Item 1. Business.
Forum Retirement Partners, L.P. (the "Partnership") was formed in 1986 to own retirement communities ("RCs") originally developed or acquired by Forum Group, Inc., ("Forum Group"), a corporation which is a substantial equity owner of the Partnership and the parent corporation of Forum Retirement, Inc., the general partner of the Partnership (the "General Partner").
Partnership Recapitalization. On October 6, 1993, the Partnership entered into an agreement (the "Recapitalization Agreement") with Forum Group pursuant to which the Partnership issued 6.5 million depositary units representing limited partners' interests in the Partnership ("Preferred Depositary Units" or "Units") to a subsidiary of Forum Group ("Forum A/H"), and Forum A/H made a capital contribution to the Partnership of $13.0 million in the aggregate, or $2.00 per unit. The proceeds were used to prepay a portion of the Partnership's bank debt scheduled to mature on December 31, 1993 (the "Bank Credit Facility").
On December 28, 1993, the Partnership entered into a loan agreement with Nomura Asset Capital Corporation ("Nomura") pursuant to which Nomura provided approximately $50,707,000 in new financing (the "Nomura Loan"). The proceeds of the Nomura Loan were used to prepay the remaining balances due under the Bank Credit Facility and under the Partnership's split coupon first mortgage notes due July 1, 1996 (the "Split Coupon Notes"), to pay fees and expenses related to the financing and to fund reserves. The Nomura Loan is secured by first priority mortgages on the Partnership's nine RCs and by security interests in substantially all of the Partnership's other assets. For a description of the principal terms of the Nomura Loan, see Note 3 of Notes to Consolidated Financial Statements under Item 8.
Pursuant to the Recapitalization Agreement, and to afford holders of Preferred Depositary Units the opportunity to avoid the dilution resulting from the issuance of the Preferred Depositary Units to Forum A/H, on January 10, 1994 the Partnership commenced a subscription offering pursuant to which holders of Preferred Depositary Units of record as of the close of business on October 18, 1993 (other than Forum Group and its affiliates) were permitted to purchase .07398342 of a Preferred Depositary Unit for each Preferred Depositary Unit held by them on October 18, 1993 at a purchase price of $2.00 per Unit. 1,994,189 Preferred Depositary Units were issued in the subscription offering, which expired on February 25, 1994. In accordance with the Recapitalization Agreement, the Partnership used the $3,988,398 of proceeds of the subscription offering to repurchase 1,994,189 Preferred Depositary Units from Forum A/H at a purchase price of $2.00 per unit. As a result of the repurchase transaction, and several additional subsequent purchase transactions, as of March 1, 1995, Forum Group beneficially owned 62.1% of the outstanding units, including its 1.0% General Partner's interest.
As previously announced, the Board of Directors of the General Partner is continuing to analyze the possible expansion of certain of the Partnership's properties in an effort to further improve the Partnership's results of operations. A preliminary study has identified several potentially attractive expansion opportunities, which could increase the number of living units owned by the Partnership by approximately 30%, for an estimated capital expenditure totaling $25 million. Any expansion would likely modify the uses of or add capacity to existing facilities without incurring substantial land acquisition and common area build-out costs. However, any major expansion or other capital improvement program could require that the Partnership obtain additional financing and would affect the Partnership's levels of distributable cash, if any. Furthermore, such expansions may require additional regulatory approvals and modification of the Nomura Loan. There can be no assurance that the Partnership will adopt or be able to successfully implement any major expansion or other capital improvement program, as to the timing thereof or as to the effect thereof on the Partnership's financial position.
Item 2.
Item 2. Properties.
The Partnership (through an operating partnership) owns RCs in Delaware (4), Florida, New Mexico, South Carolina and Texas (2) (collectively, the "Properties"). All of the Properties are managed by Forum Group pursuant to a management agreement entered into in 1986 in connection with the formation of the Partnership under which Forum Group acts as manager (the "Management Agreement").
Seven of the nine RCs are comprised of an independent living component and a nursing component, and each Property except Millcroft and Shipley Manor also includes an assisted living component. Foulk Manor and Myrtle Beach Manor each consist of an assisted living component and a nursing component, but do not contain an independent living component.
Independent living components contain a variety of accommodations, together with amenities such as dining facilities, lounges, and game and craft rooms. All residents of the independent living components are provided security, meals, and housekeeping and linen service. Emergency healthcare service is available upon demand 24 hours a day from on-site staff, and each independent living unit is equipped with an emergency call system. The independent living components of the Properties consist of apartments and, in the case of Foulk Manor North, villas. Independent living unit residency fees presently range from $999 to $3,790 per month, depending on the size and location of accommodations. Each apartment and villa resident enters into a residency agreement that may be terminated by the resident on short notice. Although there can be no assurance that available independent living units will be reoccupied as residency agreements expire or are terminated, since 1988 at least 80% of the residents of the apartments and villas have renewed their residency agreements from year to year.
