-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, MKvr3KRKZoI8tm7uKap6LDLGB/2UFVx8cg0Y+G3mYeNxnVxu6kYoG2C265GQO4qw XVPgxzxa/LmQ/0jk7Do6aA== 0000033939-94-000008.txt : 19940817 0000033939-94-000008.hdr.sgml : 19940817 ACCESSION NUMBER: 0000033939-94-000008 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19940630 FILED AS OF DATE: 19940815 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FORUM GROUP INC CENTRAL INDEX KEY: 0000033939 STANDARD INDUSTRIAL CLASSIFICATION: 8300 IRS NUMBER: 610703072 STATE OF INCORPORATION: IN FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-06350 FILM NUMBER: 94543949 BUSINESS ADDRESS: STREET 1: 8900 KEYSTONE CROSSING STE 200 STREET 2: P O BOX 40498 CITY: INDIANAPOLIS STATE: IN ZIP: 46240-0498 BUSINESS PHONE: 3178460700 MAIL ADDRESS: STREET 1: 8900 KEYSTONE CROSSING STE 200 STREET 2: PO BOX 40498 CITY: INDIANAPOLIS STATE: IN ZIP: 46240-0498 FORMER COMPANY: FORMER CONFORMED NAME: EXCEPTICON INC DATE OF NAME CHANGE: 19810909 FORMER COMPANY: FORMER CONFORMED NAME: GUARDIAN CARE CORP DATE OF NAME CHANGE: 19720615 10-Q 1 FORUM GROUP, INC., FORM 10-Q FQE 6-30-94 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For Quarter Ended June 30, 1994 Commission File Number 0-6350 FORUM GROUP, INC. (Exact name of registrant as specified in its charter) Indiana 61-0703072 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 8900 Keystone Crossing, Suite 200 P.O. Box 40498 Indianapolis, Indiana 46240-0498 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 317-846-0700 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days: Yes X No ----- ----- Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court: Yes X No ----- ----- The number of shares outstanding of the registrant's common stock as of August 9, 1994 was 22,500,109. INDEX FORUM GROUP, INC., AND SUBSIDIARIES PART I. FINANCIAL INFORMATION PAGE - - ----------------------------- ---- Item 1. Financial Statements (Without Audit) Condensed consolidated balance sheets -- June 30 and March 31, 1994 3 Condensed consolidated statements of operations -- Three months ended June 30, 1994 and 1993 4 Condensed consolidated statements of cash flows -- Three months ended June 30, 1994 and 1993 5 Notes to condensed consolidated financial statements -- June 30, 1994 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 PART II. OTHER INFORMATION - - -------------------------- Item 1. Legal Proceedings 15 Item 6. Exhibits and Reports on Form 8-K 17 SIGNATURES 18 - - ---------- -2- PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ----------------------------- FORUM GROUP, INC., AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Without Audit) June 30, March 31, 1994 1994 ------------- ------------ (in thousands) ASSETS ------ Property and equipment: Land and improvements $ 34,518 $ 34,505 Buildings and leasehold improvements 176,516 176,209 Furniture and equipment 13,251 13,046 ----------- ----------- 224,285 223,760 Less accumulated depreciation and amortization 13,103 11,600 ----------- ----------- 211,182 212,160 Investments: Forum Retirement Partners, L.P. 12,403 12,420 Greenville Retirement Community, L.P. 3,649 3,614 Rancho San Antonio Retirement Housing Corporation 558 7,228 Other 55 0 ----------- ----------- 16,665 23,262 ----------- ----------- Cash and cash equivalents 33,865 18,331 Accounts receivable, less allowance for doubtful accounts of $359 and $277 5,990 5,246 Notes, investments and other receivables 4,175 5,717 Management fees receivable 972 964 Restricted cash 10,510 9,992 Deferred costs and other assets, net 13,794 14,528 ----------- ----------- $ 297,153 $ 290,200 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ Liabilities: Long-term debt, including $3,718 due within one year $ 204,463 $ 205,094 Trade accounts payable 2,070 2,332 Accrued expenses 12,304 12,523 Resident deposits and refundable resident fees 17,782 17,253 Deferred income 7,364 7,041 ----------- ----------- Total Liabilities 243,983 244,243 Other partners' equity 1,655 1,673 Shareholders' equity: Common stock, no par value - authorized 48,000 shares, issued 22,500 and 21,262 shares 63,928 58,773 Accumulated deficit (12,413) (14,489) ----------- ----------- Total Shareholders' Equity 51,515 44,284 ----------- ----------- $ 297,153 $ 290,200 =========== =========== See Notes to Condensed Consolidated Financial Statements. -3- FORUM GROUP, INC., AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Without Audit) Three Months Ended June 30, ------------------------- 1994 1993 ----------- ----------- (in thousands except per share amounts) Revenues: Net operating revenues $ 26,743 $ 24,673 Management fees 1,094 103 Investment and other income 253 325 ----------- ----------- TOTAL REVENUES 28,090 25,101 ----------- ----------- Costs and expenses: Operating expenses 19,083 18,565 General and administrative expenses 688 967 Litigation expense 0 1,080 Depreciation 1,527 2,232 ----------- ----------- TOTAL COSTS AND EXPENSES 21,298 22,844 ----------- ----------- 6,792 2,257 Interest expense (4,656) (4,414) ----------- ----------- Income (loss) before minority interests and extraordinary charge 2,136 (2,157) Minority interests (60) 956 ----------- ----------- Income (loss) before extraordinary charge 2,076 (1,201) Extraordinary charge - early extinguishment of debt 0 (415) ----------- ----------- NET INCOME (LOSS) 2,076 (1,616) ACCUMULATED DEFICIT AT BEGINNING OF PERIOD (14,489) (7,359) ----------- ----------- ACCUMULATED DEFICIT AT END OF PERIOD $ (12,413) $ (8,975) =========== =========== Average number of common and common equivalent shares outstanding 22,764 9,320 =========== =========== Net (income) loss per common and common equivalent share (primary and fully diluted): Income (loss) before extraordinary charge $ 0.09 $ (0.13) Extraordinary charge 0.00 (0.04) ----------- ----------- Net income (loss) $ 0.09 $ (0.17) =========== =========== See Notes to Condensed Consolidated Financial Statements. -4- FORUM GROUP, INC., AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Without Audit) Three Months Ended June 30, ------------------------- 1994 1993 ---------- ---------- (in thousands) Cash flows from operating activities: Net income (loss) $ 2,076 $ (1,616) Adjustments to reconcile net income (loss) to cash provided by operating activities: Depreciation and amortization 1,527 2,233 Amortization of deferred financing costs 580 141 Other partners' and cooperative members' interest in losses (earnings) of consolidated companies 60 (956) Net (income) losses of investments accounted for using the equity method 82 (95) Other accrued revenues and expenses 806 1,161 Non-cash portion of extraordinary charge 0 270 ---------- ---------- NET CASH PROVIDED BY OPERATING ACTIVITIES 5,131 1,138 ---------- ---------- Cash flows from investing activities: Additions to property and equipment (525) (391) Net proceeds from sales of investment in Rancho San Antonio Retirement Housing Corporation 6,554 0 Notes, investments and other receivables 104 130 Other 47 37 ---------- ---------- NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 6,180 (224) ---------- ---------- Cash flows from financing activities: Proceeds from long-term debt 203 90,282 Payments on long-term debt (843) (97,521) Proceeds from issuance of common stock and warrants, net 5,156 20,000 Deferred financing and other costs (227) (9) Proceeds from cooperative memberships 0 2,575 Distribution to other partners (77) (77) Recapitalization and tender offer costs 0 (5,729) Resident deposits 529 1,001 Net increase in restricted cash (518) (1,454) ---------- ---------- NET CASH PROVIDED BY FINANCING ACTIVITIES 4,223 9,068 ---------- ---------- Net increase in cash and cash equivalents 15,534 9,982 Cash and cash equivalents at beginning of period 18,331 5,723 ---------- ---------- Cash and cash equivalents at end of period $ 33,865 $ 15,705 ========== ========== See Notes to Condensed Consolidated Financial Statements. -5- FORUM GROUP, INC., AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Without Audit) June 30, 1994 Note A - Basis of Presentation - - ------------------------------ The balance sheet at March 31, 1994 has been derived from the audited financial statements at that date included in the Annual Report on Form 10-K of Forum Group, Inc. ("Forum Group") filed with the Securities and Exchange Commission for the fiscal year ended March 31, 1994 (the "1994 10-K"). The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three-month period ended June 30, 1994 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 1995. For further information, refer to Forum Group's consolidated financial statements as of and for the year ended March 31, 1994, and the footnotes thereto, included in the 1994 10-K. Note B - Change In Consolidation - - -------------------------------- The assets, liabilities and financial results of Rancho San Antonio Retirement Housing Corporation ("RSARHC"), a cooperative which owns The Forum at Rancho San Antonio ("Rancho San Antonio"), a continuing care community in Cupertino, California, were included in the consolidated financial statements of Forum Group through July 31, 1993 since Forum Group owned a majority of RSARHC's cooperative memberships. Effective August 1, 1993, due to continued sales of cooperative memberships, Forum Group no longer owned in excess of 50% of the memberships, and accordingly, the financial statements of RSARHC are no longer included in Forum Group's consolidated financial statements. Sales of cooperative memberships totalled $96,500,000 through June 30, 1994 and profits on these sales will be recognized using the cost recovery method. Forum Group's continuing ownership interest in RSARHC as the owner of 18.8% of the cooperative memberships at June 30, 1994 is accounted for on the cost method. Prior to June 1, 1994, Forum Group's continuing ownership interest in RSARHC was accounted for on the equity method. The assets, liabilities and financial results