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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-8187
Greenbriar Corporation
(Exact name of Registrant as specified in its charter)
Nevada 75-2399477
(State or other jurisdiction of (IRS Employer
Incorporation or organization) Identification No.)
14185 Dallas Parkway, Suite 650, Dallas, Texas 75254
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 407-8400
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
------------------- ---------------------
Common Stock, $.01 par value American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the issuer (1) filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
past 12 months (or for such shorter period that the issuer 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 if there is no disclosure of delinquent filers in
response to Item 405 of Regulation S-K contained in this form, and no disclosure
will be contained, to the best of issuer's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
issuer, computed by reference to the closing sales price on March 31, 2003, was
approximately $1,126,000.
At March 31, 2003, the issuer had outstanding approximately 343,900 shares of
par value $.01 Common Stock.
Documents Incorporated by Reference:
None
GREENBRIAR CORPORATION
Index to Annual Report on Form 10-K
Fiscal year ended December 31, 2001
Part I.........................................................................3
ITEM 1: DESCRIPTION OF BUSINESS.............................................3
ITEM 2: DESCRIPTION OF PROPERTIES..........................................13
ITEM 3: LEGAL PROCEEDINGS..................................................13
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................14
ITEM 5: MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS...........15
ITEM 6: SELECTED FINANCIAL DATA............................................15
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION..........16
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........20
ITEM 8: FINANCIAL STATEMENTS...............................................20
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE..............................................20
Part III......................................................................21
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS..................................21
ITEM 11: EXECUTIVE COMPENSATION............................................22
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT....25
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....................27
ITEM 14. CONTROLS AND PROCEDURES..........................................28
Part IV.......................................................................29
ITEM 15: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K...29
2
PART I
ITEM 1: DESCRIPTION OF BUSINESS
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Overview and Background of Operations
Greenbriar Corporation, its subsidiaries and affiliates (the "Company") has
evolved into a retirement real estate company which specializes in the
buying, selling and leasing of retirement specific real estate with a
concentration in the assisted living industry. The Company also operates
assisted and full service independent living communities designed to serve
the needs of the elderly population. Assisted living residents generally
comprise frail elderly persons who require assistance with the activities
of daily living such as ambulation, bathing, eating, personal hygiene,
grooming and dressing, but who do not generally require more expensive
skilled nursing care. Independent living residents typically require only
occasional assistance but receive other support services.. When necessary,
the Company enhances the value of these properties by proper operations and
marketing. The Company will then resell or lease these properties to third
parties, including partnerships in which the Company has an interest, at
their appreciated value.
As of March 31, 2003, the Company owned or leases four communities in four
states. The Company operated three of the communities , with a capacity of
252 residents, and leases one community to a third party. The Company had
no interests in any partnerships that operated communities.
The Assisted Living Industry
The Company believes that the assisted living industry has become the
preferred alternative to meet the growing demand for a cost-effective
setting in which to care for the elderly who do not require more intensive
medical attention provided by a skilled nursing center but who cannot live
independently due to physical or cognitive frailties. In general, assisted
living represents a combination of housing, general support services and
full time personal care services designed to aid elderly residents with the
activities of daily living ("ADLs") on a scheduled and unscheduled basis.
Many assisted living communities also provide assistance to residents with
low acuity medical needs or may offer higher levels of personal assistance
for incontinent residents or residents with Alzheimer's disease or other
forms of dementia. Another growing trend in the industry is the provision
of care for higher levels of acuity. Generally, assisted living residents
have higher levels of need than residents of independent retirement
communities but lower levels than residents in skilled nursing centers. The
Company believes that assisted living is one of the fastest growing
segments of elderly care and will continue to experience significant growth
due to the following:
Consumer Preference - The Company believes that assisted living is
increasingly becoming the setting preferred by prospective residents
and their families in which to care for the frail elderly. Assisted
living offers residents greater independence in a residential setting
which the Company believes results in a higher quality of life than
that experienced in more institutional or clinical settings such as
skilled nursing centers. According to the National Center for Assisted
Living, there are more than 28,000 assisted living residences in the
U.S. housing more than one million people.
Demographic & Social Trends - The target market for the Company's
services is, generally, persons 75 years and older, one of the fastest
growing segments of the U.S. population (the average age of a resident
in Assisted Living is typically age 84 or older and that resident is
either widowed or single). According to the U.S. Census Bureau, the
portion of the U.S. population age 75 and older will have increased by
28.7%, from approximately 13.0 million in 1990 to over 16.8 million by
3
the year 2000, and the number of person's age 85 and older is expected
to have increased 37.3% during the 1990s. This age group is projected
to increase by 33.2% between the years 2000 and 2010. It is estimated
by the United States Bureau of census that approximately 50% of the
population of seniors over age 85 need assistance with ADLs and
approximately 50% of such seniors develop Alzheimer's disease or other
forms of dementia. According to Claritas, Inc., a nationally
recognized demographics provider, 59% of householders over age 80 in
2000 had incomes of $15,000 and above and 40 % had incomes of $25,000
and above. Accordingly, the Company believes that the number of
seniors who are able to afford high-quality residential environments,
such as those offered by the Company, has increased in recent years.
According to a 1998 study by the National Investment Conference (NIC),
reported incomes and net worth of residents in assisted living
communities are substantially lower than currently presumed by
feasibility standards and industry benchmarks ($25,000 or more annual
income). However, the same study states that residents are more
willing to spend down assets and family members are providing more
assistance than previously estimated. If the study is correct, this
has dramatic implications for the future of the industry as it
indicates that the industry's potential market could be two to three
times larger than previously thought. Because of severe overbuilding
in many markets, the NIC prediction has not been proved or disproved
at this time.
Lower Average Cost - The Company believes that the average annual cost
to residents receiving assisted living care in the Company's
communities is significantly less than the cost of receiving similar
care in a skilled nursing center.
Changing Supply of Long-term Care Beds - Most of the states in which
the Company currently operates have enacted certificate of need
("CON") or similar legislation that restricts the supply of licensed
nursing center beds. These laws generally limit the construction of
nursing centers and the addition of beds or services to existing
nursing centers, thus limiting the available supply of traditional
nursing home beds. In addition, some long-term care centers have
started to convert traditional nursing home beds into sub-acute beds.
The Company also believes that high construction costs and limits on
government reimbursement for the full cost of construction and
start-up expenses will also constrain the growth and supply of
traditional nursing home centers and beds. The Company expects that
this tightening supply of nursing beds coupled with the aging of the
population will create an increasing demand for assisted living
communities. Finally, changes in Medicare reimbursement regulations
have had a very negative impact on the nursing home industry. A high
percentage of nursing homes are in bankruptcy and many have closed,
further reducing the number of available beds and discouraging
development of new beds. However, upscale private nursing homes seem
to be experiencing an upturn and new construction of private pay
nursing homes appears to be increasing in some markets.
Business Strategy
The Company has a business strategy of acquiring undervalued assisted and
full service retirement communities, enhancing their value and selling or
leasing the property to third parties, including partnerships in which the
Company has an interest. The Company believes that significant growth
opportunities still exist to provide assisted living and full service
independent living services to the rapidly growing elderly population. In
addition, due to a series of setbacks that have plagued the industry,
including overbuilding; higher than anticipated operating costs; quicker
turnover of residents than anticipated and difficulties in obtaining
insurance, there are a number of properties available to be purchased at
what the Company believes to be attractive prices.
As discussed more fully in Management's Discussion and Analysis or Plan of
Operations (See Item: 7) the Company plans on participating in the
acquisitions of properties through limited partnership interests in
partnerships formed in conjunction with officers of the Company.
4
Acquisition Strategy - When reviewing acquisition opportunities, the
Company considers, among other things, the competitive climate, the current
reputation of the community or its operator, the quality of its management,
the need and costs to reposition the community in the marketplace, the
construction quality and any need for renovations and the opportunity to
improve or enhance a community's operating results. The Company intends to
sell any of the communities it acquires when they can be sold or leased at
profit.
Operating Strategy -The Company seeks to improve the profitability of its
operations through continued enhancement of the communities in its
portfolio. The Company's communities are primarily operated and marketed on
a private-pay, single-occupancy basis. The Company provides limited double
occupancy in which residents are non-related people who are usually
state-assisted. The Company has few state-assisted residents. Most states
now have a currently operating Medicaid waiver program (allowing a state to
set its own disbursement standards for Medicaid funds - such as payment for
assisted living services).
The Company believes that the assisted living industry will continue as a
private-pay industry for the foreseeable future, but may become more
price-sensitive as more people need assisted living for longer periods due
to increased life spans. Costs of caring for an aging America may become
more of a private-pay and state-assisted partnership than currently exists.
However, although Medicaid coverage is common and becoming more so,
participation is still low.
The Company's operating strategy is to choose properties that can achieve
and sustain a strong competitive position within chosen markets. The
Company also seeks to continue to enhance the performance of the
communities in its portfolio. The Company seeks to enhance current
operations by (i) maintaining and improving occupancy rates at its
communities (ii) opportunistically increasing resident service fees, (iii)
improving operating efficiencies and (iv) improving market positioning.
Offer Residents Customized Care and Service Packages -The Company offers
each of the residents in its communities a personalized assisted living
service plan which may include any combination of basic support care,
personal care, supplemental services, wellness services and, if needed,
Alzheimer's and special care services, all subject to the level of services
allowed to be offered by the licensing in place at each community. The
Company offers services on both a "point for services basis" and "level of
service basis." Charges for services are based on each community's price
structure. The Company uses active participation of the resident, the
responsible party, the resident's personal physician and other appropriate
support team members in determining the level of care needed on an
individual basis, whether using the point or level of service system. As a
result, the Company believes that it is able to maximize customer
satisfaction while avoiding the high cost of delivering all services to all
residents without regard for need or choice. In communities the Company
operates, the care plan for each resident is reviewed and updated at least
quarterly by the resident, the resident's family and the resident's
physician.
Maintain and Improve Occupancy Rates - The Company also seeks to maintain
and improve occupancy rates by continuing to (i) attract new residents
through marketing programs directed towards family decision makers, namely
adult children of potential residents, (ii) actively seek referrals from
hospitals, rehabilitation hospitals, physicians, clinics, home healthcare
agencies and other acute and sub-acute healthcare providers in the markets
served by the Company and (iii) develop new market niches such as respite
care, adult day care and other specialty care programs sought by
caregivers.
Selectively Increase Service Pricing Levels - The Company regularly reviews
opportunities to increase resident service fees within its existing
markets, while maintaining competitive market positions. In keeping with
this strategy, the Company will continue to offer high quality assisted
living services at average to above average prices and generally target
private-pay residents. The Company's private-pay residents are typically
seniors who can afford to pay for services from both their own and their
family's financial resources. Such resources may include social security,
investments, proceeds from the sale of a residence, contributions from
family members and insurance proceeds from long-term care insurance
policies.
5
Improve Operating Efficiencies - The Company seeks to improve the operating
results of its communities by actively monitoring and managing its
operating costs. In addition, the Company believes that concentrating
communities within selected geographic regions may enable the Company to
achieve operating efficiencies through economies of scale, reducing
corporate and regional overhead and providing for more effective management
supervision and financial controls. The Company has also become a member of
HPSI, a nationwide purchasing group, to further leverage its ability to
reduce and control purchasing costs.