Assisted living components provide residents a semistructured environment that encourages independent living. Residents have private or semiprivate suites, eat meals in a private dining room, and are provided the added services of scheduled activities, housekeeping and linen service, preventive health surveillance, periodic health monitoring, assistance with activities of daily living, and emergency care. The charge for a private assisted living suite presently ranges from $50 to $130 per day.
Nursing components provide residents a full range of nursing care. Residents have private or semiprivate rooms, and share communal dining and social facilities. In most instances, each resident of the independent living component of a Property is entitled to priority admission in the assisted living (if any) or nursing component. The charge for a private nursing room presently ranges from $59 to $178 per day.
The Properties also provide ancillary healthcare services, including the operation of an adult day care center on the premises of one RC.
The following table indicates the name and location and current capacity for each Property:
The overall average occupancy rates for the Properties for calendar year 1994 was 93.8%. The degree of utilization of each facility is dependent on many factors. Occupancy rates may be adversely affected by the opening of newly developed facilities and the expansion or renovation of competing facilities.
Mortgages
The Properties are subject to first mortgages securing outstanding borrowings under the Nomura Loan. The current principal amount outstanding under the Nomura Loan is $49.9 million, and borrowings under the Nomura Loan bear interest at 9.93% per annum (including a servicing cost of 0.2% per annum). See "Item 1 - Business" and Note 3 of Notes to Consolidated Financial Statements filed under Item 8 for additional information regarding the Nomura Loan.
Depreciation
The aggregate net federal tax basis of the Properties as of December 31, 1994, was $59.6 million for real property and $3.9 million for personal property.
Real Estate Taxes
The average real estate tax rate for calendar year 1994 for the Properties was approximately two percent and the aggregate assessed real estate tax value for such facilities for the same period was $58.7 million.
Sources of Payment
The independent and assisted living components (if any) of the Properties receive direct payment for resident occupancy solely on a private pay basis. The nursing components of the Properties receive payment for resident care directly on a private pay basis, including payment from private health insurance, and from governmental reimbursement programs such as the federal Medicare program for certain elderly and disabled residents, and state Medicaid programs for certain financially indigent residents. The following table indicates the approximate percentages of operating revenues for each of the last five years derived by the Partnership from private sources, and Medicare and Medicaid:
Most private insurance carriers reimburse their policyholders, or make direct payment to facilities, for covered services at rates established by the facilities. Where applicable, the resident is responsible for any difference between the insurance proceeds and the total charges. In certain states, Blue Cross plans pay for covered services at rates negotiated with facilities. In other states, Blue Cross plans are administered under contracts with facilities providing for payment under formulae based on the cost of services. The Medicare program also makes payment under a cost-based reimbursement formula. Under the Medicaid program, each state is responsible for developing and administering its own reimbursement formula.
Within the statutory framework of the Medicare and Medicaid programs, there are substantial areas subject to administrative rulings, interpretations and discretion which affect payments
made under those programs. In addition, the federal and state governments might reduce the funds available under those programs in the future or require more stringent utilization of healthcare facilities. Those measures could adversely affect the Partnership's future revenues and, therefore, the value of the Properties.
Various legislative and industry groups are studying numerous healthcare issues, including access, delivery, and financing of long-term health care, and at any given time there are numerous federal and state legislative proposals relating to the funding and reimbursement of healthcare costs. It is difficult to predict whether these proposals will be adopted or the form in which they might be adopted, and no assurance can be given that any such legislation, if adopted, would not have a material effect on the Partnership.
Regulation and Other Factors
Healthcare facility operations are subject to federal, state, and local government regulations. Facilities are subject to periodic inspection by state licensing agencies to determine whether the standards necessary for continued licensure are maintained. In granting and renewing licenses, the state agencies consider, among other things, buildings, furniture, and equipment; qualifications of administrative personnel and staff; quality of care; and compliance with laws and regulations relating to operation of facilities. State licensure of a nursing facility is a prerequisite to certification for participation in the Medicare and Medicaid programs. Requirements for licensure of assisted living components are generally less comprehensive and stringent than requirements for licensure of nursing facilities. Most states do not have licensure requirements for the independent living components of RCs. The Properties are presently in substantial compliance with all applicable federal, state and local regulations with respect to licensure requirements. However, because those requirements are subject to change, there can be no assurance that the Properties will be able to maintain their licenses upon a change in standards, and future changes in those standards could necessitate substantial expenditures by the Partnership to comply therewith.
Competition
The Properties compete with facilities of varying similarity in the respective geographical market areas in which the Properties are located. Competing facilities are operated on a national, regional, and local basis by religious groups and other nonprofit organizations, as well as by private operators, some of which have substantially greater resources than the Partnership. The independent living components of the Properties face competition from all the various types of residential opportunities available to the elderly. However, the number of RCs that offer on-premises healthcare services is limited. The assisted living and nursing components of the Properties compete with other assisted living and nursing facilities, and, to a lesser extent, with general hospitals. Because the target market segment of the Properties (i.e., full-service RCs) is relatively narrow, the risk of competition may be higher than with some other types of RCs. Additionally, the Properties may be subject to competition from new RCs, and assisted living and nursing facilities, developed in close proximity to them.
