SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For Quarter Ended June 30, 1995 Commission File Number 1-9302 FORUM RETIREMENT PARTNERS, L.P. (Exact name of registrant as specified in its charter) DELAWARE 35-1686799 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 11320 Random Hills Road, Suite 400 Fairfax, Virginia 22030 (Address of principal executive offices) (Zip Code) 703-277-7000 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- There are 11 pages in this report. INDEX PART I. FINANCIAL INFORMATION PAGE ----------------------------- ---- Item 1. Financial Statements (Without Audit) Condensed consolidated balance sheets -- June 30, 1995 and December 31, 1994 3 Condensed consolidated statements of operations -- Three and six months ended June 30, 1995 and 1994 4 Condensed consolidated statements of cash flows -- Six months ended June 30, 1995 and 1994 5 Notes to condensed consolidated financial statements -- June 30, 1995 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7 PART II. OTHER INFORMATION -------------------------- Item 1. Legal Proceedings 10 SIGNATURES 11 ---------- -2- PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ---------------------------- FORUM RETIREMENT PARTNERS, L.P. AND SUBSIDIARY PARTNERSHIP CONDENSED CONSOLIDATED BALANCE SHEETS June 30, December 31, 1995 1994 ------------- ------------ (Without Audit) (Note) ASSETS (in thousands) Property and equipment: Land $ 14,816 $ 14,758 Buildings 98,477 97,918 Furniture and equipment 8,513 8,174 ----------- ----------- 121,806 120,850 Less accumulated depreciation 25,781 24,000 ----------- ----------- NET PROPERTY AND EQUIPMENT 96,025 96,850 Cash and cash equivalents 6,273 5,588 Accounts receivable, less allowances for doubtful accounts of $208 and $208 1,535 2,650 Restricted cash 2,928 2,625 Deferred costs, net of accumulated amortization of $532 and $352 2,021 2,152 Other assets 2,059 1,298 ----------- ----------- TOTAL ASSETS $ 110,841 $ 111,163 =========== =========== LIABILITIES AND PARTNERS' EQUITY Long-term debt, including $974 and $927 due within one year $ 49,482 $ 49,934 Accounts payable and accrued expenses 3,730 3,969 Management fees and amounts due to parent of general partner 1,453 1,195 Deferred management fees due to parent of general partner 15,780 15,780 Resident deposits 1,397 1,445 ----------- ----------- TOTAL LIABILITIES 71,842 72,323 ----------- ----------- General partner's equity in subsidiary partnership 229 228 ----------- ----------- Partners' equity: General partner 492 492 Limited partners (15,285 units issued and outstanding) 38,278 38,120 ----------- ----------- TOTAL PARTNERS' EQUITY 38,770 38,612 ----------- ----------- $ 110,841 $ 111,163 =========== =========== See Notes to Condensed Consolidated Financial Statements. -3- FORUM RETIREMENT PARTNERS, L.P. AND SUBSIDIARY PARTNERSHIP CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Without Audit) Three Months Ended Six Months Ended June 30, June 30, ------------------ ----------------- 1995 1994 1995 1994 -------- -------- ------- -------- (in thousands except per unit amounts) Revenues: Routine $ 10,946 $ 10,352 $ 21,567 $ 20,502 Ancillary 1,424 1,040 2,891 2,165 Other income 80 47 153 94 -------- -------- ------- -------- TOTAL REVENUES 12,450 11,439 24,611 22,761 -------- -------- ------- -------- Costs and expenses: Routine expenses 7,754 7,068 15,357 14,087 Ancillary costs 1,137 904 2,339 1,808 Management fees to parent of general partner 991 914 1,957 1,818 General and administrative 162 223 287 420 Litigation 29 20 68 42 Depreciation 897 926 1,782 1,783 Interest, including amounts to parent of general partner of $7, $10, $15, and $21 1,327 1,349 2,661 2,697 -------- -------- ------- -------- TOTAL COSTS AND EXPENSES 12,297 11,404 24,451 22,655 -------- -------- ------- -------- Income before general partner's interest in income of subsidiary partnership 153 35 160 106 General partner's interest in income of subsidiary partnership 1 0 1 1 -------- -------- ------- -------- NET INCOME 152 35 159 105 General partner's interest in net income 1 0 1 1 -------- -------- ------- -------- Limited partners' interest in net income $ 151 $ 35 $ 158 $ 104 ======== ======== ======== ======== Average number of units outstanding 15,285 15,285 15,285 15,285 ======== ======== ======== ======== Net income per unit $ 0.01 $ 0.00 $ 0.01 $ 0.01 ======== ======== ======== ======== See Notes to Condensed Consolidated Financial Statements. -4- FORUM RETIREMENT PARTNERS, L.P. AND SUBSIDIARY PARTNERSHIP CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Without Audit) Six Months Ended June 30, ------------------------- 1995 1994 ---------- ---------- (in thousands) Cash flows from operating activities: Net income $ 159 $ 105 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation of property and equipment 1,782 1,783 Amortization of deferred financing costs 179 173 Accrued management fees currently due to parent of general partner 9 914 Other accrued revenues and expenses, net 426 7 ---------- ---------- NET CASH PROVIDED BY OPERATING ACTIVITIES 2,555 2,982 ---------- ---------- Cash flows from investing activities: Additions to property and equipment (957) (815) ---------- ---------- NET CASH USED BY INVESTING ACTIVITIES (957) (815) ---------- ---------- Cash flows from financing activities: Reduction of long-term debt (452) (343) Net increase in restricted cash (351) (729) Payment on note payable to