of Rancho San Antonio Retirement Services, Inc., the wholly-owned subsidiary of Forum Group which operates the healthcare and assisted living components of Rancho San Antonio, have been included in the consolidated financial statements of Forum Group for all periods presented. Note C - Investments - - -------------------- Forum Group has a 43.2% beneficial interest in Forum Retirement Partners, L.P. ("FRP"), a publicly-traded limited partnership which owns nine retirement communities. In addition, Forum Group is the parent company of FRP's general partner and has a long-term management contract with -6- FORUM GROUP, INC., AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Without Audit) June 30, 1994 (continued) FRP. Summary financial information for FRP as of and for the three months ended June 30, 1994 is as follows (in thousands): Net property $ 97,625 Other assets 14,127 --------- 111,752 Less liabilities 73,125 --------- Net assets $ 38,627 ========= Revenues $ 11,439 Costs and expenses 11,404 --------- Net income $ 35 ========= Forum Group has a 50% beneficial interest in Greenville Retirement Community, L.P. ("GRP"), a limited partnership which owns the Stonegates retirement community in Wilmington, Delaware. Summary financial information for GRP as of and for the three months ended June 30, 1994 is as follows (in thousands): Net property $ 20,423 Other assets 939 --------- 21,362 Less liabilities 22,409 --------- Net deficit $ 1,047 ========= Revenues $ 1,613 Costs and expenses 1,400 --------- Net income $ 213 ========= -7- FORUM GROUP, INC., AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS AS OF AND FOR THE THREE MONTHS ENDED June 30, 1994 Results Of Operations - - --------------------- Forum Group operates (i) 10 retirement communities, including one community owned by a nonprofit Arizona corporation, and one nursing facility, owned or leased directly or indirectly by Forum Group (the "Owned Communities") , (ii) four retirement communities owned by partnerships which are not wholly owned by Forum Group but which are consolidated for financial reporting purposes (the "Consolidated Partnership Communities"), (iii) 11 retirement communities owned by entities which are not consolidated for financial reporting purposes (the "Unconsolidated Communities"), including nine communities owned by FRP, one owned by GRP, and one owned by RSARHC (which was consolidated for financial reporting purposes prior to July 31, 1993) (see Note B of the Notes to Condensed Consolidated Financial Statements). The periods in which the financial results of the consolidated components of Rancho San Antonio are included in the financial statements of Forum Group are not comparable. Consequently, Rancho San Antonio is presented separately below in order to present a comparable disclosure of the other entities' financial results. Certain summary financial information for the Owned Communities, Rancho San Antonio, the Consolidated Partnership Communities, and other corporate operations ("Corporate Operations") is presented below: Three Months Ended June 30, 1994 -------------------------------- Consolidated Owned Rancho Partnership Corporate Communities San Antonio Communities Operations Totals Net ----------- ----------- ----------- ---------- ------ Operating Revenues $18,967 $ 1,079 $ 6,673 $ 24 $26,743 Operating Expenses 12,740 1,061 4,080 1,202 19,083 General and Administra- tive Expense 0 0 16 672 688 Litigation Expense 0 0 0 0 0 Depreciation 1,009 0 513 5 1,527 Interest Expense 3,045 20 1,230 361 4,656 -8- FORUM GROUP, INC., AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Three Months Ended June 30, 1993 -------------------------------- Consolidated Owned Rancho Partnership Corporate Communities San Antonio Communities Operations Totals Net ----------- ----------- ----------- ---------- ------ Operating Revenues $16,870 $ 1,500 $ 6,123 $ 180 $24,673 Operating Expenses 12,306 1,720 3,921 618 18,565 General and Administra- tive Expense 0 0 6 961 967 Litigation Expense 0 0 0 1,080 1,080 Depreciation 963 763 499 7 2,232 Interest Expense 653 533 1,000 2,228 4,414 Owned Communities. Net operating revenues for the three months ended June 30, 1994 increased by $2,097,000 (12%), from $16,870,000 to $18,967,000, as compared to the same period of the previous year. This increase was primarily attributable to favorable changes in occupancy, increased utilization of ancillary healthcare services and increases in residency fees and charges. Combined occupancy increased from 91% at June 30, 1993 to 94% at June 30, 1994. Operating expenses, including general and administrative expenses and depreciation (collectively, "Total Operating Expenses"), for the three months ended June 30, 1994 at the Owned Communities increased by $480,000 (4%), from $13,269,000 to $13,749,000, as compared to the same period of the previous year. This increase was primarily attributable to the increase in occupancy, increased utilization of ancillary