Significant competitive factors for attracting residents to the independent living components of the Properties include price, physical appearance, and amenities and services offered. Additional competitive factors for attracting residents to the assisted living and nursing components of the Properties include quality of care, reputation, physician and nursing services available, and family preferences. The Partnership believes that its RCs rate high in each of these categories, except that its RCs are generally more expensive than competing facilities. The assisted living and nursing components of the Properties are designed to supplement, not to compete with, healthcare services provided by general hospitals.
Insurance
The Partnership maintains professional liability, comprehensive general liability, and other typical insurance coverage on all its RCs. The Partnership believes that its insurance is adequate in amount and coverage.
Item 3.
Item 3. 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 against the General Partner alleging breach of the Partnership Agreement, breach of fiduciary duty, fraud, and civil conspiracy. On March 17, 1994, 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.
The General Partner intends to vigorously defend against this litigation. The Partnership, in accordance with the Management Agreement, reimbursed the General Partner for $146,000 of litigation costs relating to this claim in 1994.
Pursuant to the Management Agreement, management fees payable to Forum Group for periods from the formation of the Partnership in 1986 to December 31, 1993 were deferred. Such deferred fees will become payable only if certain conditions occur. Under the terms of the Management Agreement entered into in connection with the formation of the Partnership in 1986, and as disclosed in the Partnership's 1986 Prospectus, Forum Group's management fees for periods after December 31, 1993 are not deferred. See "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations" for further discussion of the Management Agreement.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted during 1994 to a vote of security holders.
PART II
Item 5.
Item 5. Market for the Partnership's Common Equity and Related Unitholder Matters.
(a) Market Information. The principal United States market in which Units are being traded is the American Stock Exchange (symbol:FRL).
The high and low sales prices for Units for each full quarterly period within the two most recent fiscal years, as reported in the consolidated transaction reporting system, were as follows:
(b) Holders. The approximate number of record holders of Units as of February 10, 1995, was 968.
(c) Dividends. The Partnership has not made any distributions on Preferred Depositary Units for 1994, 1993, 1992, and 1991. With improvements in the Partnership's operating results and the completion of the Recapitalization in the fourth quarter of 1993, the Partnership presently expects to have positive cash flow in 1995. See "Item 1 -- Business" for a discussion of possible cash needs for expansions of the Partnership's RCs. There necessarily can be no assurance that operating results will continue to improve or as to whether or when, or at what levels, any future cash distributions to holders of Units will be made.
Item 6.
Item 6. Selected Financial Data.
* Cash flow from operations, as adjusted, reflects the net cash flow generated by the operations of the partnership for the indicated periods, adjusted as described below. Management fees have been deferred during periods prior to January 1, 1994, and therefore have not been paid from the cash flow from operations. The amounts of deferred management fees (in thousands) for the periods covered above were: 1993: $3,516,000; 1992: $3,337,000; 1991: $3,391,000 and 1990: $1,615,000. Beginning in January, 1994 management fees became due and payable on a current basis and therefore reduced cash flows from operations. Cash flow from operations, as adjusted, is computed by subtracting property and equipment additions and principal amortization of Long Term Debt from the "Net cash provided by operating activities" in the Consolidated Statements of Cash Flows and adjusting for changes in accrued revenues and expenses, net, included therein. Accordingly, cash flow from operations, as adjusted, does not represent cash flow provided by operating activities as defined by generally accepted accounting principles, should not be considered as an alternative to net income as an indicator of the Partnership's operating performance and is not indicative of cash available to fund all cash flow needs. See "Item 8 -- Financial Statements and Supplementary Data" for the Partnership's Consolidated Statements of Cash Flows.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Results of Operations.
Introduction. At December 31, 1994, the Partnership owned nine RCs, all of which were managed by Forum Group. Operating revenues and net operating income (operating revenues less operating expenses and management fees) for the year then ended, were $3,289,000 (8%) and $1,781,000 (24%), respectively, higher than 1993. Combined occupancy at December 31, 1994 was 95%, compared to 94% at December 31, 1993.
The year ended December 31, 1994 produced net income of $317,000 compared to a net loss of $4,679,000 for 1993. The loss for the year ended December 31, 1993 included an extraordinary charge in the amount of $2,917,000 related to the early extinguishment of debt.
On March 26, 1992, the Partnership sold the business and substantially all of the assets of The Lafayette/Philadelphia, an RC located in Philadelphia, Pennsylvania ("The Lafayette"), for $17,000,000. Approximately $16,000,000 of the proceeds were used to repay a portion of the indebtedness under the Partnership's then-outstanding Split Coupon Notes.