Offer Alzheimer's and Other Dementia Services - As of March 31, 2003, the
Company operated two communities with distinct special care wings
specifically designed to serve the needs of individuals with Alzheimer's
disease and other forms of dementia. The Company's experience indicates
that Alzheimer's residents often respond better by sharing a suite with
another Alzheimer's resident rather than being in a single occupancy suite.
Consequently, the Company's Alzheimer's programs are designed to allow
double occupancy, although rooms are available for single occupancy.
Assisted Living Services
The Company offers a wide range of full service retirement and assisted
living care and services to its residents. The residents are allowed to
select among the services offered beyond basic support services and are
charged only for the specific services or level of services they need. The
services offered by the Company can generally be categorized as follows:
Basic Support Services - These services include providing up to three
meals per day in a common dining room, special dietary planning,
laundry, general housekeeping, organized social and other activities,
transportation, maintenance, utilities (except telephone), security
and 24-hour emergency call monitoring.
Supplemental Services - These services include performing,
coordinating or assisting with bill paying, banking, personal
shopping, transportation, appointments, pet care and reminder
services.
Personal Care Services - These services include providing assistance
with activities of daily living (the ADL's) such as ambulation,
bathing, eating, dressing, personal hygiene and grooming.
Wellness Services - These services include assistance with the
administration of medication and health monitoring by a nurse, which
are provided as permitted by government regulation.
Alzheimer's and Special Care Services - Alzheimer's care includes a
higher 24-hour staff ratio to provide oversight and around-the-clock
scheduled activities. An Alzheimer's care wing is secured from the
rest of the building.
6
Properties
Operating Communities - The following table sets forth certain information
with respect to communities that were owned, operated or managed by the
Company at March 31, 2003. The Company considers its communities to be in
good operating condition and suitable for the purpose for which they are
being used.
Community
Care Resident Operations
Community Location Level Units Capacity(1) Commenced Ownership
- -------------------------------------------------------------------------------------------------------------
Graybrier Southern Pines, NC FE, DC 55 90 Feb-94 Owned (2)
Pacific Pointe King City, OR S 114 114 Jan-93 Leased (3)
Sweetwater Springs Lithia Springs, GA FE, DC 48 48 Oct-96 Leased (4)
Windsor House Greenville Greenville, SC FE, DC 31 41 Nov-97 Owned (2)(5)
Total
Key:
S basic support and supplemental services are offered.
FE basic support, supplemental, personal care and wellness services
are offered ("Frail Elderly").
DC Alzheimer's and special care services are offered ("Dementia
Care").
(1) Reflects licensed capacity for Assisted Living and Dementia Care
and actual number of units for Independent Living.
(2) Subject to first mortgage. Historically, each community has
generally been pledged as collateral on a single mortgage and
deed of trust securing a note payable to a bank, financial
institution, individual or other lender. The mortgages and deeds
of trust mature between 2004 and 2037 and bear interest at fixed
and variable interest rates ranging from 7.5% to 12% as of
December 31, 2002
(3) Leased from a partnership. Initial lease term is 10 years,
expiring in 2012. The Company is responsible for all costs
including repairs to the community, property taxes and other
direct operating costs of the community. The lease includes
clauses that allow for rent to increase over time based on a
specified schedule.
(4) Leased from a REIT for 15 years expiring in 2011.
(5) Leased to a third party.
Repair and Maintenance - The Company conducts routine repairs and
maintenance, as needed, of its communities on a regular basis. Several of
the Company's communities have been in operation for ten years or more. The
Company has no other current plans for significant expenditures relating to
its existing communities and considers them to be in good repair and
working order.
Community Description
The Company's existing communities as of March 31, 2003 range in size from
31 to 113 units, are from one to three stories and from 20,800 to 106,250
square feet. Most communities have a large family room, usually equipped
with a fireplace, a spacious open dining area, library, TV room, commercial
kitchen, beauty salon, laundry and indoor and outdoor recreational areas.
Units generally range in size from approximately 330 to 400 square feet for
a studio unit, 470 to 650 square feet for a one-bedroom unit and 680 to 850
square feet for a two-bedroom unit. Assisted living units, among other
amenities, typically include a private bathroom, kitchenette, closets,
living and sleeping areas, a lockable door, emergency call system,
individual room temperature controls and fire alarm and sprinkler systems.
7
Alzheimer's care units are approximately the same size as studios and
contain only sleeping, limited storage and, in some units, bathroom areas.
Most do not have emergency call systems but do have sprinkler and fire
alarm systems.
Operations
In communities in the Company's portfolio, the day-to-day operations of
each community are managed by an Executive Director who is responsible for
all operations of the community, including overseeing the quality of care
and services, marketing, coordinating social activities, monitoring
financial performance and ensuring appropriate maintenance of the grounds
and building. The Executive Director consults with outside providers, such
as pharmacists and dieticians, to assist residents with medication review,
menu planning and response to any special dietary needs. Personal care,
dietary services, housekeeping and laundry services are performed primarily
by line staff who are either part or full-time employees of the Company and
who are trained to perform a variety of such services. Part or full-time
employees perform most building maintenance services, while third party
contractors generally perform elevator, HVAC maintenance and landscaping
services.
The Company's senior management and other personnel provide some support
services to each of the Company's communities, including development of
operational standards, budgets and quality assurance programs, recruiting,
training and financial, accounting and data processing services such as
accounts payable, billing and payroll. Corporate personnel and community
executive directors collaborate with respect to the establishment of
community goals and strategies, quality assurance oversight, development of
Company policies and procedures, development and implementation of new
programs, cash management, human resource management and community
development.
The Company has attracted and continues to seek highly dedicated and
experienced personnel. All employees are required to complete training
programs which include a core curriculum comprised of personal care basics,
job related specific training, Alzheimer's disease processes, first aid,
fire safety, nutrition, infection control and customer service. Executive
Directors receive training in all of these areas, plus marketing, community
relations, healthcare management and fiscal management. In addition to some
classroom training, the Company's communities provide new employees with on
the job training, utilizing experienced staff as trainers and mentors.
Quality Assurance
A commitment to quality assurance is designed to achieve a high degree of
resident and family member satisfaction with the care and services the
Company provides. In addition to ongoing training and performance reviews
of all employees, the Company's quality control measures include:
Philosophy of Management- The Company's philosophy of management is to
demonstrate by its actions and require from its employees high standards of
personal integrity, to develop a climate of openness and trust, to
demonstrate respect for human dignity in every circumstance, to be
supportive in all relationships, to promote teamwork by involving employees
in the management of their own work and to promote the free expression of
ideas and opinions..
Regular Community Inspections - Community inspections are conducted by
corporate personnel (including the vice president of construction and
maintenance, the vice president of operations and the director of medical
services) on a regular basis. These inspections cover the appearance of the
exterior and grounds, the appearance and cleanliness of the interior, the
professionalism and friendliness of staff, resident care plans, the quality
of activities and the dining program, observance of residents in their
daily living activities and compliance with governmental regulations.
8
Marketing
The Company's marketing and sales efforts are undertaken at the local
level. These efforts are intended to create awareness of a community and
its services among prospective residents, their families, other key
decision-makers and professional referral sources. The communities engage
in traditional types of marketing activities, such as special events,
direct mailings, print advertising, signs and yellow page advertising.
These marketing activities and media advertisements are directed to
potential residents and their adult children, who often comprise the
primary decision makers for placing a frail elderly relative in an assisted
living setting.
Government Regulation
Healthcare is an area of extensive and frequent regulatory change. The
assisted living industry is maturing and, accordingly, the manner and
extent to which it is regulated at the Federal and state levels are
evolving at a steady pace. Currently, most states have a licensure category
or statute that uses the term "assisted living." Several states are
proposing regulations using the term. More than forty states have specific
language in statute, licensure regulations (including states with draft
regulations) or Medicaid policy that addresses the philosophy of assisted
living. Several states have or are reviewing licensure regulations and
increasing the role of state personnel in monitoring and controlling the
assisted living industry.
Currently, assisted living and Alzheimer's care communities are not
specifically regulated as such by the Federal Government. However, the
Company's existing communities and communities it acquires are subject to
regulation and licensing by state and local health, social service agencies
and other regulatory authorities. Although regulatory requirements vary
from state to state, these requirements generally address, among other
things, staff education, training and records; staffing levels; community
services, including administration and assistance with self-administration
of medication; physical community specifications; size and furnishing of
community units and common areas; food and housekeeping services and
emergency evacuation plans and resident rights and responsibilities. Most
of the Company's communities are required to possess state licenses in
order to provide the levels and types of services that they offer. A
limited number of the Company's communities are not required to possess
such licenses because they do not supply care and/or supervision to an
extent requiring them to be licensed under their respective state's laws.
The Company's communities are also subject to various state and local
building codes and other ordinances, including safety codes. Management
anticipates that states establishing regulatory frameworks for assisted
living communities will require the licensing of assisted living
communities and will establish varying requirements with respect to such
licensing. The Company has obtained all required licenses for each of its
communities. Each of the Company's licenses must be renewed annually.
Currently, only a few states have CON requirements for assisted living
communities. If Federal and state reimbursement increase or overbuilding
continues in the industry other states may initiate CON requirements. This
is not happening at this time and there is significant overbuilding in many
markets. Consequently most major companies have either stopped or greatly
reduced their development programs. Conversely, small operators and
individual entrepreneurs continue to build, even in overbuilt markets. This
overbuilding provides a significant opportunity for the Company to acquire
properties as a substantial discount under original cost.
Like healthcare centers, assisted living communities are subject to
periodic survey or inspection by governmental authorities. From time to
time in the ordinary course of business, the Company receives deficiency
reports. The Company reviews such reports and takes appropriate corrective
action. Although most inspection deficiencies are resolved through a plan
of correction, the reviewing agency typically is authorized to take action
against a licensed community where deficiencies are noted in the inspection
process. Such action may include imposition of fines, imposition of a
provisional or conditional license or suspension or revocation of a license
or other sanctions. Any failure by the Company to comply with applicable
requirements could have a material adverse effect on the Company's
business, financial condition and results of operations. The Company
believes that its communities are in substantial compliance with all
applicable regulatory requirements.
9
As noted earlier, the Company participates in Federally funded state
reimbursement programs. However, the Company expects the bulk of its
revenues to come from private payments.
The Americans with Disabilities Act ("ADA"), enacted July 26, 1990, has had
and will continue to have a major effect on the full service residential
retirement and assisted living industry. The communities acquired by the
Company must be in compliance with this act. The Fair Housing Amendments
Act of 1988 also prohibits discrimination against the handicapped in the
sale or rental of a dwelling, or in the provision of services in connection
with such a dwelling.