healthcare services and normal inflationary increases, as partially offset by a reduction of $239,000 due to a change in the estimate of workers compensation premiums. Net Operating Income, comprised of operating revenue less Total Operating Expenses, for the three months ended June 30, 1994 at the Owned Communities increased by $1,617,000, from $3,601,000 to $5,218,000, as compared to the same period of the previous year. Exclusive of the impact of the change in workers compensation premium estimate discussed above, this increase constitutes 66% of the increase in net operating revenues for the quarter, which is indicative of the degree of incremental operating income that results from increased occupancy. Rancho San Antonio. Due to the change in financial statement presentation discussed above in Note B of the Notes to Condensed Consolidated Financial Statements, the financial results of Rancho San -9- FORUM GROUP, INC., AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Antonio are not comparable between fiscal periods. Therefore, no discussion of variances regarding Rancho San Antonio is presented. Net operating revenues for the consolidated components of Rancho San Antonio for the three months ended June 30, 1994 decreased by $421,000, from $1,500,000 to $1,079,000, as compared to the same period of the previous year. Occupancy of the consolidated components of Rancho San Antonio increased from 61% at June 30, 1993 to 87% at June 30, 1994. Total Operating Expenses for the consolidated components of Rancho San Antonio for the three month period decreased by $1,422,000, from $2,483,000 to $1,061,000, as compared to the same period of the previous year. Net Operating Income for the consolidated components of Rancho San Antonio for the three month period ended June 30, 1994 increased by $1,001,000, from a loss of $983,000 to income of $18,000, as compared to the same period of the previous year. Consolidated Partnership Communities. Net operating revenues for the three months ended June 30, 1994 increased by $550,000 (9%), from $6,123,000 to $6,673,000, as compared to the same period of the previous year. This increase was primarily attributable to increased occupancy, increased utilization of ancillary healthcare services, and increases in residency fees and charges. Combined occupancy increased from 89% at June 30, 1993 to 91% at June 30, 1994. Total Operating Expenses for the Consolidated Partnership Communities for the three months ended June 30, 1994 increased by $183,000 (4%), from $4,426,000 to $4,609,000, as compared to the same periods of the previous year. This increase was primarily attributable to the increase in occupancy, increased utilization of ancillary healthcare services and to normal inflationary increases. Net Operating Income for the Consolidated Partnership Communities for the three months ended June 30, 1994 increased by $367,000, from $1,697,000 to $2,064,000, as compared to the same period of the previous year. This increase constitutes 67% of the increase in net operating revenues for the three months ended June 30, 1994, which is indicative of the degree of incremental profits that result from increased occupancy. Corporate Operations. Revenues for the three months ended June 30, 1994 decreased $156,000, from $180,000 to $24,000, compared to the same period of the previous year. Revenues are primarily comprised of rental income from certain residential units of Rancho San Antonio ($166,000 and $1,000, respectively) and a change in the estimate of amounts reimbursable to third party payors from prior years for sold operations ($23,000). Operating expenses ($1,202,000), general and administrative expenses ($672,000) and depreciation ($5,000) for the three months ended June 30, 1994 increased by $293,000 as compared to the same period of the previous year. This change reflects the absence of the FRP future service liability income recognition of $198,000 due to recognizing FRP's management fee income, increased costs associated with Rancho San Antonio of $221,000 and increased home office staff ($75,000), net of decreases in contract services ($168,000), legal ($30,000) and other general and administrative expenses ($3,000). Marketing and unoccupied residential expenses of Rancho San Antonio allocated to Forum Group were $664,000 and $483,000 for the quarter ended June 30, 1994 and 1993, respectively. Corporate Operations includes the unallocated interest expense of corporate debt ($361,000). -10- FORUM GROUP, INC., AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Unconsolidated Communities. Forum Group's equity in the earnings of FRP, which is reflected as other revenues, decreased from revenue of $30,000 for the three months ended June 30, 1993 to a charge of $51,000 for the three months ended June 30, 1994. This decrease primarily reflects Forum Group's equity method recognition of FRP's management fee expense, as partially offset by improved occupancy and operating performance