The improvement in operating revenues was attributable to improved occupancy rates for the Partnership's RCs during 1994, increases in the amount of revenue generated per occupied unit, and increased provision of ancillary healthcare services. Average occupancy of the Properties for 1994 was 93.8% as compared to average occupancy of 91.1% for 1993, and average revenue per occupied unit for the same periods has improved from $27,156 to $28,190. Because many of the Partnership's operating expenses are fixed, a substantial portion of incremental revenues generated by improvements in occupancy are expected to flow- through to increase the Partnership's net operating income. In light of the large and growing segment of the U.S. population which is 75 years of age and older and the low levels of construction of new RCs and other competitive properties during the 1990's compared to the high levels of RC and other real estate construction and development in the 1980's, management of the Partnership presently expects the recent increases in occupancy levels and billing rates and, therefore, in net operating income, to be sustainable, although there necessarily can be no assurance with respect thereto.
Management of the Partnership has implemented various systems designed to control and, in some instances, decrease operating expenses. In addition, as discussed below, on December 28, 1993, the Partnership refinanced its long-term indebtedness on terms that reduce the Partnership's overall level of indebtedness and total required debt service payments during the term of the new loan.
The Partnership has not made any distributions on its Units for 1994, 1993, 1992, and 1991. With the continued improvements in the Partnership's operating results and the completion of the Refinancing in the fourth quarter of 1993, the Partnership expects to continue to have positive cash flow in 1995. There necessarily can be no assurance that operating results will continue to improve or as to whether or when, or at what levels, any distributions will be made. The Board of Directors of the General Partner is continuing to analyze the possible expansion of certain of its RCs as well as other alterations intended to increase the Partnership's levels of operating income. Implementation of this strategy may affect the Partnership's levels of distributable cash, if any. See "Item 1 - Business" for a discussion of opportunities for expansion which the Board of Directors of the General Partner intends to consider.
Operating Revenues. Operating revenues for the year ended December 31, 1994 increased by $3,289,000 (8%) compared to operating revenues for 1993. This increase is primary attributable to increases in occupancy, residency fees and charges, and increases in the provision of ancillary healthcare services.
Operating revenues for the year ended December 31, 1993 increased by $2,149,000 (5%) compared to operating revenues for 1992. Operating revenues for the year ended December 31, 1992 included $2,206,000 from the operation of The Lafayette. The remaining change (increase of $4,355,000) is primarily attributable to increases in occupancy, residency fees and charges.
A change in the estimate of amounts reimbursable by third party payors from prior years resulted in the recognition of $210,000 and $379,000 of additional operating revenues for 1994 and 1993, respectively.
Operating Expenses. Operating expenses, including management fees and depreciation, for the year ended December 31, 1994 increased by $1,643,000 (4%) compared to those combined expenses for the same period of 1993. This increase was principally attributable to changes in occupancy, increased provision of ancillary healthcare services, and normal inflationary increases in other operating expenses, as partially offset by a reduction of $300,000 for the year ended December 31, 1994, due to a reduction in workers' compensation insurance costs.
Operating expenses, including management fees and depreciation, for the year ended December 31, 1993 decreased by $760,000 (2%) compared to 1992. Those expenses for the year ended December 31, 1992 included $2,286,000 from the operation of The Lafayette. The remaining change (increase of $1,526,000) is primarily attributable to increases in occupancy combined with normal inflationary increases in other operating expenses.
Pursuant to the terms of the Management Agreement as in effect since the Partnership's formation in 1986, management fees (based on the Partnership's gross operating revenues) payable to Forum Group for all periods prior to 1994 have been deferred. Such fees accruing after January 1, 1994 have not been deferred. The deferred management fees were expensed in the Partnership's statements of operations and reflected on a deferred basis in the Partnership's balance sheets for the relevant periods. Accordingly, except for variations in management fees payable resulting from variations in revenue levels, the current payment of such fees for periods after January 1, 1994 did not affect the Partnership's operating or net income as compared to prior periods, although it did affect the Partnership's cash position.
Interest Expense. Total interest expense for the year ended December 31, 1994 decreased by $722,000 compared to total interest expense for 1993, due primarily to a reduction in the principal amount of long-term debt.
Total interest expense for the year ended December 31, 1993 decreased by $1,404,000 compared to total interest expense for 1992, also due primarily to a reduction in the principal amount of long-term debt.
Income Taxes. The Omnibus Budget Reconciliation Act of 1987 provides that certain publicly traded partnerships will be treated as corporations for federal income tax purposes. A grandfather provision delays corporate tax status until 1998 for publicly traded partnerships in existence prior to December 18, 1987. On August 8, 1988, the General Partner was authorized by the limited partners to do all things deemed necessary or desirable to insure that the Partnership is not treated as a corporation for federal income tax purposes. Alternatives available to avoid corporate taxation after 1998 include: (i) selling or otherwise disposing of all or substantially all of the Partnership's assets pursuant to a plan of liquidation, (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 avoid being taxed as a corporation for federal income tax purposes, there can be no assurance that it will be successful.
Financial Condition
Liquidity and Capital Resources. At December 31, 1994, the Partnership had cash and cash equivalents of $5,588,000, accounts receivable of $2,650,000, and current liabilities of $5,164,000. The Partnership believes that it has adequate liquidity to meet its foreseeable working capital requirements.