Regulation of the industry is likely to increase, particularly for those
providers accepting Medicaid reimbursements. Federal and state governments
regulate various aspects of the Company's business. The Company is subject
to Federal and state anti-remuneration laws, such as the Federal health
care program anti-kickback law that governs various types of financial
arrangements among health care providers and others who may be in a
position to refer or recommend patients to these providers. This law
prohibits direct and indirect payments that are intended to induce the
referral of patients to, the arranging of services by, or the recommending
of a particular provider of health care items or services. The Federal
health care program anti-kickback law has been interpreted to apply to some
contractual relationships between health care providers and sources of
patient referral. Similar state laws vary from state to state, are
sometimes vague and have rarely been interpreted by courts or regulatory
agencies. Violation of these laws can result in loss of license, civil or
criminal penalties and exclusion of health care providers or suppliers from
furnishing covered items or services to beneficiaries of the Federal health
care program. The Company cannot be sure that these laws will be
interpreted consistently with its practices.
The Company is subject to the Fair Labor Standards Act, which governs such
matters as minimum wage, overtime and other working conditions. Many of the
Company's employees are paid at rates related to the Federal minimum wage
and accordingly, increases in the minimum wage will result in an increase
in labor costs.
In compliance with underlying state bond financing, rents at one community
in Oregon must be approved by an agency of the state.
Management is not aware of any non-compliance by the Company with
applicable regulatory requirements that would have a material adverse
effect on the Company's financial condition or results of operations.
Competition
The long-term care industry is highly competitive and the assisted living
and Alzheimer's care businesses in particular have and will continue to
become increasingly competitive in the future. In the communities within
its portfolio the Company competes with other assisted living companies and
numerous other companies providing similar long-term care alternatives such
as home healthcare agencies, community-based service programs, retirement
communities and convalescent centers (nursing homes). In addition, the
Company competes with a number of tax-exempt nonprofit organizations which
can finance capital expenditures on a tax-exempt basis or receive
charitable contributions unavailable to the Company and which are generally
exempt from income tax. In most markets where the Company operates or plans
to operate the level of competition is rapidly increasing both from
regional, national and local providers. The Company expects this trend to
continue and many markets are already overbuilt and more will be overbuilt
in the future. If reimbursement programs, such as the Medicaid waiver
program, increase, assisted living competition will grow from existing and
new companies focusing primarily on assisted living. Nursing home centers
that provide long-term care services are also a source of competition for
the Company, particularly with respect to Alzheimer's care services. Many
of the Company's present and potential competitors have, or may have access
to, greater financial, management and other resources than those of the
Company. There can be no assurance that competitive pressures will not have
10
a material adverse effect on the Company's portfolio. However, these same
circumstances provide a substantial opportunity for the Company to acquire
communities at a price that will allow a profitable resale or lease if the
community is operated properly. The Company also competes with other
providers of long-term care in the acquisition and development of
additional communities.
The Company also competes with other providers of long-term care in
attracting and retaining qualified and skilled personnel. In recent years,
the healthcare industry has experienced a shortage of qualified healthcare
professionals. The Company's operations require some professionally
certified (RN or LPN) staff, primarily for supervision of care staff. While
the Company has been able to retain the services of an adequate number of
professionals to staff its communities appropriately and maintain its
standards of quality care, there can be no assurance that continued
shortages will not affect the ability of the Company to maintain the
desired staffing levels.
Insurance
The provision of personal and healthcare services entails an inherent risk
of liability compared to more institutional long-term care communities.
Assisted living communities of the type operated by the Company, especially
its dementia care communities, offer residents a greater degree of
independence in their daily lives. This increased level of independence,
however, may subject the resident and the Company to certain risks that
would be reduced in more institutionalized settings. The Company currently
maintains liability insurance intended to cover such claims however the
number of insurance carriers who offer such insurance is rapidly
diminishing and the costs continue to escalate. The Company also carries
property insurance on each communities.
Environmental Matters
Under various Federal, state and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real estate may be
required to investigate and clean up hazardous or toxic substances or
petroleum product releases at the property, and may be held liable to a
governmental entity or to third parties for property damage and for
investigation and clean up costs incurred by such parties in connection
with the contamination. Such laws typically impose clean up responsibility
and liability without regard to whether the owner or operator knew of or
caused the presence of the contaminants and the liability under such laws
has been interpreted to be joint and several unless the harm is divisible
and there is a reasonable basis for allocation of responsibility. The costs
of investigation, remediation or removal of such substances may be
substantial and the presence of such substances or the failure to remediate
properly such property may adversely affect the owner's ability to sell or
lease the property or to borrow using the property as collateral. In
addition, some environmental laws create a lien on the contaminated site in
favor of the government for damages and costs it incurs in connection with
the contamination. Persons who arrange for the disposal or treatment of
hazardous or toxic substances also may be liable for the costs of removal
or redemption of such substances at the disposal or treatment community,
whether or not such community is owned or operated by that person or
corporation. Finally, the owner or operator of a site may be subject to
common law claims by third parties based on damages and costs resulting
from environmental contamination emanating from a site.
The Company has conducted environmental assessments on most of its existing
communities that it operates plus one community it leases. These
assessments have not revealed any environmental liability that the Company
believes would have a material adverse effect on the Company's business,
assets or results of operations nor is the Company aware of any such
environmental liability. The Company owns one community that has been
operated for nine years for which an environmental assessment has not been
obtained. The Company believes that all of its communities are in
compliance in all material respects with all Federal, state and local laws,
ordinances and regulations regarding hazardous or toxic substances or
petroleum products. The Company has not been notified by any governmental
authority, and is not otherwise aware, of any material non-compliance,
liability or claim relating to hazardous or toxic substances or petroleum
products in connection with any of its communities.
11
Control by Insiders
As of March 31, 2003, the Company's officers, directors and affiliated
entities owning more than 5% of the Company's outstanding stock owned
approximately 56% of the outstanding shares of Common Stock. Sylvia M.
Gilley, widow of former Chairman, President and Chief Executive Officer
James R. Gilley, and one corporation wholly owned by Mrs. Gilley,
beneficially owned an aggregate of approximately 22.8% of the outstanding
Common Stock of the Company. Mr. Victor L. Lund, a director of the Company
and the founder of Wedgwood Retirement Inns (a company acquired by the
Company in 1996), beneficially owned approximately 17.7% of the outstanding
shares of Common Stock. Mr. Floyd Rhoades, as a result of the stock he
received when the Company purchased American Care Communities, Inc.,
beneficially owns 9.1% of the Company's outstanding stock. Mr. William
Shirley, due principally from the sale to the Company of assisted living
communities, beneficially owns approximately 6% of the outstanding Common
Stock of the Company. Accordingly, such individuals will have the ability,
by voting their shares in concert, to significantly influence (i) the
election of the Company's Board of Directors and, thus, the direction and
future operations of the Company, and (ii) the outcome of all other matters
submitted to the Company's stockholders, including mergers, consolidations
and the sale of all or substantially all of the Company's assets. In
addition, the parties listed above currently hold options or conversion
rights to acquire 87,800 shares of Common Stock. The issuance of additional
shares of Common Stock pursuant to the exercise of these stock options
granted under the Company's stock option plan would increase the number of
shares held by the Company's executive officers, directors and affiliated
entities in the future.
Anti-Takeover Provisions
The Company's Articles of Incorporation and Bylaws contain, among other
things, provisions (i) establishing a classified board of directors with
staggered term of service (ii) authorizing shares of preferred stock with
respect to which the Board of Directors has the power to fix the rights,
preferences, privileges and restrictions without any further vote or action
by the stockholders (iii) requiring holders of at least 80% of the
outstanding Common Stock to join together in requesting a special meeting
of stockholders and (iv) prohibiting removal of a director other than for
"cause" and then only if the holders of at least 80% of the outstanding
Common Stock vote for such removal. The Company is also subject to Sections
78.411-78.444 of the Nevada Revised Statutes (the "Control Act") which in
general prohibits any business combination involving the Company and a
person that beneficially owns 10% or more of the outstanding Common Stock
or an affiliate or associate of the Company who within the past three years
was the beneficial owner, directly or indirectly, or 10% or more of the
outstanding Common Stock, except under certain circumstances. The
application of the Control Act and/or the provisions of the Company's
Articles of Incorporation and Bylaws could delay, deter or prevent a
merger, consolidation, tender offer or other business combination or change
of control involving the Company that some or a majority of the Company's
stockholders might consider to be in their personal best interests,
including offers or attempted takeovers that might otherwise result in such
stockholders receiving a premium over the market price of the Common Stock
and may adversely affect the market price of and the voting and other
rights of, the holders of Common Stock.
Employees
At March 31, 2003, the Company employed 140 employees, including 58
full-time and 82 part-time employees. The Company believes it maintains
good relationships with its employees. None of the Company's employees are
represented by a collective bargaining group.
12
Corporate Offices
The Company's principal office is approximately 12,000 square feet of
leased space in Dallas, Texas. The lease extends through April 2006. The
Company believes the leased space will meet the Company's needs for the
foreseeable future.
ITEM 2: DESCRIPTION OF PROPERTIES
- ---------------------------------
See Item 1 for a discussion of properties owned or leased by the Company.
ITEM 3: LEGAL PROCEEDINGS
- -------------------------
Lifestyles Senior Housing Managers, LLC
In 1995 Lifestyles Senior Housing Managers, LLC (Lifestyles) entered into a
contract to manage an assisted living community in Seaside, OR, which is
leased by Neawanna by the Sea, LP (Neawanna) from a REIT. In 1996 the
Company acquired the lease for Neawanna. In March 2000 Lifestyles organized
and held a meeting with the executive director of Neawanna for the purpose
of offering her the position of manager of an assisted living community not
affiliated with Greenbriar. Greenbriar believes the action of Lifestyles
represented a breach of their fiduciary duty as the manager and terminated
the management contract. Lifestyles contended their termination was
unjustified. The matter was taken to arbitration and on April 9, 2001 the
Company was notified that the arbitration panel had awarded Lifestyles
$498,000 for damages plus expenses.
One of the terms of the Neawanna lease is that any unsatisfied debt
exceeding $250,000 is an event of default. Rather than lose the lease on
Neawanna, on July 12, 2001 Villa Del Rey - Seaside, Inc. and Neawanna By
The Sea LP filed for Chapter 11 bankruptcy protection in the United States
Bankruptcy Court for The District of Nevada. In addition Villa del Rey -
Roswell LP filed for Chapter 11 in the same court. Although unrelated to
the Lifestyles matter Villa Del Rey - Roswell LP has a lease for an
assisted living community, which is cross-collateralized with the lease
held by Neawanna by the Sea, LP.
In September 2002 the Company has entered into an agreement to sell its
interest in VDR Roswell to an independent third party. This same group has
purchased Lifestyles' claim regarding Neawanna. The Company is currently
negotiating the sale of Neawanna to that group. In November 2002 all of the
above entities were released from bankruptcy and Neawanna and VDR Roswell
were sold.
Internal Revenue Service Examination
In 1991 the Company sold four nursing homes to a not for profit entity who
used tax-free bonds to finance the purchase. On September 18, 2002 the
Company was notified by the Internal Revenue Service (IRS) that they have
initiated an examination under Section 6700 of the Internal Revenue Code as
it relates to the Company's activities in connection with the issuance and
sale of such bonds.
