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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 SEPTEMBER 30, 1998
COMMISSION FILE NUMBER: 1-9302
FORUM RETIREMENT PARTNERS, L.P.
(Exact name of registrant as specified in its charter)
Delaware 35-1686799
(State of Incorporation) 10400 Fernwood Road (I.R.S. Employer Identification
Bethesda, MD 20817 Number)
TELEPHONE: (301) 380-9000
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE
Preferred Depository Units Representing Preferred ON WHICH REGISTERED
Limited Partners' Interests American Stock Exchange
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
September 30, 1998 and December 31, 1997
Condensed Consolidated Statements of Operations - 4
Three and nine months ended September 30, 1998 and 1997
Condensed Consolidated Statements of Cash Flows - 5
Nine months ended September 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
2
FORUM RETIREMENT PARTNERS, L.P. AND SUBSIDIARY PARTNERSHIP
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
September 30, December 31,
1998 1997
--------------- ------------
(unaudited)
ASSETS
------
Property and equipment, net................................ $ 96,988 $ 99,615
Deferred financing costs, net.............................. 887 1,144
Restricted cash............................................ 4,546 2,452
Cash and cash equivalents.................................. 6,216 6,459
-------- --------
Total assets.......................................... $108,637 $109,670
======== ========
LIABILITIES AND PARTNERS' EQUITY
--------------------------------
Debt....................................................... $ 45,931 $ 46,854
Deferred income taxes...................................... 1,870 --
Due to Host Marriott Corporation........................... 2,566 --
Due to/(from) Marriott International....................... (1,515) 3,909
Other liabilities.......................................... 621 678
General partner's equity in subsidiary partnership......... 299 262
Deferred management fees due to parent of general partner.. 15,780 15,780
-------- --------
Total liabilities..................................... 65,552 67,483
-------- --------
Partners' equity:
General partner.......................................... 537 528
Limited partners (15,285 units issued and outstanding)... 42,548 41,659
-------- --------
Total partners' equity................................ 43,085 42,187
-------- --------
Total liabilities and partners' equity................ $108,637 $109,670
======== ========
See Notes to Condensed Consolidated Financial Statements.
3
FORUM RETIREMENT PARTNERS, L.P. AND SUBSIDIARY PARTNERSHIP
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three and Nine Months Ended September 30, 1998 and 1997
(unaudited, in thousands, except per unit data)
Three Months Nine Months
Ended Ended
September 30, September 30,
------------------ ------------------
1998 1997 1998 1997
------- ------- ------- -------
REVENUES.......................................................... $ 5,125 $ 4,332 $14,856 $13,915
------- ------- ------- -------
OPERATING COSTS AND EXPENSES
Depreciation and amortization................................... 957 1,006 2,867 2,784
Base management fees to MSLS.................................... 1,283 1,142 3,781 3,489
Property taxes.................................................. 330 352 743 1,278
Insurance and other............................................. 117 424 213 458
------- ------- ------- -------
Total operating costs and expenses............................ 2,687 2,924 7,604 8,009
------- ------- ------- -------
OPERATING PROFIT BEFORE PARTNERSHIP EXPENSES
AND INTEREST.................................................... 2,438 1,408 7,252 5,906
General and administrative...................................... (80) (45) (254) (350)
Interest expense................................................ (1,231) (1,269) (3,717) (3,839)
Interest income................................................. 145 112 371 253
------- ------- ------- -------
Income before general partner's interest in income of
subsidiary partnership.......................................... 1,272 206 3,652 1,970
General partners' interest in income of subsidiary partnership.... 13 2 37 20
------- ------- ------- -------
INCOME BEFORE INCOME TAXES........................................ 1,259 204 3,615 1,950
Provision for income taxes resulting from change in tax status
(see Note 5)................................................. -- -- (1,271) --
Provision for income taxes for current operations (see Note 5).. (503) -- (1,446) --
------- ------- ------- -------
Total provision for income taxes.............................. (503) -- (2,717) --
------- ------- ------- -------
NET INCOME........................................................ $ 756 $ 204 $ 898 $ 1,950
======= ======= ======= =======
General partner's interest in net income.......................... $ 8 $ 2 $ 9 $ 20
======= ======= ======= =======
Limited partners' interest in net income.......................... $ 748 $ 202 $ 889 $ 1,930
======= ======= ======= =======
Number of limited partner units................................... 15,285 15,285 15,285 15,285
======= ======= ======= =======
Earnings per limited partner unit................................. $0.05 $0.01 $0.06 $0.13
======= ======= ======= =======
See Notes to Condensed Consolidated Financial Statements.