The General Partner is continuing to study the possible expansion of certain of the Partnership's properties in an effort to further increase operating income. A preliminary study has identified several attractive expansion opportunities, which could increase the number of living units owned by the Partnership by approximately 30%, for an estimated capital expenditure totaling $25 million. Any expansion would likely modify the uses of, or add capacity to, existing facilities without incurring substantial land acquisition and common area build-out costs. Any significant expansion could require the Partnership to obtain additional financing, modify existing financing and obtain regulatory approvals.
On December 28, 1993, the Partnership entered into a loan agreement with Nomura for $50,707,000 in new financing. The Nomura Loan bears interest at the rate of 9.93% per annum (including a 0.20% servicing fee), is amortized over a 20-year period and matures on January 1, 2001. The proceeds of the Nomura Loan were used to prepay in full (i) the approximately $9.5 million remaining principal balance of secured debt under a prior bank credit facility which was due to mature on December 31, 1993, and (ii) approximately $34.1 million aggregate principal amount of the Partnership's split coupon first mortgage notes, which were due to mature on June 30, 1996, and to pay related fees and expenses.
As discussed above, management fees payable to Forum Group for all periods from the formation of the Partnership in 1986 to December 31, 1993 ($15,780,000) were deferred. Management fees for periods after December 31, 1993 are being paid quarterly, in arrears. Deferred management fees are payable to Forum Group out of proceeds of sales and refinancings after making distributions of those proceeds in an amount sufficient to (i) meet limited partners' tax liabilities, (ii) repay limited partners' capital contributions, and (iii) pay a 12% cumulative, simple annual return on limited partners' unrecovered capital contributions. Deferred management fees become immediately due and payable in the event that the Management Agreement is terminated, which may occur under certain conditions including, but not limited to, if Forum Retirement, Inc. is removed as the General Partner and 80% in interest of the limited partners vote to terminate such agreement. The Partnership is unable to determine when or if management fees deferred prior to January 1, 1994 will become payable.
Operating activities provided $3,541,000 more cash during the year ended December 31, 1994 than during 1993, due principally to improved operating performance and reductions in other accrued revenues and expenses during 1993, net of the above- described difference in the treatment of management fees due the parent of the General Partner.
Investing activities used $643,000 more cash during the year ended December 31, 1994 than during 1993, due to normal fluctuations in the timing of purchases of property and equipment.
Financing activities used $1,822,000 more cash during the year ended December 31, 1994 than during 1993, due principally to the October, 1993 Recapitalization Agreement and the December, 1993 Nomura Loan closing.
Inflation. Management does not believe that inflation has had a material effect on net income. To the extent possible, increased costs are recovered through increased residency fees and charges.
Item 8.
Item 8. Financial Statements and Supplementary Data.
The following consolidated financial statements are filed under this Item:
Page(s) -------
Independent Auditors' Report
The Partners Forum Retirement Partners, L.P.:
We have audited the accompanying consolidated balance sheets of Forum Retirement Partners, L.P. and subsidiary partnership as of December 31, 1994 and 1993 and the related consolidated statements of operations, partners' equity and cash flows for each of the years in the three-year period ended December 31, 1994. These consolidated financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Forum Retirement Partners, L.P. and subsidiary partnership as of December 31, 1994 and 1993 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1994 in conformity with generally accepted accounting principles.
/s/KPMG Peat Marwick, L.L.P.
KPMG Peat Marwick LLP Indianapolis, Indiana February 6, 1995
FORUM RETIREMENT PARTNERS, L.P. AND SUBSIDIARY PARTNERSHIP
Consolidated Balance Sheets
December 31, 1994 and 1993
(in thousands)
See accompanying Notes to Consolidated Financial Statements.
FORUM RETIREMENT PARTNERS, L.P. AND SUBSIDIARY PARTNERSHIP
Consolidated Statements of Operations
Years ended December 31, 1994, 1993 and 1992
(in thousands except per unit amounts)
See accompanying Notes to Consolidated Financial Statements.
FORUM RETIREMENT PARTNERS, L.P. AND SUBSIDIARY PARTNERSHIP
Consolidated Statements of Partners' Equity
Years ended December 31, 1994, 1993 and 1992
(in thousands)
See accompanying Notes to Consolidated Financial Statements.
FORUM RETIREMENT PARTNERS, L.P. AND SUBSIDIARY PARTNERSHIP
Consolidated Statements of Cash Flows
Years ended December 31, 1994, 1993 and 1992
(in thousands)
See accompanying Notes to Consolidated Financial Statements.
FORUM RETIREMENT PARTNERS, L.P. AND SUBSIDIARY PARTNERSHIP
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies
Organization
Forum Retirement Partners, L.P. and a subsidiary partnership (the "Partnership") own nine retirement communities ("RCs") which were acquired from Forum Group, Inc. ("Forum Group"). Forum Group was engaged to manage, and continues to manage, the RCs for the Partnership.
The general partner of the Partnership, a wholly owned subsidiary of Forum Group, receives 1% of all distributions of net cash flow until the limited partners receive cumulative distributions equal to a 12% cumulative annual return on the initial offering price. Thereafter, the general partner is to receive 30% of all distributions of net cash flow. Forum Group owned 62.1% of the Partnership at December 31, 1994.