The IRS examination is focused on whether the tax-free bonds were issued
inappropriately and whether certain inappropriate statements were made or
furnished with respect to the excludability of income or the securing of
other tax benefits. If so, the IRS is reviewing whether the Company was
involved.
The Company did sell the properties and receive tax-free bonds. The Company
subsequently sold the bonds. The Company believes that it did nothing
inappropriate. Both the issuance of tax-free bonds and their subsequent
sale are a highly technical area and the Company relied on the advice and
reports of investment bankers, appraisers, attorneys, and outside certified
public accountants.
Other than the initial notice the Company has not been contacted by the IRS
regarding this matter.
13
Other
The Company has been named as a defendant in other lawsuits in the ordinary
course of business. Management is of the opinion that these lawsuits will
not have a material effect on the financial condition, results of
operations or cash flows of the Company.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -----------------------------------------------------------
The Company held its annual meeting on June 7, 2002. At that meeting the
shareholders re-elected two members to the Board of Directors.
14
PART II
ITEM 5: MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- ----------------------------------------------------------------
The Company's Common Stock is traded under the symbol "GBR" and is listed
on the American Stock Exchange. The high and low closing sales prices of
the Company's Common Stock on the American Stock Exchange during the last
two fiscal years, adjusted for the December 2001 reverse split and the
January 2002 stock dividend are:
2002 2001
High Low High Low
--------------------- ---------------------
First Quarter $24.50 12.50 $11.80 5.20
Second Quarter 21.00 8.00 11.00 5.00
Third Quarter 9.50 7.50 7.00 5.20
Fourth Quarter 10.00 5.50 15.28 4.20
The Company has not paid cash dividends on its Common Stock during at least
the last ten fiscal years and it has been the Company's practice to retain
all earnings to pay down long-term debt and to finance the future expansion
and development of its business. Any determination to pay cash dividends in
the future will be at the discretion of the Board of Directors and will be
dependent on the Company's financial condition, results of operations,
contractual restrictions, capital requirements, business prospects and such
other factors as the Board of Directors deems relevant. The Company's
ability to pay dividends in the future may be limited by the terms of
future debt financing and other arrangements.
The closing price on the Company's common stock on March 31, 2003, was
$7.40 per share. As of March 31, 2003, there were 508 holders of record of
the Company's common stock.
ITEM 6: SELECTED FINANCIAL DATA
- -------------------------------
2002 2001 2000 1999 1998
-------------------------------------------------------------
Operating revenue $ 4,422 $ 23,568 $ 33,482 $ 33,587 $ 46,208
Operating expenses 6,767 27,543 6,378 33,606 50,499
-------------------------------------------------------------
Operating profit (loss) (2,345) (3,975) (10,115) (19) (4,291)
Earnings (loss) from continuing operations
before income taxes $ (2,996) $ 9,559 $ (10,115) $ 709 $ (10,357)
Income tax expense 749 2,824 -- -- --
Earnings (loss) from continuing
operations (3,745) 6,735 (10,115) 709 (10,357)
Loss from discontinued operations (4,628) (317) (508) (627) (245)
NET EARNINGS (LOSS) (8,373) 6,418 (10,623) 82 (10,602)
Earnings (loss) per common Share
Basic and diluted $ (23.32) $ 15.53 $ (39.17) $ (12.33) $ (37.20)
BALANCE SHEET DATA:
Total assets $ 12,624 $ 44,022 $ 102,588 $ 119,908 $ 130,353
Long-term debt 8,479 16,693 50,887 50,477 58,154
Total liabilities 11,273 34,753 68,944 69,425 78,516
Preferred stock redemption obligation -- -- 26,988 27,763 21,748
Total stockholders' equity 1,351 9,269 6,656 22,720 30,089
15
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
- -----------------------------------------------------------------
Overview
As of December 31, 2002 the Company owns or leases three communities in
three states with a capacity of 257 residents, consisting of two
communities that are owned and one that is leased. In addition the Company
owns one community that is operated by an independent third party with a
capacity of 41 residents.
Since 1996 the Company has owned, leased and operated assisted living and
retirement communities throughout the United States. During that period of
time the Company has both acquired and sold over seventy communities. The
acquiring and disposing of its real estate assets has been an integral part
of the Company's business.
During the past year the Company's business strategy has evolved into one
of focusing on the real estate component and reducing its operating
activities. The Company objective is to become an investor in various
entities, principally partnerships, whose intent is to acquire properties
and either sell, lease or enter into joint venture agreements with third
party operators with respect to these properties
In October 2001 the company became a 56% limited partner in a partnership,
Corinthian Real Estate Investors LP (CREI), which acquired two assisted
living communities in Carrollton, TX. In September 2002 the partnership
sold its two properties for cash sufficient to pay off its debt plus a note
for $1,394,000. The note is due in two years with interest of 12% payable
monthly. CREI owed the Company $400,000 and settled its obligation by
giving the Company a $400,000 participation in the note.
In January 2002 the Company became a 56% limited partner in a partnership,
Muskogee Real Estate Investors (MREI), which acquired two assisted living
communities in Muskogee, OK, including one community acquired from the
Company. In September 2002 the partnership leased the two Communities to a
third party for three years. The lease will generate positive cash flow
during the three-year lease period. The lessee has committed to purchase
the two properties sometime during the three-year period for $6,000,000.
The current debt on the property is $4,000,000. When the purchase is
completed the Company will receive 56% of $2,000,000 or $1,120,000.
The Company has a note to Sylvia M. Gilley for $3,375,000 bearing interest
at 10%. In November 2002, the Company transferred its 56% interest in MREI
to Sylvia M. Gilley in exchange for a reduction of $1,120,000 on the debt
and a one year extension on the due date of the Company's note to Mrs.
Gilley.
In September 2002 the Company entered into an agreement with an independent
third party to jointly acquire properties in the future. The third party
entity is affiliated with the various entities that acquired or leased the
properties from CREI and MREI mentioned above. Affiliates of this group
also purchased properties in Harlingen, TX and Sherman, TX from the Company
on September 30, 2002 and acquired the Company's interest in entities that
operated properties in Roswell NM and Seaside OR.
The agreement provides that partnerships formed by the Company will be
allowed to participate in the acquisition of twelve communities and receive
a 50% partnership interest. The Company has agreed to pay $660,000, payable
at $55,000 per month from October 2002 through September 2003, to cover the
due diligence expenses incurred by its partner in these ventures. The
agreement further provides that at any time during the twenty-four months
subsequent to the formation of a partnership and the acquisition of
properties the third party can purchase the Company's partnership interest
in each of the 12 properties.
Critical Accounting Policies and Estimates
The Company's discussion and analysis of its financial condition and
results of operations are based upon the Company's Consolidated Financial
Statements, which have been prepared in accordance with accounting
principles generally accepted in the United States. Certain of the
Company's accounting policies require the application of judgment in
selecting the appropriate assumptions for calculating financial estimates.
By their nature, these judgments are subject to an inherent degree of
uncertainty. These judgments and estimates are based upon the Company's
16
historical experience, current trends, and information available from other
sources that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying
value of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under different
assumptions or conditions.
The Company believes the following critical accounting policies are more
significant to the judgments and estimates used in the preparation of its
consolidated financial statements. Revisions in such estimates are recorded
in the period in which the facts that give rise to the revisions become
known.
Deferred Tax Assets
Significant management judgment is required in determining the provision
for income taxes, deferred tax assets and liabilities and any valuation
allowance recorded against net deferred tax assets. The future
recoverability of the Company's net deferred tax assets is dependent upon
the generation of future taxable income prior to the expiration of the loss
carry forwards. The Company believes that it will generate future taxable
income to fully utilize the net deferred tax assets.
Fiscal 2002 as Compared to Fiscal 2001
Revenues and Operating Expenses from Assisted Living Operations. Revenues
decreased to $9,120,000 in 2002 compared to $30,861,000 in 2001. Community
operating expenses, which consist of assisted living operations expense,
lease expense and depreciation and amortization, were $8,070,000 in 2002 as
compared to $25,417,000 in 2001.
During the last six months of 2001 the Company disposed of 11 Communities
as part of redemption of its Series E and F Preferred Stock. The Company
also sold three Communities to not for profit organizations. The Company
also sold one Community and leased one Community to independent third
parties. In addition the Company entered into a sub-management contract for
three properties whereby the sub-manager is retaining the revenue and
paying the expenses as their fee for being a sub-manager. The sub-manager
also had an option to acquire the communities upon approval of the third
party lenders. For reporting purposes the Company for the duration of the
sub management agreement no longer recorded the revenue and operating
expenses of the three Communities. In May 2002 one of the properties with a
sub-management contract was sold and one was returned to the Company and
immediately leased to a third party. The final property was shut down and
is in the process of being turned over to the lender.
During the first quarter of 2002 leases held by the company for the
operation of two properties were not renewed. As of May 31, 2002 one
property was contributed to a partnership in which the Company has a 56%
limited partnership interest. The partnership is accounted for using the
equity method of accounting.
On September 30, 2002 the company sold two properties and on November 1,
2002 the Company sold two subsidiaries each of whom owned an assisted
living property
In October 2001 and May 2002 the Company obtained 56% limited partnership
interests in two partnerships which own four communities. These communities
are accounted for using the equity method of accounting and therefore the
Company does not record the revenue and expenses of the communities.
Overall the Company recorded revenue and expenses for 24 fewer communities
2002 than the comparable periods in the prior year. The reduction in the
revenue and operating expenses for 2002 as compared to 2001 is almost
entirely due to the reduction in the number of Communities owned and leased
by the company
Corporate General and Administrative Expenses. These expenses were
$2,329,000 in 2002 as compared to $4,875,000 in 2001. The decrease in the
corporate general and administrative expenses is primarily a result of a
decrease in salaries and related payroll expenses. Due to a significant
reduction in the number of Communities operated by the Company the number
of employees on the corporate staff was reduced. In addition salaries for
members of senior management have been reduced. Also during 2001 the
Company was incurring legal and professional fees with respect to a lawsuit
with a preferred shareholder in addition to its customary expenses. Legal
fees decreased by $1,55,052 in 2002 when compared to 2001.
Write-off of Impaired Assets and Related Expenses. During 2002 the Company
wrote down the recorded value of a property it is attempting to sell.
17
Interest and Dividend Income Interest and dividend income was $412,000 in
2002 as compared to $212,000 in 2001. The increase in interest and dividend
income is a result of interest recorded on a $1,600,000 note receivable
related to the Company's investment in the Corinthian Real Estate Investors
L.P. in November 2001.
Interest Expenses. These expenses decreased to $2,279,000 in 2001 as
compared to $4,958,000 in 2000. The decrease is due primarily to the
reduction in the number of Communities.
Gain on Sale of Partnership Interest In November the Company sold it's 56%
interest in MREI to Sylvia M. Gilley in exchange for a reduction of
$1,120,000 owed to Ms Gilley and a one year extension on the remaining
portion of the note due her of $2,255,000. The Company recorded income of
$930,000.
