<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act
of 1934
FOR QUARTER ENDED JUNE 30, 1998
COMMISSION FILE NUMBER: 1-9302
FORUM RETIREMENT PARTNERS, L.P.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<CAPTION>
<S> <C> <C>
DELAWARE 35-1686799
(STATE OF INCORPORATION) 10400 FERNWOOD ROAD (I.R.S. EMPLOYER IDENTIFICATION
BETHESDA, MD 20817 NUMBER)
TELEPHONE: (301) 380-9000
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
<TABLE>
<CAPTION>
<S> <C>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
Preferred Depository Units Representing Preferred American Stock Exchange
Limited Partners' Interests
</TABLE>
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
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FORUM RETIREMENT PARTNERS, L.P. AND SUBSIDIARY PARTNERSHIP
INDEX
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PAGE NO.
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PART I. FINANCIAL INFORMATION (unaudited):
Condensed Consolidated Balance Sheets - 3
June 30, 1998 and December 31, 1997
Condensed Consolidated Statements of Operations - 4
Three and six months ended June 30, 1998 and 1997
Condensed Consolidated Statements of Cash Flows - 5
Six months ended June 30, 1998 and 1997
Notes to Condensed Consolidated Financial Statements 6
Management's Discussion and Analysis of 9
Operations and Financial Condition
PART II. OTHER INFORMATION AND SIGNATURE 12
</TABLE>
2
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FORUM RETIREMENT PARTNERS, L.P. AND SUBSIDIARY PARTNERSHIP
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
-------- ------------
(unaudited)
<S> <C> <C>
ASSETS
------
Property and equipment, net................................ $ 97,318 $ 99,615
Deferred financing costs, net.............................. 972 1,144
Restricted cash............................................ 3,872 2,452
Cash and cash equivalents.................................. 6,179 6,459
-------- --------
Total assets $108,341 $109,670
======== ========
LIABILITIES AND PARTNERS' EQUITY
--------------------------------
Debt....................................................... $ 46,246 $ 46,854
Deferred income taxes...................................... 1,501 --
Due to Host Marriott Corporation........................... 1,126 --
Due to Marriott International............................. 442 3,909
Other liabilities.......................................... 631 678
General partner's equity in subsidiary partnership......... 286 262
Deferred management fees due to parent of general partner.. 15,780 15,780
-------- --------
Total liabilities 66,012 67,483
-------- --------
Partners' equity:
General partner........................................... 529 528
Limited partners (15,285 units issued and outstanding).... 41,800 41,659
-------- --------
Total partners' equity 42,329 42,187
-------- --------
Total liabilities and partners' equity $108,341 $109,670
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
3
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FORUM RETIREMENT PARTNERS, L.P. AND SUBSIDIARY PARTNERSHIP
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three and Six Months Ended June 30, 1998 and 1997
(unaudited, in thousands, except per unit data)
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
June 30, June 30,
-------------------- ------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
REVENUES...................................................................... $ 5,117 $ 4,640 $ 9,731 $ 9,066
------- ------- ------- -------
OPERATING COST AND EXPENSES
Depreciation and amortization................................................ 945 833 1,910 1,777
Base management fees to MSLS................................................. 1,326 1,209 2,498 2,347
Property taxes............................................................... 243 98 413 561
Insurance and other.......................................................... 50 24 96 41
------- ------- ------- -------
Total operating costs and expenses 2,564 2,164 4,917 4,726
------- ------- ------- -------
OPERATING PROFIT BEFORE PARTNERSHIP EXPENSES
AND INTEREST................................................................. 2,553 2,476 4,814 4,340
General and administrative................................................... (96) (45) (174) (146)
Interest expense............................................................. (1,242) (1,298) (2,486) (2,570)
Interest income.............................................................. 120 99 226 140
------- ------- ------- -------
Income before general partner's interest in income of
subsidiary partnership....................................................... 1,335 1,232 2,380 1,764
General partners' interest in income of subsidiary partnership................ 13 13 24 18
------- ------- ------- -------
INCOME BEFORE INCOME TAXES.................................................... 1,322 1,219 2,356 1,746
Provision for income taxes resulting from change in tax status (see Note 5).. -- -- (1,271) --
Provision for income taxes for current operations............................ (490) -- (943) --
------- ------- ------- -------
Total provision for income taxes (490) -- (2,214) --
------- ------- ------- -------