parent of general partner (62) (99) Deferred loan costs (48) (162) Other 0 (90) ---------- ---------- NET CASH USED BY FINANCING ACTIVITIES (913) (1,423) ---------- ---------- Net increase in cash and cash equivalents 685 744 Cash and cash equivalents at beginning of period 5,588 4,700 ---------- ---------- Cash and cash equivalents at end of period $ 6,273 $ 5,444 ========== ========== See Notes to Condensed Consolidated Financial Statements. -5- FORUM RETIREMENT PARTNERS, L.P. AND SUBSIDIARY PARTNERSHIP NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Without Audit) June 30, 1995 Note A - Basis of Presentation ------------------------------ The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six-month period ended June 30, 1995 are not necessarily indicative of the results that may be expected for the year ending December 31, 1995. For further information, refer to the consolidated financial statements of Forum Retirement Partners, L.P. (the "Partnership") as of and for the year ended December 31, 1994, and the footnotes thereto, included in the Partnership's Annual Report on Form 10-K for the year ended December 31, 1994 (the "1994 10-K"). Note B - General Partner's Interest in Subsidiary Partnership ------------------------------------------------------------- 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 in a subsidiary operating partnership in which the Partnership owns a ninety-nine percent interest. The General Partner's interest in the subsidiary operating partnership is reflected in the statements of operations as a reduction of the income or loss of the Partnership. The Partnership is a 62.1% owned subsidiary of Forum Group. 6 FORUM RETIREMENT PARTNERS, L.P. AND SUBSIDIARY PARTNERSHIP ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS June 30, 1995 Results Of Operations --------------------- Three Months Ended June 30, 1995 and 1994. Net operating results reported for the Partnership for the second three months of the current year were better than those for the same three-month period of 1994. As of June 30, 1995 and 1994, the Partnership owned nine retirement communities ("RCs"), all of which were managed by Forum Group. A comparison of operating revenues, operating expenses and net operating income, as adjusted for a non-recurring item is as follows: Three Months Ended June 30, ------------------------------------- 1995 1994 * Change -------- -------- -------- (dollars in thousands) RC operating revenues $12,370 $11,392 + 8.6% RC operating expenses * 8,891 8,132 + 9.3% RC management fees 991 914 + 8.4% ------- ------- Net operating income * $ 2,488 $ 2,346 + 6.1% ======= ======= ------ *As adjusted for a $160,000 non-recurring favorable workers' compensation adjustment in 1994. Current operating revenues of $12,370,000 increased 8.6% over operating revenues for the same period last year. Combined average occupancy for the three months ended June 30, 1995 of 94.1% increased by 1.5 percentage points as compared to the same period of 1994, and the combined average monthly rental rate for the three months ended June 30, 1995 increased by 2.9% compared to the same period for 1994. Ancillary services to residents increased by $384,000. Current adjusted operating expenses increased 9.3% over operating expenses for the same period last year, primarily attributable to increases in occupancy, additional ancillary services, and normal inflationary and operational increases in other operating expenses. As a result, during these same quarterly periods, the adjusted operating margin (RC operating revenues less RC operating expenses) percentage declined from 28.6% for 1994 to 28.1% for 1995. Six Months Ended June 30, 1995 and 1994. Net operating results reported for the Partnership for the first six months of the current year were better than those for the same six-month period of 1994. 7 FORUM RETIREMENT PARTNERS, L.P. AND SUBSIDIARY PARTNERSHIP ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) A comparison of operating revenues, operating expenses and net operating income, as adjusted for non-recurring items is as follows: Six Months Ended June 30, ------------------------------------- 1995 * 1994 * Change -------- -------- -------- (dollars in thousands) RC operating revenues * $24,648 $22,572 + 9.2% RC operating expenses * 17,696 16,415 + 7.8% RC management fees 1,957 1,818 + 7.6% ------- ------- Net operating income * $ 4,995 $ 4,339 + 15.1% ======= ======= ------ *As adjusted for a $190,000 non-recurring unfavorable adjustment for Medicare reimbursement estimates in 1995 for the prior year and a $520,000 non-recurring favorable workers' compensation adjustment in 1994. Current adjusted operating revenues of $24,648,000 increased 9.2% over adjusted operating revenues for the same period last year. Combined average occupancy for the six months ended June 30, 1995 of 94.1% increased by 1.2 percentage points as compared to the same period of 1994, and the combined average monthly rental rate for the six months ended June 30, 1995 increased by 3.8% compared to the same period for 1994. Ancillary services to residents increased by $726,000. Current adjusted operating expenses increased 7.8% over operating expenses for the same period last year, primarily attributable to increases in occupancy, additional ancillary services, and normal inflationary and operational increases in other operating expenses. As a result, during these same periods, the adjusted operating margin (RC operating revenues less RC operating expenses) percentage improved from 27.3% for 1994 to 28.2% for 1995. Partnership Status For Tax Purposes. The Omnibus Budget Reconciliation Act of 1987 provides that certain publicly traded partnerships will be treated as corporations for federal income tax purposes. A grandfathering provision delays corporate tax status until 1998 for certain partnerships, including the Partnership. 