Other Income Expenses: In September 2002 the Company entered into a venture
with a third party to secure partnership interests in future acquisitions
of assisted living communities. The agreement required the Company to pay
$660,000 over the next twelve months to fund the cost of the due diligence
for these acquisitions. There can be no assurance that this venture will be
successful and the Company has therefore charged the entire cost to
expense. The Company records its 56% investment CREI by the equity method
of accounting. The Company's share of the operating losses of this
partnership was $621,000. On September 30, 2002 CREI sold it's two
properties to a third party for a gain of $2,315,000. The Company has
deferred recognition of its 56% participation in the gain.
Discontinued Operations In October 2001the Financial Accounting Standard
Board issued Statement of Financial Accounting Standards #144 Accounting
for the Impairment or Disposal of long Lived Assets. (SFAS # 144). The
Company adopted SFAS # 144 effective January 1, 2002 which resulted in a
presentation of the net operating results of these qualifies properties
sold in 2002 as (loss) from discontinued operations for all periods
presented. During 2002 the Company disposed of six properties. Revenue for
the six properties were approximately $4,698,000 in 2002 and $7,293,000 in
2001. Operating expenses for the six properties were approximately
$5,325,000 in 2002 and $7,610,000 in 2001.
The loss on sale of these six properties in 2002 was $4,001,000which
includes income tax expense of $440,000.
Fiscal 2001 as Compared to Fiscal 2000
Revenues and Operating Expenses from Assisted Living Operations. Revenues
decreased to $23,568,000 in 2001 compared to $33,482,000 in 2000 .
Community operating expenses, which consist of assisted living operations
expense, lease expense and depreciation and amortization, were $19,432,000
in 2001 as compared to $26,951,000 in 2000. During 2001 the Company gave
LSOF 11 communities as part of the settlement in October 2001, sold three
communities to a not-for-profit in April, June and August of 2001, entered
into a sub management agreement for three communities in November, leased
one community in November and sold one community to a third party in April.
The decrease in operating revenue and expenses is due almost entirely to
the reduction in the number of communities operated by the Company.
Corporate General and Administrative Expenses. These expenses were
$4,875,000 in 2001 as compared to $5,448,000 in 2000. The decrease in the
corporate general and administrative expenses between 2001 and 2000 is
primarily a result of the decrease in salaries and related personal
expenses .Due to the significant reduction in the number of communities
operated by the Company the number of employees on the corporate staff was
reduced. Also reduced were the overhead costs associated with personnel. In
addition in October the salaries for the two senior officers was reduced.
Write-off of Impaired Assets and Related Expenses. As noted above the
Company is attempting to sell three communities and based upon the terms of
the pending transaction Company has reduced the carrying value of the
communities by $1,887,000.
Interest and Dividend Income. Interest and dividend income was $212,000 in
2001 as compared to $254,000 in 2000. The reduction in interest and
dividend is due to a net reduction in the notes that generated the interest
income.
Interest Expenses. These expenses decreased to $3,280,000 in 2001 as
compared to $3,771,000 in 2000. Approximately $1,000,000 of the decrease is
a result of the disposition of owned communities throughout 2001. There was
an increase in interest expense in 2001 for additional notes due to the
conversion of the Series D preferred stock to a note. The Series D
18
preferred stock was held by Sylvia Gilley, the wife of the Company's CEO.
The preferred stock was issued to Mrs. Gilley in 1996 to assist the Company
in completing an acquisition. As the holder of preferred stock Mrs. Gilley
received dividends, which are not deductible for tax purposes. As a note
the interest paid will provide the Company with a tax deduction. The note
matures on July 1, 2003. Because the note was a conversion of preferred
stock the same corporate limitations regarding the redemption of preferred
stock will apply to the note
Other income (expense), net. Other income (expense) was $16,602,000 in 2001
The Company recorded a gain of $16,129,000 due to the settlement with LSOF.
The balance of the other income represents the net gain on the properties
sold during 2001.
Discontinued Operations In October 2001the Financial Accounting Standard
Board issued Statement of Financial Accounting Standards #144 Accounting
for the Impairment or Disposal of long Lived Assets. (SFAS # 144). The
Company adopted SFAS # 144 effective January 1, 2002 which resulted in a
presentation of the net operating results of these qualifies properties
sold in 2002 as (loss) from discontinued operations for all periods
presented. During 2002 the Company disposed of six properties. Revenue for
the six properties were approximately $7293,000 in 2001 and $7,779,000 in
2000. Operating expenses for the six properties were approximately
$7,610,,000 in 2001 and $8,287,000 in 2001.
Liquidity and Capital Resources
At December 31, 2002 the Company had current assets of $2,048,000 and
current liabilities of $1,501,000.
During 2001 the Company reduced its long-term debt from $50,887,000 to
$16,693,000. During 2002 the Company further reduced its long-term debt to
$8,986,000. The reduction was due to the sale of properties, the repayment
of the mortgages related to the properties and the exchange of a
partnership interest held by the Company for a reduction in debt.
In December 2002 the company satisfied a $1,600,000 note it owed a third
party by exchanging it for a $1,600,000 note receivable the Company held
from a third party. The Company has guaranteed the original creditor that
the note will be paid. The note is due September 30, 2004.
Future acquisitions by the Company are dependent upon obtaining capital and
financing through various means, including financing obtained from loans,
sale/leaseback transactions, long-term state bond financing, debt or equity
offerings and, to the extent available, cash generated from operations.
There can be no assurance that the Company will be able to obtain adequate
capital to finance its projected growth.
Effect of Inflation
The Company's principal sources of revenues are from resident fees from
Company-owned or leased assisted living communities and management fees
from communities operated by the Company for third parties. The operation
of the communities is affected by rental rates that are highly dependent
upon market conditions and the competitive environment in the areas where
the communities are located. Compensation to employees is the principal
cost element relative to the operations of the communities. Although the
Company has not historically experienced any adverse effects of inflation
on salaries or other operating expenses, there can be no assurance that
such trends will continue or that should inflationary pressures arise that
the Company will be able to offset such costs by increasing rental rates or
management fees.
Forward Looking Statements
"Safe Harbor" Statement under the Private Securities Litigation Reform Act
of 1995: A number of the matters and subject areas discussed in this filing
that are not historical or current facts deal with potential future
circumstances, operations, and prospects. The discussion of such matters
and subject areas is qualified by the inherent risks and uncertainties
surrounding future expectations generally, and also may materially differ
from Greenbriar Corporation's actual future experience involving any one or
more of such matters and subject areas relating to interest rate
fluctuations, ability to obtain adequate debt and equity financing, demand,
pricing, competition, construction, licensing, permitting, construction
delays on new developments contractual and licensure, and other delays on
the disposition, transition, or restructuring of currently or previously
owned, leased or managed communities in the Company's portfolio, and the
ability of the Company to continue managing its costs and cash flow while
maintaining high occupancy rates and market rate assisted living charges in
its assisted living communities. Greenbriar Corporation has attempted to
identify, in context, certain of the factors that they currently believe
may cause actual future experience and results to differ from Greenbriar
Corporation's current expectations regarding the relevant matter or subject
area. These and other risks and uncertainties are detailed in the Company's
reports filed with the Securities and Exchange Commission (SEC), including
Greenbriar Corporation's Annual Reports on Form 10-K and Quarterly Reports
on Form 10-Q.
19
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -------------------------------------------------------------------
Nearly all of the Company's debt is financed at fixed rates of interest.
Therefore, the Company has minimal risk from exposure to changes in
interest rates.
ITEM 8: FINANCIAL STATEMENTS
- ----------------------------
The financial statements required by this Item begin at page F-1 hereof.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- --------------------------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
None.
20
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS
- -----------------------------------------
Directors and Business Experience
Class I
Term expires in 2004
--------------------
Gene S. Bertcher Due to the death of James R. Gilley, the
Age 54 Company's Chairman, President and Chief
Executive Officer, on December 30, 2002, Mr.
Bertcher was elected President and Chief
Executive Officer on January 3, 2003. Mr.
Bertcher has been Executive Vice President,
Chief Financial Officer and Treasurer of the
Company since November 1989 and was a director
from November 1989 until September 1996 and
re-elected to the board in 1999. He is a
certified public accountant
Class II
Term expires in 2005
--------------------
Victor L. Lund Mr. Lund has been a director of the Company
Age 74 since 1996. He founded Wedgwood Retirement
Inns, Inc. (Wedgwood) in 1977. Wedgwood became
a wholly owned subsidiary of the Company on
March 31, 1996. For most of Wedgwood's
existence, Mr. Lund was Chairman of the Board,
President and Chief Executive Officer,
positions he held until the Company acquired
Wedgwood. He continues to serve as Chairman of
the board of Wedgwood.
Class III
Term expires in 2003
--------------------
Don C. Benton Mr. Benton has been a director of the Company
Age 47 since June 1994. He currently serves as a
consultant to various Twelve Step ministry
programs. He was Director of Twelve Step
Ministries, Lovers Lane United Methodist Church
of Dallas from 1991 until 1997 and has been a
consultant for Spiritual Counseling and
Education for the Addiction Recovery Center
since 1993. He also served in that capacity for
the Argyle Specialty Hospital. Mr. Benton is a
Licensed Chemical Dependency Counselor and a
Certified Alcohol and Drug Abuse Counselor.
Other Executive Officers and Business Experience
Oscar Smith Mr. Smith has been Secretary of the Company
Age 60 since December 2001. He has been Vice President
of the Company since June 1994. Prior to
joining the Company he owned and operated a
multi-unit retail and manufacturing business in
Norfolk, Virginia..
Organization of the Board of directors
The board of directors has the following committee:
Committee Members
--------- -------
Audit Victor L. Lund - Chairman
Don C. Benton
21
Section 16(a) Beneficial Ownership Reporting Compliance
Based solely upon a review of Forms 3, 4 and 5 furnished to the Company
pursuant to Rule 16a-3(e) promulgated under the Securities Exchange Act of
1934 (the "Exchange Act"), or upon written representations received by the
Company, the Company is not aware of any failure by any director, officer
or beneficial owner of more than 10% of the Company's common stock to file
with the Securities and Exchange Commission, on a timely basis, any Form 3,
4 or 5 relating to 1998.
ITEM 11: EXECUTIVE COMPENSATION
- -------------------------------
The following tables set forth the compensation paid by the Company for
services rendered during the fiscal years ended December 31, 2002, 2001 and
2000 to the Chief Executive Officer of the Company and to the other
executive officers of the Company whose total annual salary in 2002
exceeded $100,000, the number of options granted to any of such persons
during 2002 and the value of the unexercised options held by any of such
persons on December 31, 2002.
Summary Compensation Table
Long Term
Compensation-
Number of
Shares of
Name and Annual Common Stock All
Principal Compensation- Underlying Other
Position Year Salary Options Compensation(1)
--------- ---- ------------- -------------- ---------------
James R. Gilley, 2002 $12,000 - $5,500
Chairman, President and Chief 2001 386,000 10,000 8,000
Executive Officer 2000 460,000 10,000 5,500
Gene S. Bertcher, 2002 14,000 (Y) $6,500
Executive Vice President and 2001 155,000 - 8,00
Chief Financial Officer 2000 185,000 - 4,500
(1) Constitutes directors' fees paid by the Company to the named
individuals.
