to
Partnership Current Report on Form 8-K, dated October 12, 1993 (the
"October 1993 Form 8-K")............................................... N/A
Exhibit 2(3): Letter Agreement, dated December 14, 1993, by and among Forum
Group, Forum A/H and the Partnership (incorporated by reference to Exhibit
2(3) of Amendment No. 1 to the 1993 Form S-2, dated December 21, 1993
("1993 Amendment No. 1"))............................................. N/A
Exhibit 4(1): Amended and Restated Agreement of Limited Partnership, dated as
of December 29, 1986, of the Partnership, as amended (incorporated by
reference to Exhibit 4(1) to the 1993 Form S-2)........................ N/A
Exhibit 10(1): Management Agreement (MLP), dated as of December 31, 1986, by and
among the Partnership, Forum Retirement Operations, L.P., Forum Health
Partners I-A, L.P., Foulk Manor Associates, L.P. and Forum Group (the
"Management Agreement") (incorporated by reference to Exhibit 10(1) to the
1993 Form S-2)......................................................... N/A
Exhibit 10(2): First Amendment to Management Agreement, dated as of September
20, 1986 (incorporated by reference to Exhibit 10(2) to the 1993 Form
S-2)................................................................... N/A
Exhibit 10(3): Second Amendment to Management Agreement, dated as of September
20, 1989 (incorporated by reference to Exhibit 10(3) to the 1993
Form S-2).............................................................. N/A
Exhibit 10(4): Third Amendment to Management Agreement, dated as of
May 27, 1992 (incorporated by reference to Exhibit 10(4) to the 1993
Form S-2).............................................................. N/A
29
<PAGE>
Exhibit 10(5): Fourth Amendment to Management Agreement, dated as of
November 9, 1993 (incorporated by reference to Exhibit 10(5) to the 1993
Form S-2).............................................................. N/A
Exhibit 10(6): Depositary Agreement, dated as of December 29, 1986, by and
among the Partnership, the General Partner, limited partners and
assignees holding depository receipts and Manufacturers Hanover Trust
Company ("Manufacturers") (incorporated by reference to Exhibit 10(6)
to the 1993 Form S-2).................................................. N/A
Exhibit 10(7): Assignment of Depositary Agreement from Manufacturers to
American Stock & Trust Company, dated January 1, 1992 (incorporated by
reference to Exhibit 10(7) of Amendment No. 2 to the 1993 Form S-2, dated
January 5, 1994 ("1993 Amendment No. 2")............................... N/A
Exhibit 10(8): Loan Agreement, dated as of December 28, 1993, by and among
FRP Financing Limited, L.P., Nomura Asset Capital
Corporation and Bankers Trust Company (incorporated by reference to
Exhibit 10(8) to 1993 Amendment No. 2)................................. N/A
Exhibit 10(9): Amendment to Loan Agreement, dated as of January 31, 1994, by
and among FRP Financing Limited, L.P., Nomura Asset Capital Corporation and
Bankers Trust Company (incorporated by reference to Exhibit 10(9) to 1995
Form 10-K)............................................................. N/A
Exhibit 10(10): Second Amendment to Loan Agreement, dated as of March 31, 1995,
by and among FRP Financing Limited, L.P., Nomura Asset Capital Corporation
and Bankers Trust Company (incorporated by reference to Exhibit 10(10) to
1995 Form 10-K)........................................................ N/A
Exhibit 16: Letter, dated as of March 27, 1997, from
KPMG Peat Marwick LLP................................................. E-16
Exhibit 21: Subsidiaries of the Partnership............................... E-21
Exhibit 99: Forward-Looking Statements.................................... E-99
Reports on Form 8-K. No reports on Form 8-K were filed by the Partnership
during the last quarter of the fiscal year covered by this report.
30
<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., GENERAL PARTNER
----------------------------------------
Date: March 31, 1997 By: /s/ Paul E. Johnson, Jr.
------------------------------------
Paul E. Johnson, Jr., President
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT
HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE
DATES INDICATED.