at the nine retirement communities owned by FRP and managed by Forum Group. Forum Group's equity in the earnings of GRP, which is also reported as other revenues, increased from $65,000 for the three months ended June 30, 1993 to $80,000 for the three months ended June 30, 1994. Forum Group's equity in the losses of the unconsolidated component of Rancho San Antonio for the three months ended June 30, 1994 was $111,000. Consolidated General and Administrative Expenses. For the three months ended June 30, 1994, consolidated general and administrative expenses decreased by $279,000, from $967,000 to $688,000, compared to the comparable period in fiscal 1994. This decrease is primarily attributable to (i) decreases in certain contract services and legal expenses, and (ii) the reclassification of certain headquarters human resource expenses from the general and administrative category to the operations category. Management Fees. For the three months ended June 30, 1994, management fee income increased by $991,000, from $103,000 to $1,094,000. This increase is primarily attributable to the recognition of management fee income (i) due from FRP for periods subsequent to December 31, 1993, and (ii) due from RSARHC for periods subsequent to July 31, 1993. Pursuant to the terms of the management agreement between Forum Group and FRP, management fees for periods prior to December 31, 1993 have been deferred, and have not been recognized as income by Forum Group. Litigation Expenses. During the three months ended June 30, 1993, expenses of $1,080,000 were incurred in conjunction with certain litigation related to Forum Group's June, 1993 recapitalization (the "FGI Recapitalization"). Depreciation. For the three months ended June 30, 1994, consolidated depreciation expense decreased by $705,000 compared to the comparable period in the previous year. This decrease is primarily attributable to RSARHC no longer being a consolidated entity, as partially offset by additional fixed asset additions over the past twelve months. Interest Expense. Interest expense attributable to the Owned Communities, Consolidated Partnership Communities and Corporate Operations increased by $755,000, from $3,881,000 to $4,636,000, during the three months ended June 30, 1994. This change is primarily attributable to changes in average borrowing costs. Minority Interests. The decrease of $1,016,000 in the minority interests' elimination for the three months ended June 30, 1994 compared to the same period of the prior fiscal year, resulted from improved operating results and a change in the method of accounting for Forum Group's minority ownership of RSARHC (see Note B of the Notes to Condensed Consolidated Financial Statements). -11- FORUM GROUP, INC., AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Extraordinary Charge. During the three months ended June 30, 1993 an extraordinary charge of $415,000 was recorded to reflect expenses related to the early extinguishment of debt in conjunction with the FGI Recapitalization. Net Income/Loss Per Share. The three months ended June 30, 1994 produced net income of $2,076,000 ($0.09 per share of common stock of Forum Group ("Common Share")) compared to net losses of $1,616,000 ($0.17 per Common Share) for the three months ended June 30, 1993. The three month period ended June 30, 1993 was adversely affected by $1,080,000 ($0.12 per Common Share) of expenses related to certain litigation related to the FGI Recapitalization and an extraordinary charge of $415,000 ($0.04 per Common Share) related to the early extinguishment of debt. All per share data are based upon the weighted average number of common and common equivalent shares outstanding for the relevant periods. Financial Condition - - ------------------- Recapitalization. In June, 1993 Forum Group consummated the FGI Recapitalization pursuant to a series of agreements and modifications thereto (collectively, the "Acquisition Agreement") with a group of investors (the "Investors"). Pursuant to the Acquisition Agreement, the Investors commenced a tender offer on July 27, 1993 whereby the Investors offered to purchase Common Shares from shareholders of Forum Group (other than Forum Group) for $3.62 per share (the "Investors' Tender Offer"). As a result of the FGI Recapitalization, including the Investors' Tender Offer, the Investors acquired approximately 71.7% of the outstanding Common Shares. For a more thorough discussion of the FGI Recapitalization, see the 1994 10-K. On February 1, 1994 proceeds of a refinancing loan (the "Refinancing Loan") of $93,301,000 were used to (i) retire certain indebtedness which was incurred pursuant to the FGI Recapitalization, (ii) pay expenses totalling approximately $10,366,000, $7,427,000 of which related to the purchase of an interest rate cap agreement from a financial institution (the "Interest Rate Cap Agreement"), and (iii) pay prepayment premiums totalling approximately $3,000,000. The Refinancing Loan requires