NET INCOME (LOSS)............................................................. $ 832 $ 1,219 $ 142 $ 1,746
======= ======= ======= =======
General partner's interest in net income...................................... $ 8 $ 12 $ 1 $ 17
======= ======= ======= =======
Limited partners' interest in net income...................................... $ 824 $ 1,207 $ 141 $ 1,729
======= ======= ======= =======
Number of limited partner units............................................... $15,285 $15,285 $15,285 $15,285
======= ======= ======= =======
Earnings per limited partner unit............................................. $.05 $.08 $ .01 $0.11
======= ======= ======= =======
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
4
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FORUM RETIREMENT PARTNERS, L.P. AND SUBSIDIARY PARTNERSHIP
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 1998 and 1997
(unaudited, in thousands)
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1998 1997
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OPERATING ACTIVITIES
Net income.......................................... $ 142 $ 1,746
Adjustments to reconcile to cash from operations
Depreciation........................................ 1,910 1,777
Amortization of deferred financing costs............ 172 184
Increase in deferred income taxes................... 1,501 --
Change in other operating accounts.................. (3,075) (2,769)
------- -------
Cash provided by operations......................... 650 938
------- -------
INVESTING ACTIVITIES
Capital expenditures................................ (491) (2,301)
Other............................................... 877 --
(Increase) decrease in capital improvement reserve.. (586) 34
------- -------
Cash used in investing activities................... (200) (2,267)
------- -------
FINANCING ACTIVITIES
Repayments of debt.................................. (608) (550)
Principal payments on note due to general partner... (26) (68)
Increase in financing reserve....................... (96) --
------- -------
Cash used in financing activities................... (730) (618)
------- -------
Decrease in cash and cash equivalents............... (280) (1,947)
Cash and cash equivalents, beginning of period...... 6,459 6,199
------- -------
Cash and cash equivalents, end of period............ $ 6,179 $ 4,252
======= =======
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
5
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FORUM RETIREMENT PARTNERS, L.P. AND SUBSIDIARY PARTNERSHIP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. The accompanying condensed consolidated financial statements of Forum
Retirement Partners, L.P. (the "Partnership") and subsidiary partnership
have been prepared by the Partnership without audit. Certain information
and footnote disclosures normally included in financial statements
presented in accordance with generally accepted accounting principles have
been condensed or omitted. The Partnership believes the disclosures made
are adequate to make the information presented not misleading. However,
the condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Partnership's Annual Report on Form 10-K for the fiscal
year ended December 31, 1997.
In the opinion of the Partnership, the accompanying unaudited condensed
consolidated financial statements reflect all adjustments (which include
only normal recurring adjustments) necessary to present fairly the
financial position of the Partnership as of June 30, 1998 and December 31,
1997, and the results of its operations for the three and six months ended
June 30, 1998 and 1997 and cash flows for the six months ended June 30,
1998 and 1997. Interim results are not necessarily indicative of fiscal
year performance because of the impact of seasonal and short-term
variations.
The Partnership's balance sheet has been presented in a non-classified
format. Accordingly, information as reported in prior filings has been
restated.
2. Forum Retirement, Inc., a wholly-owned subsidiary of Forum Group, Inc.
("Forum Group"), is the general partner of the Partnership (the "General
Partner") and owns a one percent interest in the Partnership and a one
percent interest in a subsidiary operating partnership in which the
Partnership owns a ninety-nine percent limited partnership interest. The
General Partner's interest in the subsidiary operating partnership is
reflected in the accompanying consolidated statements of operations as a
reduction of the income of the Partnership. Forum Group beneficially owns
approximately 93% of the outstanding Preferred Depository Units (the
"Units") representing a preferred limited partner interest in the
Partnership.
On June 21, 1997, HMC Senior Communities, Inc. ("HMCSC"), a wholly-owned
subsidiary of Host Marriott Corporation ("Host Marriott"), acquired all of
the outstanding stock of Forum Group from Marriott Senior Living Services,
Inc. ("MSLS"), a subsidiary of Marriott International, Inc. ("MI"). In
connection with the acquisition, Forum Group assigned to MSLS its interest
as manager under a long-term management agreement (the "Management
Agreement") for the nine communities owned by the Partnership.