Option Grants Table
(Option Grants in Last Fiscal Year)
Number of Percent of
Securities Total Options
Underlying Granted to Exercise or
Options Employees in Base Price Expiration
Name Granted Fiscal Year Per Share Date
----- ---------- --------------- ----------- -----------
NONE
22
Aggregated Option Exercises in Last Fiscal
Year and FY-End Option Values
Value of Unexercised
Number of Securities In-the-Money
Underlying Unexercised Options at 2002
Options at 2002 FY-End FY-End
Shares Acquired Value ------------------------- ------
Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
---- --------------- -------- ------------------------- -------------------------
James R. Gilley (Y) (Y) 50,000 (Y) (Y) (Y)
Gene S. Bertcher (Y) (Y) 1,000 (Y) (Y) (Y)
Stock Option Plan
The Board of Directors administers the Company's 1992 Stock Option Plan, as
amended (the "1992 Plan"), 1997 Stock Option Plan (the "1997 Plan") and the
2000 Stock Option Plan (the "2000 Plan") each of which provides for grants
of incentive and non-qualified stock options to the Company's executive
officers, as well as its directors and other key employees, and consultants
in the case of the 1997 Plan and 2000 Plan. Under the three Plans, options
are granted to provide incentives to participants to promote long-term
performance of the Company and specifically, to retain and motivate senior
management in achieving a sustained increase in stockholder value.
Currently, none of the Plans has a pre-set formula or criteria for
determining the number of options that may be granted. The exercise price
for an option granted is determined by the compensation committee, in an
amount not less than 100 percent of the fair market value of the Company's
common stock on the date of grant. The compensation committee reviews and
evaluates the overall compensation package of the executive officers and
determines the awards based on the overall performance of the Company and
the individual performance of the executive officers. The Company currently
has reserved 10,875 shares of common stock for issuance under the 1992
Plan, 25,000 shares of common stock under the 1997 Plan and 25,000 shares
of common stock under the 2000 Plan. As of March 31, 2003 options have been
granted for all shares reserved under the 1992 Plan. No options are issued
for the 1997 or 2000 Plans.
Compensation of Directors
The Company pays each director a fee of $2,500 per year, plus a meeting fee
of $2,000 for each board meeting attended.
Audit Committee Report
Due to the death of James R. Gilley and the resignation of S, Louis Jackson
the Board of Directors currently has three members. The Audit Committee is
currently comprised of the two outside directors, Victor L. Lund and Donald
C. Benton. The Company anticipates that at least one additional outside
director will be added within the next sixty days.
23
PERFORMANCE GRAPH
The following graph compares the cumulative total return on a $100
investment in the company's common stock on December 31, 1998 through
December 31, 2002, based on the company's closing stock price on December
31, for each of those years. The same information is provided for the
Standard & Poor's 500 index and, from 1998 through 2002 for an industry
peer group1.
][GRAPHIC OMITTED]
1 The company considers its peer group to be public companies whose business is
primarily in the assisted living industry. Those companies are Alterra
Healthcare Corporation, American Retirement Corporation, ARV Assisted Living,
Inc., Assisted Living Concepts, Inc., Emeritus Corporation and Sunrise Assisted
Living, Inc.
24
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- -----------------------------------------------------------------------
The following table sets forth as of March 31, 2003, certain information
with respect to all stockholders known by the company to own beneficially
more than 5% of the outstanding common stock (which is the only outstanding
class of securities of the company, except for Series B preferred stock,
the ownership of which is immaterial), as well as information with respect
to the company's common stock owned beneficially by each director, director
nominee, and current executive officer whose compensation from the company
in 2001 exceeded $100,000, and by all directors and executive officers as a
group. Unless otherwise indicated, each of these stockholders has sole
voting and investment power with respect to the shares beneficially owned.
All share numbers have been adjusted to reflect the company's one for
twenty-five reverse stock split at the close of business on November 30,
2001 and the company's one for four stock dividend on February 4, 2002.
Common Stock
-------------------------------------
Name and Address Number Percent
of Beneficial Owner of of
Shares Class
--------------------------------------------------------------------------
Sylvia M. Gilley(1 & 2) 153,843 35.1%
6211 Georgian Court
Dallas TX 75240
Victor L. Lund(3) 60,748 17.7%
816 NE 87th Avenue
Vancouver WA 98664
Floyd B. Rhoades(4) 38,119 11.7%
95 Argonaut Street
Aliso Viego CA 92656
Gene S. Bertcher(5) 2,650 >1.0%
14185 Dallas Parkway, Suite 650
Dallas TX 75254
William A. Shirley, Jr.(6) 32,026 9.0%
2621 State Street
Dallas TX 75204
Don C. Benton - -
Arrowhead Ranch
Route 1, Box 204
Clarksville TX 75426
American Realty Trust, Inc.(7) 4,874 1.4%
10670 North Central Expressway
Suite 300
Dallas TX 75231
Basic Capital Management, 7,063 2.1%
Inc.(7)
10670 North Central Expressway
Suite 600
Dallas TX 75231
Nevada Sea Investments, Inc.(7) 3,640 1.1%
10670 North Central Expressway
Suite 501
Dallas TX 75231
25
International Health Products, 12,454 3.6%
Inc.(7)
10670 North Central Expressway
Suite 410
Dallas TX 75231
Davister Corporation (7) 12,560 3.7%
10670 North Central Expressway
Suite 410
Dallas TX 75231
Institutional Capital 12,125 3.5%
Corporation (7)
10670 North Central Expressway
Suite 411
Dallas TX 75231
All executive officers and 62,891 18.4%
directors as a group(five
persons)
(1) The shares are owned by a grantor trust for the benefit of Sylvia M.
Gilley, the widow of James R. Gilley.
(2) Consists of 46,143 shares of common stock owned by JRG Investments Co.,
Inc., a corporation wholly owned by James R. Gilley ("JRG"); 5,500 shares
of common stock owned by a grantor trust for the benefit of James R. and
Sylvia M. Gilley; options to James R. Gilley to purchase 10,000 shares of
common stock at $265.60 per share, exercisable through December 31, 2006;
options to James R. Gilley to purchase 10,000 shares of common stock at
$350.00 per share, exercisable through December 31, 2007; options to James
R. Gilley to purchase 10,000 shares of common stock at $50.00 per share,
exercisable through December 31, 2008; options to James R. Gilley to
purchase 10,000 shares of common stock at $13.80 per share exercisable
through December 31, 2009; options to James R. Gilley to purchase 10,000
shares of common stock at $7.50 per share, exercisable through December 31,
2010; options to James R. Gilley to purchase 10,000 shares of common stock
at $12.80 per share, exercisable through December 31, 2011; a warrant to
purchase 5,400 shares at an exercise price of $200.00 per share,
exercisable through October 1, 2006, owned by the grantor trust for the
benefit of Mr. and Mrs. Gilley; and 26,800 shares of common stock owned of
record by Mrs. Gilley. Other than shares owned by the grantor trust, Mrs.
Gilley disclaims any beneficial ownership of the shares owned by Mr. Gilley
and JRG. Mr. Gilley and JRG disclaim beneficial ownership of the shares
owned by Mrs. Gilley. Mr. Gilley has pledged all of his shares in JRG to
Institutional Capital Corporation (formerly known as MS Holding Corp.), a
non-affiliated entity, as collateral for repayment of a promissory note
payable by JRG to Institutional Capital Corporation in the remaining
principal amount of $2,996,373. (3) Consists of 60,748 shares of common
stock owned by Mr. Lund.
(4) Consists of 31,341 shares of common stock owned by Mr. Rhoades, options
to Mr., Rhoades to purchase 10,000 shares of common stock at $350.00 per
share, and 58 shares owned by his spouse. Mr. Rhoades disclaims beneficial
ownership of shares owned by his spouse.
(5) Consists of 1,650 shares of common stock owned by Mr. Bertcher and
options to purchase 1,000 shares of common stock for $225.00 per share, all
of which are vested.
(6) Includes 20,622 shares of common stock owned of record by Mr. Shirley
and 11,404 shares of common stock which Mr. Shirley may acquire upon
conversion of certain limited partnership units.
(7) Based on a Schedule 13D, dated April 8, 1998, filed by each of these
entities and by Gene E. Phillips, each of these entities owns of record the
number of shares set forth for such entity in the table above and each of
such entities and Mr. Phillips disclaim they filed such Schedule 13D as a
"group". According to the Schedule 13D, Basic Capital Management, Inc. may
be deemed to beneficially own 15,578 shares, including the shares owned of
record by American Realty Trust, Inc. and Nevada Sea Investments, Inc., and
Mr. Phillips may be deemed to beneficially own all 52,717 shares owned of
record and beneficially by these six entities. In the Schedule 13D, Mr.
Phillips does not affirm beneficial ownership of any of these shares.
26
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------------------------------------------------------
Certain Relationships and Related Transactions
The following paragraphs describe certain transactions between the company
and any stockholder beneficially owning more than 5% of the outstanding
common stock, the executive officers and directors of the company and
members of the immediate family or affiliates of any of them, which
occurred since the beginning of the 1998 fiscal year.
On November 19, 1993 the company sold 10,000 unregistered shares of its
common stock to The April Trust, a grantor trust for the benefit of James
R. Gilley, Chairman, President and Chief Executive Officer of the company,
and his wife, at a price equal to the closing price of the shares on the
American Stock Exchange on that date ($281.25) per share for consideration
consisting of a $2,250,000 promissory note (for which Mr. Gilley is a
co-maker) for the full purchase price thereof, of which $450,000 of the
principal amount of the note is a recourse obligation of Mr. Gilley and the
grantor trust and the balance of the note is non-recourse. The note bears
interest at a rate of 5.5% per annum, which accrues and is payable along
with all principal upon maturity on November 18, 2003, and is secured by a
pledge of the stock back to the company to hold as collateral for payment
of the note pending payment in full. On December 16,1996, the compensation
committee extended the due date of the note to November 18, 2008.
Effective December 31, 2002 April Trust and the Company agreed to cancel
the $2,250,000 promissory note. The 10,000 shares were returned to the
Company. From an unrelated matter the Company has a note due James R
Gilley's estate of $1,081,000. This note was reduced to $631,000 to reflect
the $450,000 recourse portion of the $2,250,000 promissory note.
Gene S. Bertcher, an officer of the company, was indebted to the company
for an aggregate of $92,500, for notes issued in 1993 as payment for shares
of Common Stock. Mr. Bertcher's notes were secured by a pledge of 650
shares of common stock. Such notes bore interest at a rate equal to any
cash or stock dividends declared on the purchased stock and were due in a
single installment for each such note on or before October 1, 2002. Upon
maturity of the note the stock was returned to the Company in full
satisfaction of the obligation.