SIGNATURE TITLE DATE
--------- ----- ----
(1) Principal Executive Officer
of General Partner
/s/ Paul E. Johnson, Jr. President March 31, 1997
- ----------------------------------
Paul E. Johnson, Jr.
(2) Principal Financial and
Accounting Officer of
General Partner:
/s/ Terrence P. Morrow
- ---------------------------------- Vice President, March 31, 1997
Terrence P. Morrow Treasurer
(3) A majority of the Board of
Directors of General Partner:
/s/ Paul E. Johnson, Jr.
- ---------------------------------- Director March 31, 1997
Paul E. Johnson, Jr.
/s/ James C. Leslie
- ---------------------------------- Director March 31, 1997
James C. Leslie
/s/ John F. Sexton
- ---------------------------------- Director March 31, 1997
John F. Sexton
S-1
<PAGE>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FORUM RETIREMENT PARTNERS, L.P. AND SUBSIDIARY PARTNERSHIP
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ------------------------------------------------------------------------------------------------------------------------------------
ADDITIONS
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE CHARGED TO OTHER
AT BEGINNING CHARGED TO COST ACCOUNTS- DEDUCTIONS- BALANCE AT END
DESCRIPTION OF PERIOD AND EXPENSES DESCRIBE DESCRIBE OF PERIOD
- ----------- ------------ --------------- --------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1996:
Deducted from asset accounts:
Allowance for doubtful
accounts receivable $227 $438 $0 $245 (1) $420
Year ended December 31, 1995:
Deducted from asset accounts:
Allowance for doubtful
accounts receivable $208 $312 $0 $293 (1) $227
Year ended December 31, 1994:
Deducted from asset accounts:
Allowance for doubtful
accounts receivable $126 $147 $0 $ 65 (1) $208
</TABLE>
Note (1) - Uncollectible accounts receivable charged off, less
recoveries and contractual adjustments of revenue.
Above, in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
F-1
<PAGE>
Exhibit 16
March 27, 1997
Securities and Exchange Commission
Washington, D.C. 20549
Ladies and Gentlemen:
We were previously principal accountants for Forum Retirement Partners, L.P.
and, under the date of February 9, 1996, except as to note 7, which is as of
March 25, 1996, we reported on the consolidated financial statements of Forum
Retirement Partners, L.P. and subsidiaries as of and for the years ended
December 31, 1995 and 1994. We have read Forum Retirement Partners, L.P.'s
statements included under Item 9 of its Form 10-K dated March 31, 1997, and we
agree with such statements.
Very truly yours,
/s/ KPMG Peat Marwick LLP
- -------------------------
KPMG Peat Marwick LLP
E-16
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF FORUM RETIREMENT PARTNERS, L.P.
NAME STATE OF
---- ORGANIZATION
------------
FRP Financing Limited, L.P. (99% limited partnership interest) Delaware
E-21
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 6,199
<SECURITIES> 0
<RECEIVABLES> 3,630
<ALLOWANCES> 420
<INVENTORY> 0
<CURRENT-ASSETS> 13,490
<PP&E> 129,263
<DEPRECIATION> 31,723
<TOTAL-ASSETS> 112,558
<CURRENT-LIABILITIES> 10,079
<BONDS> 46,855
0
0
<COMMON> 0
<OTHER-SE> 39,608
<TOTAL-LIABILITY-AND-EQUITY> 112,558
<SALES> 53,711
<TOTAL-REVENUES> 54,106
<CGS> 39,210
<TOTAL-COSTS> 53,400
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,097
<INCOME-PRETAX> 699
<INCOME-TAX> 0
<INCOME-CONTINUING> 699
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 699
<EPS-PRIMARY> 0.05
<EPS-DILUTED> 0.05
</TABLE>
<PAGE>
EXHIBIT 99
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,
1996: (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
requirement 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 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 restricts the ability of the Partnership to obtain third-
party financing (other than $1 million of equipment financing in the aggregate)
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.
E-99