On April 16, 1998, the Board of Directors of Host Marriott approved a plan
to reorganize Host Marriott's current business operations by spinning-off
Host Marriott's senior living business into a separate corporation, the
Senior Living Communities Company and contributing Host Marriott's hotels
and certain other assets and liabilities to a newly formed Delaware limited
partnership, Host Marriott, L.P., whose sole general partner will be Host
Marriott Trust, a newly formed Maryland Real Estate Investment Trust
("REIT"). After the proposed reorganization, HMCSC will lease hotels from
Host Marriott, L.P. The reorganization, if consummated, will not have a
significant impact on the operations of the Partnership.
Consummation of the reorganization is subject to significant contingencies,
including final Board approval, consent of shareholders, limited partners,
bondholders, lenders and ground lessors of Host Marriott, its affiliates
and other third parties. Accordingly, there can be no assurance that the
reorganization will be completed.
3. Revenues represent house profit from the Partnership's senior living
communities. House profit reflects the net revenues flowing to the
Partnership as property owner and represents gross community operating
sales less property-level expenses excluding depreciation and amortization,
property taxes, insurance, management fees and certain other costs which
are classified as operating costs and expenses.
6
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FORUM RETIREMENT PARTNERS, L.P. AND SUBSIDIARY PARTNERSHIP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
House profit generated by the Partnership's senior living communities consists
of (in thousands):
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<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Community Sales
Routine............................................... $14,468 $12,671 $26,970 $25,067
Ancillary............................................. 2,098 2.397 4,251 4,271
------- ------- ------- -------
Total Community Sales.............................. 16,566 15,068 31,221 29,338
------- ------- ------- -------
Department Costs
Routine............................................... 9,617 8,746 17,827 17,052
Ancillary............................................. 1,832 1,682 3,663 3,220
------- ------- ------- -------
Total Department Costs............................. 11,449 10,428 21,490 20,272
------- ------- ------- -------
Department Profit
Routine............................................... 4,851 3,925 9,143 8,015
Ancillary............................................. 266 715 588 1,051
------- ------- ------- -------
Revenues........................................... $ 5,117 $ 4,640 $ 9,731 $ 9,066
======= ======= ======= =======
4. Restricted cash includes the following (in thousands):
June 30, December 31,
1998 1997
------- ------------
Debt service reserve fund..... $ 487 $ 391
Fixed asset reserve fund...... 855 268
Real estate tax reserve fund.. 784 627
Insurance reserve fund........ 1,746 1,166
------- -------
$ 3,872 $ 2,452
======= =======
</TABLE>
The debt service, fixed asset, real estate tax and insurance 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. In some
cases, to ensure prompt payment, the Partnership utilizes its unrestricted
cash to pay for capital expenditures, insurance premiums and real estate
taxes and is thereafter reimbursed for such payments out of funds held in
the appropriate escrow account.
5. The Omnibus Budget Reconciliation Act of 1987, as amended by the Taxpayer
Relief Act of 1997 (the "Act"), provided that certain publicly traded
partnerships should be treated as corporations for federal income tax
purposes. A provision of the Act allows certain publicly traded
partnerships which would otherwise become subject to tax as a corporation
beginning in 1998 to elect to be subject to a special tax on gross income
from its active conduct of a trade or business, and continue to avoid being
treated as a corporation for federal income tax purposes. The tax generally
applies to a partnership's gross income at the rate of three and one half
percent, effective for taxable years beginning after December 31, 1997.
The Partnership has elected not to pay the special tax on gross income and
began being treated as a corporation for federal income tax purposes
effective January 1, 1998. Included within the Partnership's tax provision
for the six months ended June 30, 1998 is a one time charge of
approximately $1.3 million to record a net deferred tax liability related
to the change in tax status. The net deferred tax liability represents the
tax effect of the excess of the net assets reported in the accompanying
financial statements over the Partnership's tax basis in the net assets.
This difference is due primarily to the use, for income tax purposes, of
accelerated depreciation methods and shorter depreciable lives for fixed
assets and deferred management fees which have been expensed under
generally accepted accounting principals but are generally not deductible
for tax purposes until paid.
6. 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. Cash flow was not adequate to make the distributions, and the
entire $15,780,000 of management fees earned from the formation of the
Partnership through December 31, 1993 was deferred.