As part of the Wedgwood Acquisition and as an accommodation to the sellers
to assist them to help achieve a tax-free acquisition, James R. Gilley and
members of his family agreed to contribute a retail property in North
Carolina to the company in exchange for 27,000 shares of the company's
Series D preferred stock. Mr. Gilley and his family had owned the retail
property for over five years. The consideration received by James R. Gilley
and members of his family, valued at $3,375,000, was based upon an
independent appraisal of the North Carolina shopping center. The Series D
preferred stock is unregistered, has no trading market unless converted to
common stock and is entitled to one vote per share on all matters to come
before a meeting of stockholders. The Series D preferred stock bears a
cumulative quarterly dividend of 9.5% per year, which approximates the cash
flow Mr. Gilley and his family members were receiving from the retail
property prior to its contribution to the company. Mr. Gilley and his
family members and affiliates transferred all of the shares of Series D
preferred stock to The April Trust effective April 1997. On July 1, 2001
the Series D Preferred Stock was converted to a note due June 30, 2004. The
note bears interest at the rate of 10% per annum.
The Company owned a 56% interest in a partnership, which owned two assisted
living communities in Oklahoma. The partnership leased the two communities
to an independent third party for three years and entered into a future
27
sales contract that obligated the leasee to purchase the two communities at
the end of the lease. If the transaction were completed as planned the
Company would receive $1,120,000 for its 56% interest. To reduce its debt
the Company entered into an agreement with April Trust to transfer its 56%
interest to the April Trust in exchange for a reduction in the debt of
$1,120,000, which reduced its obligation to April Trust to $2,255,000.
It is anticipated that in the future the company's executive officers will
participate in the profits or losses derived from the company's involvement
in real estate and senior living property partnerships. The company feels
that allowing these officers to participate as partners instead of drawing
large salaries will allow the company to hold down its overhead while
rewarding those executive officers who help the company prosper.
It is the policy of the company that all transactions between the company
and any officer or director, or any of their affiliates, must be approved
by non-management members of the board of directors of the company. All of
the transactions described above were so approved.
ITEM 14. CONTROLS AND PROCEDURES
- ---------------------------------
Based on their most recent evaluation, which was completed within 90 days
of the filing of this Form 10-K, the Chief Executive Officer/Chief
Financial Officer has concluded that the Company's disclosure controls and
procedures are effective to insure that information required to be
disclosed in reports that the Company files or submits under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within
the time periods specified in Securities and Exchange Commission rules and
forms. There were no significant changes in the Company's internal controls
or other factors that could significantly affect these disclosure controls
subsequent to the date of the evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.
28
PART IV
ITEM 15: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
- ------------------------------------------------------------------------
(a) The following documents are filed as a part of the report:
(1) FINANCIAL STATEMENTS: The following financial statements of the
Registrant and the Report of Independent Public Accountants
therein are filled as part of this Report on Form 10-K:
Report of Independent Certified Public Accountants............F-1
Consolidated Balance Sheets...................................F-2
Consolidated Statement of Operations..........................F-4
Consolidated Statement of Changes in Stockholders' Equity.....F-5
Consolidated Statements of Cash Flows.........................F-6
Notes to Consolidated Financial Statements....................F-7
(2) FINANCIAL STATEMENT SCHEDULES: Other financial statement
schedules have been omitted because the information required to
be set forth therein is not applicable, is immaterial or is shown
in the consolidated financial statements or notes thereto.
(b) REPORTS ON FORM 8-K: The Company did not file any reports on Form 8-K
during the quarterly period ended December 31, 2002.
(c) Exhibits: The following exhibits are filed as part of, or incorporated
by reference into, this Report on Form 10-K:
Exhibit
Number Description of Exhibit
----------------------------------------------------------------------
2.1.1 Stock Purchase Agreement between Villa Residential Care
Homes, Inc., William A. Shirley, Jr. and Greenbriar
Corporation ("Registrant") (filed as Exhibit 2.1.1 to
Registrant's Form 8-K Current Report on January 13, 1998 and
incorporated herein by this reference).
2.1.2 Exchange Agreement between Villa Residential Care
Homes-Corpus Christi South, L.P. and Greenbriar Corporation
("Registrant") (filed as Exhibit 2.1.2 to Registrant's Form
8-K Current Report on January 13, 1998 and incorporated
herein by this reference).
2.1.3 Exchange Agreement between Villa Residential Care
Homes-Granbury, L.P. and Greenbriar Corporation
("Registrant") (filed as Exhibit 2.1.3 to Registrant's Form
8-K Current Report on January 13, 1998 and incorporated
herein by this reference).
2.1.4 Exchange Agreement between Villa Residential Care Homes-Oak
Park, L.P. and Greenbriar Corporation ("Registrant") (filed
as Exhibit 2.1.4 to Registrant's Form 8-K Current Report on
January 13, 1998 and incorporated herein by this reference).
2.1.5 Exchange Agreement between Villa Residential Care Homes-Fort
Worth East, L.P. and Greenbriar Corporation ("Registrant")
(filed as Exhibit 2.1.5 to Registrant's Form 8-K Current
Report on January 13, 1998 and incorporated herein by this
reference).
2.1.6 Exchange Agreement between William A. Shirley, Jr., Lucy M.
Brody and C. Kent Harrington and Greenbriar Corporation
("Registrant") (filed as Exhibit 2.1.6 to Registrant's Form
8-K Current Report on January 13, 1998 and incorporated
herein by this reference).
2.1.7* Certificate of Decrease in Authorized and Issued Shares
dated November 27, 2001, and filed with the State of Nevada
on November 30, 2001.
29
Exhibit
Number Description of Exhibit
----------------------------------------------------------------------
2.2.1 Stock Purchase Agreement between Lone Star Opportunity Fund,
L.P. and Greenbriar Corporation ("Registrant") filed as
Exhibit 2.2.1 of Registrant's Form 10-KSB for the year ended
December 31, 1997.
2.2.4 Form of Registration Rights Agreement between Registrant and
Lone Star Opportunity Fund, L.P. as regards 1,400,000 shares
of Registrant's Series F Senior Convertible Preferred Stock
and 800,000 shares of Registrant's Series G Senior
Non-Voting Preferred Stock filed as Exhibit 2.2.4 of
Registrant's Form 10-KSB for the year ended December 31,
1997.
2.2.5 Agreement between Lone Star Opportunity Fund, L.P. and
Registrant regarding certain minimum values of Registrant's
stock filed as Exhibit 2.2.5 of Registrant's Form 10-KSB for
the year ended December 31, 1997.
3.1 Articles of Incorporation of Medical Resource Companies of
America ("Registrant") (filed as Exhibit 3.1 to Registrant's
Form S-4 Registration Statement, Registration No. 33-55968,
and incorporated herein by this reference).
3.1.1 Restated Articles of Incorporation of Greenbriar
Corporation.
3.2 Bylaws of Registrant (filed as Exhibit 3.2 to Registrant's
Form S-4 Registration Statement, Registration No. 33-55968,
and incorporated herein by this reference).
3.2.1 Amendment to Section 3.1 of the Bylaws of Registrant adopted
upon approval of the Merger (filed as Exhibit 3.2.1 to
Registrant's Form S-4 Registration Statement, Registration
No. 33-55968, and incorporated herein by this reference).
3.3 Certificate of Decrease in Authorized and Issued Shares.
4.1.2 Certificate of Designations, Preferences and Rights of
Preferred Stock dated May 7, 1993, relating to Registrant's
Series B Preferred Stock (filed as Exhibit 4.1.2 to
Registrant's Form S-3 Registration Statement, Registration
No. 33-64840, and incorporated herein by this reference.
4.1.4 Certificate of Designations, Preferences and Rights of
Preferred Stock dated March 15, 1996, relating to
Registrants' Series D Preferred Stock.
4.1.6 Certificate of Voting Powers, Designations, Preferences and
Rights of Registrant's Series F Senior Convertible Preferred
Stock dated December 31, 1997, filed as Exhibit 2.2.2 of
Registrant's Form 10-KSB for the year ended December 31,
1997.
4.1.7 Certificate of Voting Powers, Designations, Preferences and
Rights of Registrant's Series G Senior Non-Voting
Convertible Preferred Stock dated December 31, 1997, filed
as Exhibit 2.2.3 of Registrant's Form 10-KSB for the year
ended December 31, 1997.
10.3.2 Form of $62,500 Promissory Note dated December 27, 1991
payable to Registrant by Gene S. Bertcher representing the
purchase price for 250,000 shares (50,000 post December 1995
shares) of Registrant's Common Stock (filed as Exhibit
10.3.2 to Registrant's Form S-4 Registration Statement,
Registration No. 33-55968, and incorporated herein by this
reference).
10.3.3 Form of Renewal of Promissory Note dated October 14, 1992
extending the maturity date of the Promissory Note
referenced in Exhibit 10.3.2 (filed as Exhibit 10.3.3 to
Registrant's Form S-4 Registration Statement, Registration
No. 33-55968, and incorporated herein by this reference).
10.3.4 Form of Security Agreement - Pledge (Non-recourse) between
Gene S. Bertcher and Registrant securing the Promissory Note
referenced in Exhibit 13.3.2. (Filed as Exhibit 10.3.4 to
Registrant's Form S-4 Registration Statement, Registration
No. 33-55968, and incorporated herein by this reference).
10.4 Form of Umbrella Agreement between Greenbriar Corporation,
James R. Gilley and Jon Harder, Sunwest Management, Inc. et
al.
30
Exhibit
Number Description of Exhibit
----------------------------------------------------------------------
10.4.2 Form of $75,000 Promissory Note dated October 12, 1992
payable to Registrant by Robert L. Griffis representing the
purchase price for 150,000 shares (30,000 post December 1995
shares) of Registrant's Common Stock (filed as Exhibit
10.4.2 to Registrant's Form S-4 Registration Statement,
Registration No. 33-55968, and incorporated herein by this
reference).
10.4.3 Form of Security Agreement - Pledge (Non-recourse) between
Registrant and Robert L. Griffis securing the Promissory
Note referenced in Exhibit 10.4.2 (filed as Exhibit 10.4.3
to Registrant's Form S-4 Registration Statement,
Registration No. 33-55968, and incorporated herein by this
reference).
10.6.1 Form of Stock Option to purchase 100,000 shares (20,000 post
December 1995 shares) of Registrant's Common Stock issued to
Oscar Smith on October 1, 1992 (filed as Exhibit 10.6.1 to
Registrant's Form S-4 Registration Statement, Registration
No. 33-55968, and incorporated herein by this reference).
10.6.2 Form of $50,000 Promissory Note dated October 1, 1992
payable to Registrant by Oscar Smith representing the
purchase price for 100,000 shares (20,000 post December 1995
shares) of Registrant's Common Stock (filed as Exhibit
10.6.2 to Registrant's Form S-4 Registration Statement,
Registration No. 33-55968, and incorporated herein by this
reference).
10.6.3 Form of Security Agreement - Pledge (Non-recourse) between
Registrant and Oscar Smith securing the Promissory Note
referenced in Exhibit 10.6.2 (filed as Exhibit 10.6.3 to
Registrant's Form S-4 Registration Statement, Registration
No. 33-55968, and incorporated herein by this reference).
10.7.1 Form of Stock Option to purchase 80,000 shares (16,000 post
December 1995 shares) of Registrant's Common Stock issued to
Lonnie Yarbrough on October 12, 1992 (filed as Exhibit
10.7.1 to Registrant's Form S-4 Registration Statement,
Registration No. 33-55968, and incorporated herein by this
reference).