On February 19, 1991, Forum Group commenced reorganization proceedings under Chapter 11 of the United States Bankruptcy Code, and on April 2, 1992, Forum Group's plan of reorganization was confirmed by the Bankruptcy Court. In February 1993, the Partnership and Forum Group entered into a settlement agreement disposing of certain claims which arose during the reorganization proceedings. As part of that settlement, the Partnership received a cash payment of $125,000 and 63,612 shares of Forum Group common stock which were sold in August 1993 for $230,000, resulting in a gain of $130,000.
To facilitate the refinancing of its long-term debt, the Partnership and Forum Group entered into a Recapitalization Agreement (the "Recapitalization Agreement") in October 1993, which provided for, among other things, an immediate infusion of $13 million of equity into the Partnership by a wholly- owned subsidiary of Forum Group. The Partnership applied the $13 million of proceeds to the partial prepayment of the outstanding principal balance of the secured bank credit agreement that was to mature on December 31, 1993. To repay the remaining amount due on the secured bank credit agreement and other indebtedness of the Partnership, on December 28, 1993, the Partnership obtained $50.7 million in new mortgage financing (see note 3).
In order that the other limited partners' interests are not diluted as a result of the Recapitalization Agreement, in January 1994, the Partnership offered all of the other limited partners the right to purchase 0.74 of a Partnership unit for each unit owned on October 18, 1993, at $2.00 per unit. Proceeds from the exercise of these rights were used to repurchase 1,994,189 units from the wholly owned subsidiary of Forum Group at $2.00 per unit. The Partnership incurred costs of $91,000 and $253,000 in 1994 and 1993, respectively, as a result of the offering.
Principles of Consolidation
The consolidated financial statements include the accounts of the Partnership and its affiliated operating partnership in which the Partnership has a 99% limited partner's interest and the general partner of the Partnership owns the remaining 1% interest. The effects of all significant intercompany accounts and transactions have been eliminated in consolidation.
Property and Equipment
Property and equipment are carried at cost. Depreciation is computed on the straight-line method at rates calculated to amortize the costs over the estimated useful lives of the related assets. The Partnership records a provision for value impairment whenever the estimated future cash flows from the property's operations or projected sale are less than the property's net carrying value.
Deferred Costs
Financing costs are amortized to interest expense on the straight-line method over the term of the related loan agreement.
Operating Revenues
Routine service revenues are generated from monthly charges for independent living units and daily charges for assisted living suites and nursing beds, and are recognized monthly based on the terms of the residents' agreements. Advance payments received for services are deferred until the services are provided. 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.
Operating revenues include amounts estimated by management to be reimbursable by Medicare, Medicaid and other cost-based programs. Cost-based reimbursements are subject to audit by agencies administering the programs, and provisions are made for potential adjustments that may result. To the extent those provisions vary from settlements, revenues are charged or credited when the adjustments become final. A change in the estimate of amounts reimbursable by third party payors from prior years resulted in the recognition of $210,000 and $379,000 of additional operating revenues for 1994 and 1993, respectively.
Income Taxes
As partnerships, the allocated share of income or loss for the year is includable in the income tax returns of the partners; accordingly, income taxes are not reflected in the accompanying consolidated financial statements.
The tax basis of the Partnership's assets are approximately $12,000,000 less than the basis reported for financial statement purposes, primarily due to the carryover tax basis of the affiliated operating partnerships and differences in tax reporting methods.
Per Unit Data
The net income (loss) per unit is based on the limited partners' interest in the net income (loss) divided by the average number of limited partner units outstanding.
Reclassifications
Certain amounts in the 1993 financial statements have been reclassified to conform with the 1994 presentation.
(2) Cash
Restricted cash includes required property, working capital and other reserves amounting to $1,434,000 and $612,000 at December 31, 1994 and 1993, respectively, and residents' deposits of $1,191,000 and $1,107,000 at December 31, 1994 and 1993, respectively.
Cash and cash equivalents include cash and highly liquid investments with a maturity of three months or less.
(3) Long-term Debt
On December 28, 1993, the Partnership entered into a new mortgage loan agreement for $50,707,000, and the proceeds were used to retire the split coupon mortgage notes and the bank credit facility and to pay the related fees, yield maintenance premium and expenses. The new loan requires monthly payments of principal (based on a 20-year amortization) and interest at 9.93% (assuming servicing costs of 0.20%) to maturity on January 1, 2001. The loan agreement prohibits prepayment for three years and requires payment of a yield maintenance premium, as defined, if prepaid thereafter. Additional principal payments are required if the debt service coverage ratio, as defined, is below specified levels. The loan is secured by all of the Partnership's RCs. Scheduled principal payments on the mortgage loan as of December 31, 1994 are $927,000 in 1995, $1,023,000 in 1996, $1,129,000 in 1997, $1,247,000 in 1998 and $1,376,000 in 1999.