7
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FORUM RETIREMENT PARTNERS, L.P. AND SUBSIDIARY PARTNERSHIP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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% of the limited
partners' interest 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.
7. On June 15, 1995, The Russell F. Knapp Revocable Trust (the "Plaintiff")
filed a complaint in the United States District Court of the Southern
District of Indiana (the "Indiana Court") against the General Partner and
Forum Group alleging breach of the partnership agreement, breach of
fiduciary duty, fraud, insider trading and civil conspiracy/aiding and
abetting. On February 4, 1998, the Plaintiff, MSLS, the General Partner,
Forum Group and Host Marriott entered into a Settlement and Release
Agreement (the "Settlement Agreement"), pursuant to which Host Marriott
agreed to pay each limited partner electing to join in the Settlement
Agreement $4.50 per unit in exchange for (i) the transfer of all
Partnership units owned by a settling limited partner; (ii) an agreement by
each settling limited partner not to purchase additional Partnership units;
(iii) a release of all claims asserted in the litigation; and (iv) a
dismissal of the litigation. Because of the derivative nature of the
allegations contained in the Plaintiff's complaint, the General Partner
invited all limited partners, in their sole discretion, to participate in
the Settlement Agreement, and detailed the requirements for participation
in two notices to unitholders, dated March 27, 1998 and May 6, 1998,
respectively. Initially, the period within which a limited partner could
elect to participate in the Settlement Agreement was scheduled to expire on
April 27, 1998. This period was extended to May 22, 1998. Host Marriott
also agreed to pay as much as an additional $1.25 per unit to the settling
Limited Partners, under certain conditions, in the event that Host Marriott
within three years following the date of settlement initiates a tender
offer for the purchase of units not presently held by Host Marriott or the
settling Limited Partners. On February 5, 1998, the Indiana Court entered
an order approving the dismissal of the Plaintiff's case.
In connection with the Settlement Agreement, Host Marriott initially
acquired 1,000,894 limited partner units, from the Plaintiff an related
parties for $4,504,023 on March 25, 1998. Host Marriott subsequently
acquired an additional 1,140,901 limited partner units from other limited
partners electing to participate in the Settlement Agreement for
$5,134,055. As a result of these purchases, Host Marriott's current
ownership interest in the Partnership, directly or through affiliates,
increased to approximately 93%.
8. On July 21, 1998, Forum Retirement, Inc. (FRI), the general partner of
Forum Retirement Partners, L.P., announced it had received a proposal from
Host Marriott to acquire all remaining outstanding Partnership Units for
$4.50 per Unit. Host Marriott curently owns 14,151,169 of the 15,285,248
outstanding Units of the Partnership. Completion of the proposed
transaction is contingent on several items including but not limited to,
FRI Board approval and approval of an advisory committee of the Board which
will consider the transaction from the perspective of the holders of the
remaining Units and the issuance of a fairness opinion with respect to the
proposed transaction by the financial advisors to such advisory committee.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
OPERATIONS AND FINANCIAL CONDITION
FORWARD-LOOKING STATEMENTS
Certain matters discussed in this Form 10-Q include forward-looking statements
within the meaning of the Private Litigation Reform Act of 1995, including
without limitation, statements related to Host Marriott Corporation ("Host
Marriott") proposed REIT conversion, the terms, structure and timing thereof,
and the expected effects of the proposed REIT conversion. All forward-looking
statements involve known and unknown risks, uncertainties, and other factors,
many of which are not within the control of the Partnership, that may cause
actual transactions, results, performance or achievements to be materially
different from any future transactions, results performance or achievements
expressed or implied by such forward-looking statements. While the Partnership
believes that the expectations reflected in these forward-looking statements are
based upon reasonable assumptions, it can give no assurance that its
performance or other expectations will be attained, that the transactions
described herein will be consummated or that the terms of the transactions or
the timing or effects thereof will not differ materially from those described
herein. The Partnership 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.