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. Assuming that the Partnership remains a publicly traded partnership, alternatives available to avoid corporate taxation after 1998 include, among others, (i) selling or otherwise disposing of all or substantially all of the Partnership's assets pursuant to a plan of liquidation, (ii) converting the Partnership into a real estate investment trust or other type of legal entity, and (iii) restructuring the Partnership to qualify as a partnership primarily with passive rental income. While the Partnership presently intends to seek to avoid being taxed as a corporation for federal income tax purposes, there can be no assurance that it will be successful. 8 FORUM RETIREMENT PARTNERS, L.P. AND SUBSIDIARY PARTNERSHIP ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Financial Condition ------------------- Liquidity And Capital Resources. At June 30, 1995, the Partnership had cash and cash equivalents of $6,273,000, accounts receivable of $1,535,000, and current liabilities of $6,157,000. The Partnership believes that it has adequate liquidity to meet its foreseeable working capital requirements. However, as discussed below, the Partnership is considering certain possible expansion projects that would require substantial additional capital. There can be no assurance that the Partnership will be able to obtain such additional capital. The partnership is continuing to analyze opportunities for expanding its existing facilities. To date, approximately $2.2 million has been approved for this program and the approved projects are currently in progress. Operating activities provided $427,000 less cash during the six months ended June 30, 1995 than during the comparable period of 1994, due principally to an increase in accrued management fees due the parent of the General Partner in 1994 as offset by changes in other accrued revenues and expenses. Investing activities used $142,000 more cash during the six months ended June 30, 1995 than during the comparable period of 1994, due to $166,000 of costs incurred for initial work on the expansion program and normal fluctuations in the purchases of property and equipment. Financing activities used $510,000 less cash during the six months ended June 30, 1995 than during the comparable period of 1994, due principally to additions to restricted cash reserves in 1994 as required by the terms of a loan and allowed withdrawals from loan cash reserves in 1995. Inflation. Management does not believe that inflation has had a material effect on the Partnership's results of operations. To the extent possible, increased costs are recovered through increased residency fees and charges. 9 PART II. OTHER INFORMATION FORUM RETIREMENT PARTNERS, L.P. AND SUBSIDIARY PARTNERSHIP June 30, 1995 ITEM 1. LEGAL PROCEEDINGS ------------------------- On January 24, 1994, the Russell F. Knapp Revokable Trust (the "Plaintiff"), filed a complaint (the "Complaint") in the United States District Court for the Northern District of Iowa (the "District Court") against the General Partner alleging breach of the Partnership Agreement, breach of fiduciary duty, fraud, and civil conspiracy. On March 17, 1994 (the "Iowa Action"), the Plaintiff amended the Complaint, adding Forum Group as a defendant. The Complaint alleges, 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 Complaint further alleges 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 is seeking the restoration of certain former directors to the Board of Directors of the General Partner and the removal of certain other directors from that Board, an injunction prohibiting the payment of an 8% management fee, and unspecified compensatory and punitive damages. On April 4, 1995, the District Court entered an order dismissing the Complaint in its entirety because no personal jurisdiction exists in Iowa over the General Partner or Forum Group. On May 3, 1995, the Plaintiff filed a Notice of Appeal with the District Court, indicating that it will appeal the District Court's decision to the United States Court of Appeals for the Eighth Circuit. On June 15, 1995, the Plaintiff filed an action in the United States District Court for the Southern District of Indiana against the General Partner and Forum Group (the "Indiana Action") containing essentially the same allegations made in the Iowa Action and other allegations. The General Partner will continue to vigorously defend against this litigation. In accordance with the Management Agreement, the Partnership reimbursed the General Partner for $68,000 and $146,000, for the six months ended June 30, 1995 and calendar year 1994, respectively, of litigation costs relating to this litigation. 10 SIGNATURE --------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FORUM RETIREMENT PARTNERS, L.P., a Delaware limited partnership By: Forum Retirement, Inc., General Partner Date: August 11, 1995 By: /s/ Richard A. Huber ------------------------------ Richard A. Huber, Secretary 11