4
FORUM RETIREMENT PARTNERS, L.P. AND SUBSIDIARY PARTNERSHIP
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 1998 and 1997
(unaudited, in thousands)
1998 1997
-------- --------
OPERATING ACTIVITIES
Net income........................................... $ 898 $ 1,950
Adjustments to reconcile to cash from operations
Depreciation....................................... 2,867 2,784
Amortization of deferred financing costs........... 257 278
Increase in deferred income taxes.................. 1,870 --
Change in other operating accounts................. (4,254) (953)
------- -------
Cash provided by operations.......................... 1,638 4,059
------- -------
INVESTING ACTIVITIES
Capital expenditures............................... (1,117) (3,139)
Decrease in capital improvement reserve............ (596) --
Other.............................................. 877 --
------- -------
Cash used in investing activities.................... (836) (3,139)
------- -------
FINANCING ACTIVITIES
Repayments of debt................................. (923) (837)
Principal payments on note due to general partner.. (26) (68)
Decrease in debt service reserve................... (96) --
------- -------
Cash used in financing activities.................... (1,045) (905)
------- -------
(Decrease)/increase in cash and cash equivalents..... (243) 15
Cash and cash equivalents, beginning of period....... 6,459 6,199
------- -------
Cash and cash equivalents, end of period............. $ 6,216 $ 6,214
======= =======
See Notes to Condensed Consolidated Financial Statements.
5
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 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 September 30, 1998 and December
31, 1997, and the results of its operations for the three and nine months
ended September 30, 1998 and 1997 and cash flows for the nine months ended
September 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 to conform to industry practice. Accordingly, information as
reported in prior filings has been reclassified to conform to current
presentation.
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 condensed 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, Crestline Capital Corporation ("Crestline" formerly HMC
Senior Communities, Inc.), 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 and distributing (the
"Distribution") the stock of Crestline. The Distribution is part of a
series of transactions pursuant to which Host Marriott intends to convert
into a real estate investment trust for federal income tax purposes (the
"REIT Conversion"). As part of the REIT Conversion, Host Marriott will
contribute its hotels and certain other assets and liabilities to a newly
formed Delaware limited parntership, Host Marriott, L.P., whose sole
general partner will be HMC Merger Corporation which, for tax purposes will
qualify as a Maryland Real Estate Investment Trust ("REIT"). After the
proposed reorganization, Crestline will lease hotels from Host Marriott,
L.P. The Distribution and REIT Conversion, if consummated, will not have a
material impact on the operations of the Partnership.
Consummation of the REIT Conversion is subject to significant
contingencies, including final Host Marriott Board approval, consent of
shareholders, other 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
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 the following (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------------
1998 1997 1998 1997
-------- -------- ---------- ----------
Community Sales
Routine.................... $13,862 $12,666 $40,832 $37,733
Ancillary.................. 2,179 1,611 6,430 5,883
------- ------- ------- -------
Total Community Sales... 16,041 14,277 47,262 43,616
------- ------- ------- -------
Department Costs
Routine.................... 9,347 8,518 27,174 25,054
Ancillary.................. 1,569 1,427 5,232 4,647
------- ------- ------- -------
Total Department Costs.. 10,916 9,945 32,406 29,701
------- ------- ------- -------
Department Profit
Routine.................... 4,515 4,148 13,658 12,679
Ancillary.................. 610 184 1,198 1,236
------- ------- ------- -------
Revenues................ $ 5,125 $ 4,332 $14,856 $13,915
======= ======= ======= =======
On November 20, 1997, the Emerging Issues Task Force ("EITF") of the
Financial Accounting Standards Board reached a consensus on EITF 97-2,
"Application of FASB Statement No. 94 and APB Opinion No. 16 to Physician
Practice Management Entities and Certain Other Entities with Contractual
Management Arrangements." EITF 97-2 addresses the circumstances in which a
management entity may include the revenues and expenses of a managed entity
in its financial statements. The Partnership has considered the impact of
EITF 97-2 on its financial statements and has determined that EITF 97-2
requires the Partnership to include property-level sales and operating
expenses of its senior living communities in its statements of operations.