RESULTS OF OPERATIONS
REVENUES. Revenues represent gross property routine and ancillary sales less
property-level expenses. Routine service revenues are generated from monthly
charges for independent living units and daily charges for assisted living
suites and nursing beds which are recognized monthly based on the terms of the
residents' agreements. Ancillary service revenues are generated on a "fee for
service" basis for supplementary items requested by residents and are recognized
as the services are provided. Revenues for the three months ended June 30, 1998
increased by $477,000, or 10%, to $5,117,000 compared to the same period in
1997. Revenues for the six months ended June 30, 1998 increased by $665,000, or
7%, to $9,731,000 compared to the same period in 1997. The revenue increase is
primarily the result of increases in residency fees and charges in the
independent living, assisted living and nursing components, the favorable impact
of the expansion units and increases in therapy and other ancillary healthcare
services. However, these increases were slightly offset by increased market
competition for the Delaware and Texas communities and increased wage cost from
engaging and maintaining qualified nursing staff. Combined average occupancy
(calculated based on the number of units occupied during the respective period)
at the nine senior living communities decreased by .3 percentage point to 93.8%
for the three months ended and increased by .5 percentage point to 94.2% for
the six months ended June 30, 1998, compared to the same periods in 1997.
OPERATING COSTS AND EXPENSES. Operating costs and expenses consist of
depreciation and amortization, base management fees, property taxes, insurance
and certain other costs. The Partnership's operating costs and expenses
increased $400,000, or 18%, to $2,564,000 for the three months ended and
increased $191,000, or 4%, to $4,917,000 for the six months ended June 30, 1998,
due primarily to increased depreciation expense and property taxes resulting
from the development of additional expansion units to the existing properties.
As a percentage of revenues, operating costs and expenses increased by three
percentage points to 50% for the three months ended June 30, 1998 as compared to
the same period in 1997. As a percentage of revenues, operating costs and
expenses decreased from 52% for the six months ended June 30, 1997 to 51% for
the same period in 1998.
OPERATING PROFIT. As a result of the changes in revenues and operating costs
and expenses discussed above, the Partnership's operating profit increased by
$77,000, or 3%, to $2,553,000 for the three months ended June 30, 1998.
Operting profit increased by $474,000, or 11%, to $4,814,000 for the six months
ended June 30, 1998.
INTEREST EXPENSE. Interest expense decreased by $56,000, or 4%, to $1,242,000
for the three months ended June 30, 1998 from $1,298,000 during the same period
in 1997 resulting from loan principal amortization. Year-to-date interest
expense decreased by $84,000, or 3%, to $2,486,000 for the three months ended
June 30, 1998.
INCOME TAXES. The Partnership began being taxed as a corporation effective
January 1, 1998. This resulted in a one-time charge of approximately $1.3
million included in the tax provision for the first quarter of 1998, along with
an income tax provision of $490,000 for the three months ended June 30, 1998 and
$943,000 for the six months ended June 30, 1998.
NET INCOME (LOSS). Net income was $832,000 for the three months ended June 30,
1998 compared to net income of $1,219,000 for the same period in
1997. The decrease in net income for the second quarter was impacted by the
changes in revenues and operating profit discussed above, along with the income
tax provision for current operations discussed above. Net income for the six
months ended June 30, 1998 decreased by $1,604,000 to $142,000 as compared to
$1,746,000 for the same period in 1997 due to the impact of the approximate $1.3
million one-time tax charge, and the 1998 income taxes on current operations
discussed above. The net income per limited partner unit for the three months
ended June 30, 1998 was $.05 per unit as compared to $.08 per unit for the same
period in 1997. The net income per limited partner unit for the six months ended
June 30, 1998 was $.01 per unit, compared to net income of $.11 in 1997.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
OPERATIONS AND FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES.
At June 30, 1998, the Partnership had cash and cash equivalents of $6,179,000
and restricted cash of $3,872,000.
The Partnership's long-term financing needs have historically been funded
through loan agreements with independent financial institutions. The General
Partner believes that the Partnership will have sufficient capital resources and
liquidity to continue to conduct its operations in the ordinary course of
business, although there can be no assurance of the Partnership's ability to do
so.
The Partnership's principal source of cash is from operations. Its principal
uses of cash are operating expenses, debt service, property replacement and
renewals as well as to fund the expansions discussed below.