The prepayment of the split coupon mortgage notes required a yield maintenance premium of $2,142,000 which is included in extraordinary charge in the accompanying consolidated statements of operations. The split coupon mortgage notes included a prohibition of cash distributions and required the maintenance of cash escrow and reserve funds. Base interest rates ranged from 7.75% to 9.25%, payable monthly, and additional interest rates ranged from 2.25% to 3.00%, payable monthly from net operating cash flow for the previous month, as defined, or upon maturity on June 30, 1996, for an effective rate of 11.46% through December 28, 1993. Prior to a restructuring in 1992, the split coupon mortgage notes had an effective interest rate of 11.75%. Interest payments of $255,000 were due monthly at 6% per annum through July 1992, with principal and interest payments of $527,000 due monthly at 11.75% thereafter to maturity on July 1, 1996.
Interest under the bank credit facility was payable quarterly through March 1993, and monthly thereafter, at the bank's reference rate plus 2%.
Amounts due to parent of general partner include long-term debt of $457,000 and $632,000 at December 31, 1994 and 1993, respectively, with a blended interest rate of 7.2% and maturities in varying amounts through January 31, 2004.
Interest paid during 1994, 1993 and 1992 totaled $4,679,000, $5,872,000 and $6,732,000, respectively.
(4) Commitments and Contingencies
In connection with the formation of the Partnership, the Partnership entered into a long-term management agreement with Forum Group which requires fees of 8% of gross operating revenues. Through December 31, 1993, the agreement provided for the deferral of the payment of the fees if net cash flow was not adequate to make certain distributions to limited partners. Since cash flow was not adequate to make the distributions, the $15,780,000 of management fees earned since formation of the Partnership through December 31, 1993 was deferred. The Partnership also reimbursed Forum Group for general and administrative costs incurred on behalf of the Partnership, which amounted to $180,000 in 1994 and 1993 and $176,000 in 1992.
On January 24, 1994, the Russell F. Knapp Revocable Trust (the "Plaintiff"), filed a complaint (the "Complaint") in the United States District Court for the Northern District of Iowa against the Partnership's general partner alleging breach of the partnership agreement, breach of fiduciary duty, fraud and civil conspiracy. 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 allegedly required by the partnership agreement and as represented in the 1986 Prospectus for the Partnership's initial public offering, and that the general partner's Board of Directors has approved and/or acquiesced to 8% management fees being 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 8% management fees and unspecified compensatory and punitive damages. The general partner intends to vigorously defend against this litigation. The Partnership, in accordance with the management agreement, reimbursed the general partner for $146,000 of litigation costs relating to this claim in 1994.
(5) Employee Benefit Plan
Effective April 1, 1993, Forum Group established a defined contribution profit sharing plan, including features under Section 401(k) of the Internal Revenue Code, which will provide retirement benefits to its eligible employees. The Partnership contributes to the plan for participants employed at the RCs.
The Partnership has expensed $43,000 and $34,000 in 1994 and 1993, respectively, relating to its portion of employee contributions under this plan.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
No reportable change in or disagreement with accountants has taken place during the Partnership's two most recent fiscal years or any subsequent interim period.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Partnership.
The following table lists the names and ages of all current directors and executive officers of the General Partner; all positions and offices with the General Partner held by each such person; each such person's term of office as a director or an executive officer, and the period during which he has served as such; and each such person's business experience for the past five years. The directors of the General Partner serve as such until their successors are elected. See "Item 3 -- Legal Proceedings" for a discussion of certain litigation challenging the constitution of the Board of Directors of the General Partner and the Management Agreement entered into in 1986 in connection with the formation of the Partnership. The executive officers of the General Partner serve at the pleasure of the Board of Directors of the General Partner.
Name, Principal Occupation Served and Business Experience Since Age -------------------------- ------ --- Directors:
Donald J. McNamara 1993 41 Chairman of the Board and President of the General Partner; Chairman and Co- Chief Executive Officer of The Hampstead Group since 1988; director of La Quinta Motor Inns, Inc. since 1992.
John F. Sexton 1993 62 Chairman, Evans-McKinsey Company, since 1993, theretofore Senior Vice President of Finance, Lomas Financial Corporation since prior to 1989; director of Turtle Creek National Bank since prior to 1989; director of Forecast Homes since 1992; director of Americana Hotels and Realty Corp. since prior to 1989.
James C. Leslie 1993 38 Executive Vice President - Financial Services and director of The Staubach Company since 1992 and director since prior to 1989; President and director of Wolverine Holding Company since prior to 1989; director of Columbus Realty Trust since 1993.
Non-Director Officers:
Paul A. Shively 1986 52 Vice President, Treasurer and Chief Financial Officer of the General Partner; Senior Vice President, Treasurer and Chief Financial Officer of Forum Group since prior to 1989; director and Secretary of Capital Industries, Inc., since prior to 1989; director of Forum Group, 1988-1992.
Item 11.
Item 11. Executive Compensation.
No cash compensation is paid to any officer of the General Partner for services rendered in any capacity to the Partnership and its affiliated operating partnerships.