The Partnership will adopt EITF 97-2 in the fourth quarter of 1998 with
retroactive effect in prior periods to conform to the new presentation.
Application of EITF 97-2 to the consolidated financial statements for the
three months ended September 30, 1998 and 1997 would have increased both
revenues and operating expenses by approximately $10,916,000 and $9,945,000
respectively. For nine months ended September 30, 1998 and 1997, both
revenues and operating expenses would have increased by approximately
$32,406,000 and $29,701,000 respectively. There will be no impact on
operating profit, or net income by the application of EITF 97-2.
4. Restricted cash includes the following (in thousands):
September 30, December 31,
1998 1997
------------- ------------
Debt service reserve fund..... $ 487 $ 391
Fixed asset reserve fund...... 864 268
Real estate tax reserve fund.. 1,128 627
Insurance reserve fund........ 2,067 1,166
------ ------
$4,546 $2,452
====== ======
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 nine months ended September 30, 1998
7
FORUM RETIREMENT PARTNERS, L.P. AND SUBSIDIARY PARTNERSHIP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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 principles 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. 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 acquired on
March 25, 1998, 1,000,894 Units from the Plaintiff and related parties for
$4,504,023 on March 25, 1998. Host Marriott subsequently acquired 1,140,901
additional 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 interests of the limited partnership in the
Partnership, directly or through affiliates, increased to approximately
93%.
8. On July 21, 1998, the General Partner announced it had received a proposal
from Host Marriott to acquire all remaining outstanding Partnership Units
for $4.50 per Unit (the "Merger Proposal"). The Board of Directors (the
"Board") of the General Partner appointed an advisory committee (the
"Advisory Committee") consisting of the independent members of the Board to
determine whether the terms of the Merger Proposal were fair to, and in
the best interests of, the public unitholders. The Advisory Committee
recommended that the price in the Merger Proposal be increased from $4.50
per Unit to $5.75 per Unit. On October 5, 1998, the Advisory Committee
recommended to the Board that the Merger Proposal with a $5.75 per Unit
price was fair to, and in the best interests of, the public unitholders,
and the Board approved the transaction based on the Advisory Committee's
recommendation. The Advisory Committee's conclusion was based, in part,
on a fairness opinion (the "Fairness Opinion") from its financial advisor,
Robert A. Innamorati and Co., Inc. On October 5, 1998, an Agreement and
Plan of Merger ("Merger Agreement") was executed under which unitholders
would receive a price of $5.75 per Unit. Completion of the transaction is
contingent upon, but not limited to, several items including shareholder
and various regulatory approvals. Host Marriott presently anticipates
completion of the merger transaction on December 31, 1998, but such
a result cannot be assured because of the various contigencies. Assuming a
closing on December 31, 1998 or sometime before the end of the first
quarter of 1999, Host Marriott would be required to pay a total of
$6,517,894 under the terms of the Merger Agreement, as well as an
approximate amount ranging from $683,000 to $491,000 to the settling
Limited Partners under the terms of the Settlement Agreement.