monthly payments of principal based on a 25 year amortization to maturity on February 1, 2001, and bears interest at a floating rate equal to the 30 day LIBOR rate plus 4.3%. The interest rate is effectively capped at 8.925% per annum by the Interest Rate Cap Agreement. As a result of the above-described transactions, Forum Group's long term debt as of June 30, 1994 was as set forth below (in thousands): -12- FORUM GROUP, INC., AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Forum Group, Inc. (Owned Communities and Corporate Operations): Refinancing Loan $ 92,898 Senior Subordinated Notes 10,000 Mortgages and Capitalized Leases 22,985 Other 2,794 -------- Total Owned Communities and Corporate Operations (1) 128,677 Consolidated Partnership Communities (2) 75,786 -------- Total $204,463 ======== (1) Excludes (i) indebtedness aggregating $4,454,000 of GRP, $557,000 of which is recourse to Forum Group. (2) These obligations are non-recourse to Forum Group. Liquidity And Capital Resources. At June 30, 1994, Forum Group had cash and cash equivalents of $33,865,000, accounts receivable of $5,990,000 and notes, investments and other receivables of $4,175,000. Forum Group intends to seek to grow through the acquisition of additional properties and other assets, and believes that its liquidity and the capital resources available to it are adequate to meet its foreseeable working capital and strategic growth requirements. On July 5, 1994 Forum Group announced that it had entered into a co- investment agreement with National Guest Homes, L.L.C. ("NGH"), a developer and manager of assisted living facilities targeted toward middle-income senior citizens. Under the terms of the agreement, over a period of up to 10 years, Forum Group would have the right to provide or arrange for up to $250 million in debt or equity capital to develop assisted living projects, expected to be built for approximately $5 million per project. The projects would be managed by NGH. Forum Group is currently conducting a detailed feasibility study of the possible expansion of certain of its 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 Forum Group. 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 may require Forum Group to modify existing financing and obtain regulatory approvals. Forum Group has also entered into a commitment letter agreement (the "Acquisition Commitment") with Nomura Asset Capital Corporation ("Nomura") providing for up to $100 million in new debt financing (the "Acquisition Loan"), the proceeds of which would be used, together with equity to be provided by Forum Group, to fund the purchase price for acquisitions of skilled nursing home, assisted living and other senior housing properties. Under the acquisition facility, Nomura would advance $2.00 of debt financing for each $1.00 of equity capital invested by Forum Group, which equity is presently expected to be obtained from liquid assets, future offering of additional Common Shares to shareholders (including the Investors), cash from operations (including cash from sales of units in existing RCs, primarily Rancho San Antonio), -13- FORUM GROUP, INC., AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) or a combination of the foregoing. During the 24-month period in which amounts could be drawn to finance acquisitions under the Acquisition Loan, Forum Group would have the right, subject to the satisfaction of certain conditions, to convert the indebtedness thereunder to seven-year debt under either a fixed or floating interest rate structure. During such period, Forum Group could also repay such indebtedness using proceeds from other financing sources, if any such financing becomes available on more favorable terms. Forum Group would have an option that would permit it to increase the borrowings against the properties acquired if, at the end of 24 months after the initial closing of the Acquisition Loan, the debt service coverage computed on a trailing 12- month basis exceeded certain thresholds, in which event the increased borrowings, like any increased borrowings under the Refinancing Loan, could be used to fund Forum Group's growth or for other corporate purposes. There can be no assurance that any acquisitions will be completed or, if so, as to the timing or terms thereof. The Acquisition Commitment is subject to the negotiation of definitive documentation and certain conditions. Moreover, Nomura's obligation to provide financing under the acquisition facility, if completed, will be subject to a number of conditions, and there can be no assurance that such conditions will be satisfied. Cash Flow. Operating activities for the three months ended June 30, 1994 provided $5,131,000 of cash compared to $1,138,000 of cash provided by operating activities during the three months ended June 30, 1993, due principally to significantly improved operating results. Investing activities provided $6,180,000 of cash during the three months ended June 30, 1994, compared