Messrs. Sexton and Leslie are compensated for all services as a director at the rate of $18,000 per year, payable quarterly in advance, plus $1,500 for each board or committee meeting attended in person and $1,000 per meeting attended telephonically. Mr. McNamara is compensated for all services as a director at the rate of $15,000 per year, payable quarterly in advance.
In addition to amounts payable to Forum Group under the Management Agreement, Forum Group and the General Partner are entitled to the reimbursement of various amounts and to indemnification for certain costs and losses under the Management Agreement and the Partnership Agreement.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
(a) Security Ownership of Certain Beneficial Owners. The following table shows the numbers and percentages of Units owned beneficially on January 6, 1995, by any person known to the Partnership to be the beneficial owner of more than 5% of the issued and outstanding Units. Each person has sole voting and investment power as to the Units beneficially owned by that person. In addition to the Units beneficially owned by it, Forum Group beneficially owns the General Partner's 1% general partnership interest.
None of the directors or officers of the General Partner beneficially owns any Units, except insofar as they may be deemed beneficially to own Units owned by Forum or its affiliates.
Changes in Control. There are no arrangements, known to the Partnership, the operation of which may at a subsequent date result in a change in control of the Partnership. See "Item 1 -- Business" in respect to the Recapitalization Agreement and related transactions.
Item 13.
Item 13. Certain Relationships and Related Transactions.
Apart from (i) the transactions contemplated by the Management Agreement and the Recapitalization Agreement, and (ii) the reimbursement to Forum Group for direct expenses incurred on behalf of the Partnership and office expenses, salaries, compensation expenses, administrative expenses, and other expenses necessary or appropriate to the conduct of the business of, and allocable to, the Partnership (totaling $180,000 for the Partnership's last fiscal year), there is no transaction, or series of similar transactions, since the beginning of the Partnership's last fiscal year, or any currently proposed transaction, or series of similar transactions, to which the Partnership or any of its affiliated operating partnerships was or is to be party, in which the amount involved exceeds $60,000 and in which (i) any director or executive officer of the General Partner or Forum Group, (ii) any nominee for election as a director of the General Partner or Forum Group, (iii) any security holder known to the registrant to own of record or beneficially more than 5% of any class of the registrant's voting securities, or (iv) any member of the immediate family of any of the foregoing persons, had, or will have, a direct or indirect material interest. At December 31, 1993 and 1994, deferred management fees due Forum Group under the Management Agreement totaled approximately $15,780,000. See "Item 1 - Partnership Recapitalization" and Item 7 of Part I of this Report for a discussion of the Management Agreement between the Partnership and Forum Group.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) Documents Filed as Part of Report. The following documents are filed as a part of this report:
1. Financial statements:
The following consolidated financial statements of the Partnership and its affiliated operating partnership are filed under Item 8 of this report:
2. Financial statement schedules:
The following other financial statements and financial statement schedules are filed pursuant to this item:
All other schedules for which provision is made in Regulation S-X are not required under the related instructions or are inapplicable, and have therefore been omitted.
Reports on Form 8-K. No reports on Form 8-K were filed by the Partnership during the last quarter of the fiscal year covered by this report.
SIGNATURES ----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
FORUM RETIREMENT PARTNERS, L.P., a Delaware limited partnership
By: Forum Retirement, Inc., General Partner
By:/s/Paul A. Shively ---------------------------- Paul A. Shively, Vice President and Treasurer
Date: March 16, 1995
POWER OF ATTORNEY -----------------
Each person whose signature appears below hereby authorizes Paul A. Shively to file one or more amendments to this report, which amendments may make changes in this report as any of them deems appropriate, and each person whose signature appears below hereby appoints Paul A. Shively as attorney-in-fact to execute in his name and on his behalf individually, and in each capacity stated below, any amendments to this report.
____________
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ----
(1) Principal Executive Financial and Accounting Officer of General Partner:
/s/Paul A. Shively Vice President, March 16, 1995 - ---------------------------- Treasurer and Chief Paul A. Shively Financial Officer
S-1
(2) A Majority of the Board of Directors of General Partner:
/s/Donald J. McNamara Director March 16, 1995 - ---------------------------- Donald J. McNamara
/s/James C. Leslie Director March 16, 1995 - ---------------------------- James C. Leslie
/s/John F. Sexton Director March 16, 1995 - ---------------------------- John F. Sexton
S-2
Independent Auditors' Report
The Partners Forum Retirement Partners, L.P.:
Under date of February 6, 1995, we reported on the consolidated balance sheets of Forum Retirement Partners, L.P. and subsidiary partnership as of December 31, 1994 and 1993 and the related consolidated statements of operations, partners' equity and cash flows for each of the years in the three-year period ended December 31, 1994, as contained in the annual report on Form 10-K for the year 1994. In connection with our audits of the aforementioned consolidated financial statements, we also have audited the related financial statement schedule as listed in the accompanying index. This financial statement schedule is the responsibility of the Partnership's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits.
In our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
/s/KPMG Peat Marwick, L.L.P.
KPMG Peat Marwick LLP Indianapolis, Indiana February 6, 1995