8
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's 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. The cautionary statements set forth in reports filed
under the Securities Act of 1934 contain important factors with respect to such
forward-looking statements, including the following factors that could affect
such forward-looking statements: (i) national and local economic and business
conditions that will, among other things, affect demand for senior living
facilities and other properties, the level of rates and occupancy that can be
achieved by such properties and the availability and terms of financing; (ii)
the ability to maintain the properties in a first-class manner; (iii) the
ability to compete effectively; (iv) the ability to acquire or develop
additional properties and the risk that potential acquisitions or developments
may not perform in accordance with expectations; (v) changes in travel patterns,
taxes and government regulations; (vi) governmental approvals, actions and
initiative, and (vii) the effects of tax legislative action. 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 September 30,
1998 increased by $793,000 or 18% to $5,125,000 compared to 1997. Revenues for
the nine months ended September 30, 1998 increased by $941,000 or 7% to
$14,856,000 compared to 1997. The increase in revenues 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 communities
in Delaware and Texas 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 was approximately 94% for the three and nine months ended September
30, 1998. This represents an increase of four percentage points from the three
months ended September 30, 1997 and a one percentage point increase from the
nine months ended September 30, 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
decreased $237,000 or 8%, to $2,687,000 for the three months ended and decreased
$405,000, or 5%, to $7,604,000 for nine months ended September 30, 1998, due
primarily to an overall decrease in real estate taxes, insurance and other
expenses during the year. As a percentage of revenues, operating costs and
expenses decreased 15 percentage points to 52% for the three months ended
September 30, 1998 as compared to 67% for the same period in 1997. For the nine
months ended September 30, 1998, operating costs and expenses, as a percentage
of revenues, decreased 7 percentage points to 51% compared to 58% for the same
period in 1997.
OPERATING PROFIT. As a result of the changes in revenues and operating costs
and expenses discussed above, the Partnership's operating profit increased by
$1,030,000, or 73%, to $2,438,000 for the three months ended September 30,
1998. Operating profit increased by 23% or $1,346,000, to $7,252,000 for the
nine months ended September 30, 1998.
INTEREST EXPENSE. For the three months ended September 30, 1998, interest
expense decreased $38,000 to $1,231,000 from $1,269,000 during the same period
in 1997 as a result of principal amortization. Interest expense year-to-date
decreased by $122,000 to $3,717,000 for the nine months ended September 30,
1998.
INCOME TAXES. The Partnership began being taxed as a corporation effective
January 1, 1998. The resulting one-time charge of approximately $1.3 million
was included in the tax provision for the first quarter of 1998. An income tax
provision of $503,000 for the three months ended September 30, 1998 and
$2,717,000 for the nine months ended September 30, 1998 has been included in
this quarter's statements.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
OPERATIONS AND FINANCIAL CONDITION
NET INCOME (LOSS). Net income increased $552,000 to $756,000 for the three
months ended September 30, 1998 compared to 1997. The increase in net income
for the third quarter is due to decreases in both operating and non-operating
expenses. Net income for the nine months ended September 30, 1998, decreased
from $1,950,000 in 1997 to $898,000 due to the impact of the approximate $1.3
million one-time tax charge and 1998 income tax expense related to current
operations. For the three months ended September 30, 1998, net income per
limited partner unit increased to $.05 per unit compared to $.01 in 1997. For
the nine months ended September 30, 1998 net income per limited partner unit
decreased to $.06 per unit, compared to $.13 in 1997.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998, the Partnership had cash and cash equivalents of
$6,216,000 and restricted cash of $4,546,000.
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 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 $22 million. Seven expansion
projects have been completed increasing the total number of units by 119 at a
total cost of $7.9 million. Two expansion projects currently under construction
are expected to increase the total number of units by an additional 74 at a
total cost of $6.2 million; one of these projects is expected to be completed in
the fourth quarter of 1998 and the other project is expected to be completed in
1999. The two remaining expansion projects and a portion of one of the completed
expansion projects are undergoing a feasibility analysis. As a result of
increased construction costs and deteriorating market conditions, the
Partnership may determine that it would not be economically feasible to proceed
with these remaining expansions projects.
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 $1,638,000 for the nine months ended
September 30, 1998, compared to $4,059,000 for the same period in 1997 due
principally to changes in working capital and amounts due to MI for
reimbursement of operating costs and management fees.
Cash used in investing activities was $836,000 for the nine months ended
September 30, 1998, compared to $3,139,000 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 $1,045,000 for the nine months ended
September 30, 1998, compared to $905,000 for the same period in 1997 due to
increases in repayments of debt and contributions into the debt service reserve
offset by payments on note due to general partner.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
OPERATIONS AND FINANCIAL CONDITION
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 and distributing the stock of Crestline. The
Distribution is part of a series of tranactions pursuant to which Host Marriott
intends to convert into a real estate investment trust for federal income tax
purposes. As a part of the REIT Conversion, Host Marriott will contribute to its
hotels and certain other assets and liabilities to a newly formed Delaware
limited partnership, Host Marriott, L.P., whose sole general partner will be HMC
Merger Corporation which, for tax purposes will qualify as a Maryland Real
Estate Investment Trust. After the proposed reorganization, Crestline, will
lease hotels from Host Marriott L.P. The Distribution and REIT Conversion, if
consummated, will not have a material impact on the operations of the
Partnership.