The Partnership has an on-going expansion program related to all of its
communities in an effort to further improve the Partnership's results of
operations. The expansions are designed to add capacity to and/or modify the
uses of existing facilities to increase earnings without incurring substantial
land acquisition and common area build-out costs. Certain expansions will
require additional regulatory approvals. The expansion program consists of
eleven separate projects at eight communities expected to increase the total
number of units by 280, or 17% of total units, at an estimated cost of $21
million. Currently, six expansion projects have been completed, two expansion
projects are under construction and another three expansion projects are in
active development or design. The three remaining projects in development or
design are expected to begin construction by the end of 1998 or early 1999. The
six completed projects increased the total number of units by 113, at a cost of
$7.7 million.
The Partnership is currently financing and intends to continue to finance this
expansion program with cash from operations. If cash flow from operations is
insufficient to complete future expansions on a timely basis, the expansion may
be delayed, reduced in scope or discontinued. The terms of the Partnership's
current 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 to the limited partners 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 availability of cash flow from operations, the ability
to obtain required zoning variances and permits from local government
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 and whether operating costs are higher or lower than
anticipated.
Cash provided by operating activities was $650,000 for the six months ended
June 30, 1998, compared to $938,000 for the same period in 1997 due principally
to changes in working capital and amounts due to Marriott International for
reimbursement of operating costs and management fees.
Cash used in investing activities was $200,000 for the six months ended
June 30, 1998, compared to $2,267,000 for the same period in 1997 due to a
decrease in capital expenditures from the completion of some expansion projects.
Cash used in financing activities was $730,000 for the six months ended
June 30, 1998, compared to $618,000 for the same period in 1997 due to increases
in repayments of debt, payments on note due to general partner and financing
reserve.
On April 16, 1998, the Board of Directors of Host Marriott approved a plan to
reorganize Host Marriott's current business operations by spinning-off Host
Marriott's senior living business into a separate corporation, the Senior Living
Communities Company and contributing Host Marriott's hotels and certain other
assets and liabilities to a newly formed Delaware limited partnership, Host
Marriott, L.P., whose sole general partner will be Host Marriott Trust, a newly
formed Maryland Real Estate Investment Trust ("REIT"). After the proposed
reorganization, HMCSC will lease hotels from Host Marriott, L.P. The
reorganization, if consummated, will not have a significant impact on the
operations of the Partnership.
Consummation of the reorganization is subject to significant contingencies,
including final Board approval, consent of shareholders, partners, bondholders,
lenders and ground lessors of Host Marriott, its affiliates and other third
parties. Accordingly, there can be no assurance that the reorganization will be
completed.
On July 21, 1998, Forum Retirement, Inc. (FRI), the general partner of Forum
Retirement Partners, L.P., announced it had received a proposal from Host
Marriott to acquire all remaining outstanding Partnership Units for $4.50 per
Unit. Host Marriott currently owns 14,151,169 of the 15,285,248 outstanding
Units of the Partnership. Completion of the proposed transaction is contingent
on several items including but not limited to, FRI Board approval and approval
of an advisory committee of the Board which will consider the transaction from
the perspective of the holders of the remaining Units and the issuance of a
fairness opinion with respect to the proposed transaction by the financial
advisors to such advisory committee.
On July 22, 1998, Harbor Finance Partners, LTD. ("Harbor Finance"), a
Partnership unitholder, filed a purported class action lawsuit relating to Host
Marriott's proposal in Delaware State Chancery Court against Host Marriott, FRI,
two of their affiliates, the Partnership, and FRI's directors. Harbor Finance
alleges in the complaint that these defendants breached their fiduciary duties
to the unitholders by offering an inadequate price for the units, attempting to
improperly influence the market price of the units, and failing to provide for a
mechanism that would establish a fair price for the units. Harbor Finance is
seeking certification of a class, an injunction to prevent completion of the
proposed transaction or, in the alternative, rescission of the transaction, and
compensatory damages. Punitive damages are not sought in the action. FRI
believes that there is no merit to the allegations contained in the complaint,
and that this litigation will not have a material, adverse effect on the
financial performance of the Partnership. The appointment of the Board's
advisory committee and the required fairness opinion will ensure that an
adequate price will be paid.