to $224,000 of cash used by investing activities during the three months ended June 30, 1993, due principally to proceeds from the sales of memberships in RSARHC. Financing activities provided $4,223,000 of cash during the three months ended June 30, 1994, compared to $9,068,000 of cash provided by financing activities during the comparable period of 1993, due principally to the impact of the FGI Recapitalization. -14- PART II. OTHER INFORMATION FORUM GROUP, INC., AND SUBSIDIARIES ITEM 1. LEGAL PROCEEDINGS - - ------------------------- Forum/Classic Claims. On April 29, 1993, Forum/Classic, L.P. ("Forum Classic"), Dalfort Corporation ("Dalfort"), Diamond Investments, Ltd. and Morris Weiser (collectively, the "Forum/Classic Plaintiffs") filed suit in the Superior Court of Marion County, Indiana, against Forum Group, the persons who then comprised the Board (the "Director Defendants"), and certain of the FGI Investors (collectively, the "Investor Defendants"). The Forum/Classic Plaintiffs alleged, among other things, that the Director Defendants breached their fiduciary duties by entering into the Acquisition Agreement (as originally in effect) and that the Investor Defendants knowingly participated in such alleged breaches of fiduciary duties. The Forum/Classic Plaintiffs further alleged that Forum Group breached an alleged contract to enter into certain transactions proposed by Forum/Classic and Dalfort and that the Investor Defendants induced such breach and interfered with an alleged business relationship between Forum/Classic and Dalfort and Forum Group. The Forum/Classic Plaintiffs sought on behalf of themselves and alleged other similarly situated shareholders, various forms of relief, including injunctive relief, compensatory damages, recovery of attorneys' fees and expenses. On June 4, 1993, the presiding court entered an order (the "Order") enjoining the defendants from taking action to consummate the Non-Liquidity Transaction but otherwise permitting the defendants to proceed with the transactions contemplated by the Acquisition Agreement, provided that it was modified to provide for the Liquidity Transaction. The court also concluded that (i) the decision by the Forum Group's Board of Directors to enter into the agreement in principle relating to the 1993 Recapitalization was made in good faith after reasonable investigation, the agreement in principle was conclusively presumed to be valid, and Forum Group was bound thereby and (ii) no contract existed between Forum Group and Forum/Classic or Dalfort. On June 11, 1993, the Forum/Classic Plaintiffs filed a motion (the "Contempt Motion") to find Forum Group and the Investor Defendants in contempt of the Order. The court denied the Contempt Motion but it amended the Order to clarify that the Liquidity Transaction had to provide for the payment of $3.62 per Common Share without adjustment. The Forum/Classic Plaintiffs appealed the Order, which appeal was dismissed on procedural grounds. On May 24, 1994, the Forum/Classic Plaintiffs requested permission from the trial court to file a supplemental complaint alleging, among other things, that certain aspects of the Agreement in Principle and the Acquisition Agreement were unlawful and that the Director Defendants breached their fiduciary duties in entering into and consummating the transaction with the Investor Defendants and seeking compensatory and punitive damages Pursuant to a letter agreement, dated June 8, 1994, the Forum/Classic Plaintiffs have agreed, subject to obtaining all necessary court approvals and the execution of all necessary documentation, to a dismissal with prejudice of all claims against all defendants in the above-described litigation in return for the payment and reimbursement of a portion, not to exceed $500,000, of the Forum/Classic Plaintiffs' attorneys' fees. On July 9, 1994, the parties to this litigation filed a stipulation of settlement with the court. Pursuant to the stipulation, Forum Group's shareholders have been notified in writing of the terms of the settlement and that a hearing to determine whether such settlement should be approved is -15- PART II. OTHER INFORMATION FORUM GROUP, INC., AND SUBSIDIARIES (continued) scheduled to be held on August 29, 1994. Maddock Litigation. On May 7, 1992, Charles S. Maddock, a resident of Stonegates, a condominium RC in Greenville, Delaware, instituted an action against Greenville Retirement Community, L.P. ("GRP"), the developer and managing agent of, and owner of the service units (i.e., nursing, kitchen and dining facilities) at, Stonegates, in the Court of Chancery of the State of Delaware in and for New Castle County ("State Court Action"). Forum Group is the sole general partner of, and the owner of a 50% beneficial interest in, GRP. Forum Group is also the operator and manager of Stonegates pursuant to an operation and management agreement with GRP under which, inter alia, GRP delegated to Forum Group all of GRP's duties and