Consummation of the REIT Conversion is subject to significant contingencies,
including final Host Marriott 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, the General Partner announced it had received a proposal from
Host Marriott to acquire all remaining outstanding Units not currently held by
Host Marriott or its subsidiaries for $4.50 per Unit. The Board of the General
Partner appointed an Advisory Committee consisting of the independent members of
the Board to determine whether the terms of the Merger Proposal were fair to,
and in the best interests of, the public unitholders. The Advisory Committee
recommended that the price in the Merger Proposal be increased from $4.50 per
Unit to $5.75 per Unit. On October 5, 1998 the Advisory Committee recommended to
the Board that the Merger Proposal with a $5.75 per Unit price was fair to, and
in the best interests of, the public unitholders, and the Board approved the
transaction based on the Advisory Committee's recommendation. The Advisory
Committee's conclusion was based, in part, on the Fairness Opinion from its
financial advisor, Robert A. Innamorati and Co., Inc. On October 5, 1998, the
Merger Agreement was executed under which unitholders would receive a price of
$5.75 per Unit. Completion of the transaction is contingent upon, but not
limited to, several items including shareholder and various regulatory
approvals. Host Marriott presently anticipates completion of the merger
transaction on December 31, but such a result cannot be assured because of the
various contingencies. Assuming a closing on December 31, or the end of the
first quarter of 1999, Host Marriott would be required to pay a total of
$6,157,894 under the terms of the Merger Agreement, as well as an approximate
amount ranging from $683,000 to $491,000 to the settling Limited Partners under
the terms of the Settlement Agreement.
YEAR 2000 PROBLEM
The year 2000 problem ("Year 2000") has arisen because many existing computer
programs and chip-based embedded technology systems use only the last two digits
to refer to a year, and therefore do not properly recognize a year that begins
with "20" instead of the familiar "19." If not corrected, many computer
applications could fail or create erroneous results. The following disclosure
provides information regarding the current status of the Partnership's Year 2000
compliance program.
The Partnership has adopted the compliance program because it recognizes the
importance of minimizing the number and seriousness of any disruptions that may
occur as a result of the Year 2000 issue. The Partnership's compliance program
includes an assessment of the Partnership's hardware and software computer
systems and embedded systems, as well as an assessment of the Year 2000 issues
relating to third parties with which the Partnership has a material relationship
or whose systems are material to the operations of the Partnership's senior
living properties. The Partnership's efforts to ensure that its computer
systems are Year 2000 compliant has been segregated into two separate phases:
in-house systems and third-party systems.
IN-HOUSE SYSTEMS. Since the distribution of the stock MI to the shareholders of
Host Marriott on October 8, 1993, the Host Marriott has invested in
implementation and maintenance accounting and reporting systems and equipment
that are intended to enable the Host Marriott and its subsidiaries, including
the General Partner and the Partnership, to provide adequately for its
information and reporting needs and which are also Year 2000 compliant.
Substantially all of the Partnership's in-house systems have already been
certified as Year 2000 compliant through testing and other mechanisms and the
Partnership has not d elayed any systems projects due to the Year 2000 issue.
The Partnership is in the process of engaging a third party to review its Year
2000 in-house compliance. Management believes that future costs associated with
Year 2000 issues for its in-house systems will be insignificant and therefore
not impact the Partnership's business, financial condition and results of
operations. The Partnership has not developed, and does not plan to develop, a
separate contingency plan for its in-house systems due to their current Year
2000 compliance. However, the Partnership does have detailed contingency plans
for its in-house systems covering a variety of possible events, including
natural disasters, interruption of utility service and similar events.