10
<PAGE>
PART II. OTHER INFORMATION
---------------------------
FORUM RETIREMENT PARTNERS, L.P. AND SUBSIDIARY PARTNERSHIP
ITEM 1. LEGAL PROCEEDINGS
On June 15, 1995, The Russell F. Knapp Revocable Trust (the "Plaintiff")
filed a complaint in the United States District Court of the Southern District
of Indiana (the "Indiana Court") against the General Partner and Forum Group
alleging breach of the partnership agreement, breach of fiduciary duty, fraud,
insider trading and civil conspiracy/aiding and abetting. On February 4, 1998,
the Plaintiff, MSLS, the General Partner, Forum Group and Host Marriott entered
into a Settlement and Release Agreement (the "Settlement Agreement"), pursuant
to which Host Marriott agreed to pay each limited partner electing to join in
the Settlement Agreement $4.50 per unit in exchange for (i) the transfer of all
Partnership units owned by a settling limited partner; (ii) an agreement by each
settling limited partner not to purchase additional Partnership units; (iii) a
release of all claims asserted in the litigation; and (iv) a dismissal of the
litigation. Because of the derivative nature of the allegations contained in the
Plaintiff's complaint, the General Partner invited all limited partners, in
their sole discretion, to participate in the Settlement Agreement, and detailed
the requirements for participation in two notices to unitholders, dated March
27, 1998, and May 6, 1998, respectively. Initially, the period within which a
limited partner could elect to participate in the Settlement Agreement was
scheduled to expire on April 27, 1998. This period was extended to May 22, 1998.
Host Marriott also agreed to pay as much as an additional $1.25 per unit to the
settling Limited Partners, under certain conditions, in the event that Host
Marriott within three years following the date of settlement initiates a tender
offer for the purchase of units not presently held by Host Marriott or the
settling Limited Partners. On February 5, 1998, the Indiana Court entered an
order approving the dismissal of the Plaintiff's case.
In connection with the Settlement Agreement, Host Marriott initially
acquired 1,000,894 limited partner units from the Plaintiff and related parties
for $4,504,023 on March 25, 1998. Host Marriott subsequently acquired an
additional 1,140,901 limited partner units from other limited partners electing
to participate in the Settlement Agreement for $5,134,055. As a result of these
purchases, Host Marriott's current ownership interest in the Partnership,
directly or through affiliates, increased to approximately 93%.
On July 22, 1998, Harbor Finance Partners, LTD. ("Harbor Finance"), a
Partnership unitholder, filed a purported class action lawsuit relating to Host
Marriott's proposal in Delaware State Chancery Court against Host Marriott, FRI,
two of their affiliates, the Partnership, and FRI's directors. Harbor Finance
alleges in the complaint that these defendants breached their fiduciary duties
to the unitholders by offering an inadequate price for the units, attempting to
improperly influence the market price of the units, and failing to provide for a
mechanism that would establish a fair price for the units. Harbor Finance is
seeking certification of a class, an injunction to prevent completion of the
proposed transaction or, in the alternative, rescission of the transaction, and
compensatory damages. Punitive damages are not sought in the action. FRI
believes that there is no merit to the allegations contained in the complaint,
and that this litigation will not have a material, adverse effect on the
financial performance of the Partnership. The appointment of the Board's
advisory committee and the required fairness opinion will ensure that an
adequate price will be paid.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None.
11
<PAGE>
SIGNATURE
FORUM RETIREMENT PARTNERS, L.P. AND SUBSIDIARY PARTNERSHIP
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
FORUM RETIREMENT PARTNERS, L.P.,
a Delaware Limited Partnership
By: FORUM RETIREMENT, INC., GENERAL PARTNER
-----------------------------------------
August , 1998 By: /s/ Donald D. Olinger
- ------------- -----------------------------------------
Date Donald D. Olinger
Vice President
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the Forum
Retirement Partners, L.P. condensed consolidated balance sheets and condensed
statement of operations as of the quarter ended June 30, 1998 and is qualified
in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> $
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1
<CASH> 6,179
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 134,873
<DEPRECIATION> (37,555)
<TOTAL-ASSETS> 108,341
<CURRENT-LIABILITIES> 0
<BONDS> 46,246
0
0
<COMMON> 0
<OTHER-SE> 41,497
<TOTAL-LIABILITY-AND-EQUITY> 108,341
<SALES> 9,731
<TOTAL-REVENUES> 9,731
<CGS> 0
<TOTAL-COSTS> 4,917
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,486
<INCOME-PRETAX> 2,356
<INCOME-TAX> 0
<INCOME-CONTINUING> 142
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 142
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
</TABLE>