responsibilities as managing agent of Stonegates. Mr. Maddock alleges that (i) GRP violated the condominium declaration and plan by using two condominium apartment units for a sales office, a dining room and a healthcare unit, by moving the door to the nursing facility, and by purportedly reserving other condominium apartment units for persons requiring assisted living care; (ii) GRP failed to pay its share of condominium common expenses; (iii) GRP violated its obligation to operate and maintain Stonegates according to the highest standards achievable consistent with its overall plan for Stonegates, and otherwise violated its management agreement with the condominium council; (iv) there is no justification for GRP's right to appoint three of the five members of the condominium council; and (v) GRP's option to repurchase condominium units, as well as the requirement that a condominium unit owner be a party to a residence agreement with GRP, are unreasonable restraints on alienation of property. By way of prayer for relief, Mr. Maddock seeks that (i) GRP be required to restore the two condominium apartment units to their former use, and to bear all costs of the initial change of use and the restoration; (ii) GRP be enjoined from reserving condominium apartment units for persons requiring assisted living care; (iii) GRP be required to account for and pay its share of condominium common expenses; (iv) the management agreement between the condominium council and GRP, and the operation and management agreement between GRP and Forum Group, be terminated; (v) GRP's right to appoint three of the five members of the condominium council be declared invalid; and (vi) GRP's option to repurchase condominium units, as well as the requirement that a condominium unit owner be a party to a residence agreement with GRP, be declared invalid. On August 21, 1992, Forum Group instituted an action in the Bankruptcy Court (the "Bankruptcy Court Action") alleging that the relief requested in the State Court Action effectively asserts a claim against Forum Group, the assertion of which is barred under the terms of the Reorganization Plan, and requesting injunctive relief preventing the further prosecution of the State Court Action. On September 17, 1993, the Bankruptcy Court issued an order permanently enjoining Mr. Maddock from pursuing the State Court Action. Mr. Maddock has appealed the Bankruptcy Court's decision. Knapp Litigation. On January 24, 1994, the Russell F. Knapp Revokable Trust (the "Knapp Trust") instituted an action in the United States District Court for the Northern District of Iowa against Forum Retirement, adding Forum Group as a defendant on March 17, 1994, alleging, among other things, that (i) the Knapp Trust holds a substantial number of Forum Partners' publicly traded limited partnership units, (ii) the Board of Directors of Forum Retirement is not comprised -16- PART II. OTHER INFORMATION FORUM GROUP, INC., AND SUBSIDIARIES (continued) of a majority of independent directors as required by Forum Partners' partnership agreement and as allegedly represented in Forum Partners' 1986 Prospectus for its initial public offering, (iii) the allegedly improper composition of the Board of Directors of Forum Retirement is a consequence of actions by Forum Group, (iv) Forum Retirement's Board of Directors has approved and/or acquiesced in 8% management fees being charged by Forum Group under its management agreement with Forum Partners, whereas the complaint alleges that the "industry standard" for management fees of the type at issue is 4%, thereby resulting in an alleged "overcharge" to Forum Partners estimated by the Knapp Trust at $1.8 million per annum, beginning in 1994, and (v) as a consequence of the allegedly improper composition of the Board of Directors of Forum Retirement, Forum Group and Forum Retirement have breached Forum Partners' partnership agreement and securities laws, and failed to discharge fiduciary duties. The Knapp Trust is seeking the restoration of certain former directors to the Board of Directors of Forum Retirement and the removal of certain other directors from that Board of Directors of Forum Retirement, an injunction prohibiting the payment of 8% management fees and unspecified compensatory and punitive damages. Forum Group believes that there are substantial defenses to the claims asserted by the Knapp Trust and intends vigorously to defend against such claims; however, there necessarily can be no assurance as to the ultimate outcome of these proceedings. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K - - ---------------------------------------- (a) Exhibits: --------- None (b) Reports on Form 8-K: -------------------- None -17- SIGNATURE --------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FORUM GROUP, INC. Date: August 12, 1994 By: /s/ Paul A. Shively -------------------------------- Paul A. Shively Senior Vice President and Treasurer -18- -----END PRIVACY-ENHANCED MESSAGE-----