THIRD-PARTY SYSTEMS. The Partnership relies upon operational and accounting
systems provided by third parties, primarily the manager of its senior living
properties, MI, to provide the appropriate property-specific operating systems
(including, phone, elevator, security, HVAC and other systems) and to provide it
with financial information. Based on discussions with the third parties that are
critical to the Partnership's business, including the manager of its senior
living facilities, the Partnership believes that these parties are in the
process of studying their systems and the systems of their respective vendors
and service providers and, in many cases, have begun to implement changes to
ensure that they are Year 2000 compliant. To the extent these changes impact
property-level systems, the Partnership may be required to fund capital
expenditures for upgraded equipment and software. The Partnership does not
expect these charges to be material, but is committed to making these
investments as required. To the extent that these changes relate to a third
party managers' centralized systems (including accounting, purchasing,
inventory,
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
OPERATIONS AND FINANCIAL CONDITION
personnel and other systems), the Partnership's management agreements generally
provide for these costs to be charged to the Partnership's properties subject to
annual limitations. The Partnership expects that its third party manager will
incur Year 2000 costs in lieu of costs for its centralized systems related to
system projects that otherwise would have been pursued and therefore, its
overall level of centralized systems charges allocated to the properties will
not materially increase as a result of the Year 2000 compliance effort. The
Partnership believes that this deferral of certain system projects will not have
a material impact on its future results of operations, although it may delay
certain productivity enhancements at its properties. The Partnership will
continue to monitor the efforts of these third parties to become Year 2000
compliant and will take appropriate steps to address any non-compliance issues.
The Partnership believes that in the event of material Year 2000 non-compliance,
the Partnership may have the right to seek recourse against the manager under
its third party management agreements. The management agreements generally do
not specifically address the Year 2000 compliance issue. Therefore, the amount
of any recovery in the event of Year 2000 non-compliance at a property, if any,
is not determinable at this time.
The Partnership will work with the third parties to ensure that appropriate
contingency plans will be developed to address the most reasonably likely worst
case Year 2000 scenarios, which may not have been identified fully. In
particular, the Partnership has had extensive discussions regarding the Year
2000 problem with MI, the manager of all of its senior living communities. Due
to the significance of MI to the Partnership's business, a detailed description
of MI's state of readiness follows.
MI has adopted an eight-step process toward Year 2000 readiness, consisting of
the following: (i) Awareness: fostering understanding of, and commitment to,
----------
the problem and its potential risks; (ii) Inventory: identifying and locating
----------
systems and technology components that may be affected; (iii) Assessment:
-----------
reviewing these components for Year 2000 compliance, and assessing the scope of
Year 2000 issues; (iv) Planning: defining the technical solutions and labor and
---------
work plans necessary for each particular system; (v) Remediation/Replacement:
------------------------
completing the programming to renovate or replace the problem software or
hardware; (vi) Testing and Compliance Validation: conducting testing, followed
----------------------------------
by independent validation by a separate internal verification team; (vii)
Implementation: placing the corrected systems and technology back into the
- ---------------
business environment; and (viii) Quality Assurance: utilizing a dedicated
------------------
audit team to review significant projects for adherence to quality standards and
program methodology.
MI has grouped its systems and technology into three categories for purposes of
Year 2000 compliance: (i) information resource applications and technology (IT
Applications) -- enterprise-wide systems supported by MI's centralized
information technology organization ("IR"); (ii) Business-initiated Systems
("BIS") - systems that have been initiated by an individual business unit, and
that are not supported by MI's IR organization; and (iii) Building Systems -non-
IT equipment at properties that use embedded computer chips, such as elevators,
and HVAC equipment. MI is prioritizing its efforts based on how severe an effect
noncompliance would have on customer service, core business processes or
revenues, and whether there are viable, non-automated fallback procedures
(System Criticality).
MI measures the completion of each phase based on documented and quantified
results, weighted for System Criticality. As of the end of 1998 third quarter,
the awareness and inventory phases were complete for IT Applications and nearly
complete for BIS and Building Systems. For IT Applications, the Assessment,
Planning and Remediation/Replacement phases were each over 80 percent complete,
and Testing and Compliance Validation had been completed for a number of key
systems, with most of the remaining work in its final stage. For BIS and
Building Systems, Assessment and Planning were in the mid- to upper-range of
completion, with a substantial amount of work in process, while the progress
level for Remediation/Replacement and Testing and Compliance Validation had not
yet been documented and quantified. Quality Assurance is also in progress for
IT Applications and is scheduled to begin for BIS and Business Systems in the
near future. MI's goal is to substantially complete the Remediation/Replacement
and Testing phases for its System Critical IT Applications by the end of 1998,
with 1999 reserved for unplanned contingencies and for Compliance Validation and
Quality Assurance. For System Critical BIS and Business Systems, the same level
of substantial completion is targeted for June 1999 and September 1999,
respectively.
MI has initiated Year 2000 compliance communications with its significant third
party suppliers, vendors and business partners, including its franchisees. MI is
focusing its efforts on the business interfaces most critical to its customer
service and revenues, including those third parties that support the most
critical enterprise-wide IT Applications, franchisees generating the most
revenues, suppliers of the most widely used Building Systems and BIS, the top
100 suppliers, by dollar volume, of non-IT products, and financial institutions
providing the most critical payment processing functions. Responses have been
received from a majority of the firms in this group.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
OPERATIONS AND FINANCIAL CONDITION
MI is also establishing a common approach for testing and addressing Year 2000
compliance issues for its managed and franchised properties. This includes a
guidance protocol for operated properties, and a Year 2000 "Toolkit" for
franchisees containing relevant Year 2000 compliance information. MI is also
utilizing a Year 2000 best-practices sharing system.
RISKS. There can be no assurances that Year 2000 remediation by the Partnership
or third parties will be properly and timely completed, and failure to do so
could have a material adverse effect on the Partnership, its business and its
financial condition. The Partnership cannot predict the actual effects to it of
the Year 2000 problem, which depends on numerous uncertainties such as: (i)
whether significant third parties, properly and timely address the Year 2000
issue; and (ii) whether broad-based or systemic economic failures may occur. The
Partnership is also unable to predict the severity and duration of any such
failures, which could include disruptions in passenger transportation or
transportation systems generally, loss of utility and/or telecommunications
services, and errors or failures in financial transactions or payment processing
systems such as credit cards. Due to the general uncertainty inherent in the
Year 2000 problem and the Partnership's dependence on third parties, the
Partnership unable to determine at this time whether the consequences of Year
2000 failures will have a material impact on the Partnership. The Partnership's
Year 2000 compliance program is expected to significantly reduce the level of
uncertainty about the Year 2000 problem and management believes that the
possibility of significant interruptions of normal operations should be reduced.
13
PART II. OTHER INFORMATION
---------------------------
FORUM RETIREMENT PARTNERS, L.P. AND SUBSIDIARY PARTNERSHIP
ITEM 1. LEGAL PROCEEDINGS
7. On June 15, 1995, The Russell F. Knapp Revocable Trust filed a complaint in
the United States District Court of the Southern District of Indiana
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 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 on March 25, 1998, 1,000,894 units from the Plaintiff and related
parties for $4,504,023. Host Marriott subsequently acquired 1,140,901
additional 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 limited partnership ownership interests in the
Partnership, directly or through affiliates, increased to approximately
93%. On October 5, 1998, a definitive merger agreement was signed whereby
Host Marriott will acquire by merger all the remaining outstanding Units
not currently held by Host Marriott or its subsidiaries for $5.75 per Unit.
As a result of the Merger Agreement, Host Marriott would be required to pay
a total amount ranging from $683,000 to $491,000 to the settling Limited
Partners under the terms of the Settlement Agreement.
On July 22, 1998, Harbor Finance Partners, LTD. ("Harbor Finance"), a
Partnership unitholder, filed a purported class action lawsuit in Delaware
State Chancery Court relating to the Merger Proposal 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 Partnership believes that the
appointment of the Board's Advisory Committee and the Fairness Opinion will
ensure that the Merger Proposal is fair to the unitholders and that an
appropriate 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.
14
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
--------------------------------------------
November 12, 1998 By: /s/ Donald D. Olinger
- ----------------- ---------------------------
Date Donald D. Olinger
Vice President
15