10.7.2 Form of $40,000 Promissory Note dated October 12, 1992
payable to Registrant by Lonnie Yarbrough representing the
purchase price for 80,000 shares (16,000 post December 1995
shares) of Registrant's Common Stock (filed as Exhibit
10.7.2 to Registrant's Form S-4 Registration Statement,
Registration No. 33-55968, and incorporated herein by this
reference).
10.7.3 Form of Security Agreement - Pledge (non-recourse) between
Registrant and Lonnie Yarbrough securing the Promissory Note
referenced in Exhibit 10.7.2 (filed as Exhibit 10.7.3 to
Registrant's Form S-4 Registration Statement, Registration
No. 33-55968, and incorporated herein by this reference).
10.9.6 Form of $62,500 promissory note dated December 29, 1994,
payable to Registrant by L.A. Tuttle representing the
purchase price of 50,000 shares (10,000 post December 1995
shares) of Registrant's Common Stock (filed as Exhibit
10.9.6 to Registrant's Form 10-KSB for the year ended
December 31, 1994).
10.9.7 Form of Security Agreement-Pledge between Registrant and
L.A. Tuttle securing the promissory note reference in
Exhibit 10.9.6 (filed as Exhibit 10.9.7 to Registrant's Form
10-KSB for the year ended December 31, 1994).
10.13.1 Registrant's 1992 Stock Option Plan (filed as Exhibit 10.13
to Registrant's Form S-4 Registration Statement,
Registration No. 33-55968, and incorporated herein by this
reference).
10.13.2 Registrant's 1997 Stock Option Plan (filed as Exhibit 4.1 to
Registrant's Form S-8 Registration Statement, Registration
No. 333-33985 and incorporated herein by this reference).
10.13.3 Registrant's 2000 Stock Option Plan (filed as Exhibit 4.1 to
Registrant's Form S-8 Registration Statement, Registration
No. 333-50868 and incorporated herein by this reference).
31
Exhibit
Number Description of Exhibit
----------------------------------------------------------------------
10.21.1 Extended and Consolidated Promissory Note in the principal
amount of $5,700,000 dated effective May 23, 1992 payable by
JRG Investment Co., Inc. to M.S. Holding Co. Corp. (filed as
Exhibit 10.22.1 to Registrant's Form S-4 Registration
Statement, Registration No. 33-55968, and incorporated
herein by this reference).
10.22.2 Extended and Consolidated Pledge Agreement dated effective
May 23, 1992 between JRG Investment Co., Inc. and M.S.
Holding Co. Corp. securing the Note referenced in Exhibit
10.22.1 (filed as Exhibit 10.22.2 to Registrant's Form S-4
Registration Statement, Registration No. 33-55968, and
incorporated herein by this reference).
10.22.3 Pledge Agreement dated as of May 23, 1992 between James R.
Gilley and M.S. Holding Co. Corp. (filed as Exhibit 10.22.3
to Registrant's Form S-4 Registration Statement,
Registration No. 33-55968, and incorporated herein by this
reference).
10.22.4 Irrevocable Proxy from James R. Gilley to M.S. Holding Co.
Corp. relating to shares of capital stock of JRG Investment
Co., Inc. (filed as Exhibit 10.22.4 to Registrant's Form S-4
Registration Statement, Registration No. 33-55968, and
incorporated herein by this reference).
10.22.5 Blank Assignment and Power of Attorney signed by JRG
Investment Co., Inc. relating to 482,000 (96,400 post
December 1995 shares) shares of Registrant's Common Stock
(filed as Exhibit 10.22.5 to Registrant's Form S-4
Registration Statement, Registration No. 33-55968, and
incorporated herein by this reference).
10.22.6 Blank Assignment and Power of Attorney signed by JRG
Investment Co., Inc. relating to 1,268,000 shares (236,600
post December 1995 shares) of Registrant's Common Stock
(filed as Exhibit 10.22.6 to Registrant's Form S-4
Registration Statement, Registration No. 33-55968, and
incorporated herein by this reference).
10.22.7 Three Blank Assignments and Powers of Attorney signed by JRG
Investment Co., Inc., each relating to 600,000 shares
(120,000 post December 1995 shares) of Registrant's Common
Stock (filed as Exhibit 10.22.7 to Registrant's Form S-4
Registration Statement, Registration No. 33-55968, and
incorporated herein by this reference).
10.22.8 Blank Assignment and Power of Attorney signed by JRG
Investment Co., Inc. relating to 2,281,818 shares of
Registrant's Common Stock (filed as Exhibit 10.22.8 to
Registrant's Form S-4 Registration Statement, Registration
No. 33-55968, and incorporated herein by this reference).
10.22.9 Blank Assignment and Power of Attorney signed by JRG
Investment Co., Inc. relating to 905,557 shares of
Registrant's Series A Preferred Stock (filed as Exhibit
10.22.9 to Registrant's Form S-4 Registration Statement,
Registration No. 33-55968, and incorporated herein by this
reference).
10.37 Employment Agreements dated December 31, 1996
10.37.1 Modified Employment Contract between the Company and James
R. Gilley
10.37.2 Modified Employment Contract between the Company and Gene S.
Bertcher
10.38 Stock Purchase Warrant dated December 31, 1996 between
registrant and The April Trust
10.39 Portfolio Divestiture Agreement between certain subsidiaries
of the Company, the Company, Health Care REIT and HCRI Texas
Properties, Ltd.
21.1* Subsidiaries of Registrant.
23.1* Consent of Grant Thornton.
99.2* Certification pursuant to Section 906 of the Sarbanes-Oxley
Act
* Filed herewith.
32
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934
(the "Act"), the Company has duly caused this Annual Report on Form 10-K to be
signed on its behalf by the undersigned, thereunto duly authorized.
GREENBRIAR CORPORATION
April 11, 2003 by: /s/ Gene S. Bertcher
------------------------
Gene S. Bertcher
President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
33
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Act of 1934, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
GREENBRIAR CORPORATION
April 11, 2003 by: /s/Gene S. Bertcher
---------------------------------------------------
Gene S. Bertcher, President, Chief Executive Officer
and Chairman of the Board of Directors
In accordance with 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.
April 11, 2003 /s/ Don C. Benton
----------------------------------------------------
Don C. Benton, Director
April 11, 2003 /s/ Gene S. Bertcher
----------------------------------------------------
Gene S. Bertcher, President, Chief Executive Officer
and Director
April 11, 2003 /s/ Victor L. Lund
----------------------------------------------------
Victor L. Lund, Director
GREENBRIAR CORPORATION
DECEMBER 31, 2002
CERTIFICATIONS
I, Gene S. Bertcher, Chief Executive Officer of Greenbriar Corporation, certify
that:
1. I have reviewed this annual report on Form 10-K of Greenbriar Corporation
("Registrant");
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations, and cash flows of the
Registrant as of, and for, the periods presented in this annual report;
4. The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the Registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date.
5. The Registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the Registrant's auditors and the audit committee of
the Registrant's board of directors:
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the Registrant's ability to record, process,
summarize and report financial data and have identified for the Registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal controls; and
6. The Registrant's other certifying officer and I have indicated in this annual
report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
/s/ GENE S. BERTCHER
--------------------------------------
Gene S. Bertcher
Chief Executive Officer
Chief Financial Officer
April 11, 2003
34
Report of Independent Certified Public Accountants
Board of Directors and Stockholders
Greenbriar Corporation
We have audited the accompanying consolidated balance sheets of Greenbriar
Corporation (a Nevada corporation) and subsidiaries as of December 31, 2002 and
2001, and the related consolidated statements of operations, changes in
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 2002. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Greenbriar
Corporation and subsidiaries as of December 31, 2002 and 2001, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended December 31, 2002, in conformity
with accounting principles generally accepted in the United States of America.
As discussed in Note O to the consolidated financial statements, on January 1,
2002, the Company adopted the provisions of Statement of Financial Accounting
Standards No. 144 "Accounting for the Impairment or Disposal of Long-Lived
Assets."
/s/ Grant Thornton, LLP
- -----------------------
Dallas, Texas
March 28, 2003
Greenbriar Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
December 31,
ASSETS 2002 2001
-------- --------
CURRENT ASSETS
Cash and cash equivalents $ 661 $ 1,246
Short-term investments -- 1,098
Accounts receivable - trade 22 106
Receivables from affiliated partnership -- 311
Notes receivable 1,238 --
Prepaid expenses -- 572
Other current assets, net 323 291
-------- --------
Total current assets 2,244 3,624
NOTES RECEIVABLE, from sale of properties 7,997 6,400
Less deferred gains (6,127) (6,090)
-------- --------
1,870 310
NOTE RECEIVABLE FROM AFFILIATE PARTNERSHIP -- 1,600
PROPERTY AND EQUIPMENT, AT COST
Land and improvements 678 4,430
Buildings and improvements 6,850 32,675
Equipment and furnishings 1,387 3,134
-------- --------
8,915 40,239
Less accumulated depreciation and amortization (2,282) (6,498)
-------- --------
6,633 33,741
DEFERRED INCOME TAX BENEFIT 1,161 2,350
DEPOSITS 311 1,730
OTHER ASSETS, NET 405 667
-------- --------
$ 12,624 $ 44,022
======== ========
F-2
Greenbriar Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS - CONTINUED
(Amounts in thousands, except share amounts)
December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 2002 2001
-------- --------
CURRENT LIABILITIES
Current maturities of long-term debt $ 113 $ 4,316
Accounts payable - trade 405 1,042
Accrued expenses 367 1,116
Other current liabilities 668 467
-------- --------
Total current liabilities 1,553 6,941
LONG-TERM DEBT, including amounts to related
parties of $2,853,000 8,479 16,693
INVESTMENT IN AFFILIATE 46 96
DEFERRED GAIN 740 --
FINANCING OBLIGATIONS -- 10,815
OTHER LONG-TERM LIABILITIES 455 208
-------- --------
Total liabilities 11,273 34,753
CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock (liquidation value of $100) 1 1
Common stock, $.20 par value; authorized, 4,000,000
shares; issued and outstanding, 344,000 shares in 2002
and 359,000 in 2001 72 75
Additional paid-in capital 54,923 56,828
Accumulated deficit (53,645) (45,268)
-------- --------
1,351 11,636
Less stock purchase notes receivable -- (2,367)
-------- --------
1,351 9,269
-------- --------
$ 12,624 $ 44,022
======== ========
The accompanying notes are an integral part of these statements.
F-3
Greenbriar Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except share amounts)
Year ended December 31,
2002 2001 2000
--------- --------- ---------
Revenue
Assisted living operations $ 4,422 $ 23,568 $ 33,482
Operating expenses
Assisted living operations 2,233 15,006 19,892
Lease expense 1,618 2,391 4,165
Facility depreciation and amortization 321 2,035 2,894
Termination of employment contracts -- 1,349 --
General and administrative 2,329 4,875 5,448
Write-down of assets 266 1,887 7,461
--------- --------- ---------
6,767 27,543 39,860
--------- --------- ---------
Operating loss (2,345) (3,975) (6,378)
Other income (expense)
Interest and dividend income 412 212 254
Interest expense (840) (3,280) (3,771)
Gain on sale of partnership interest - related party 930 -- --
Other income (expense), net (1,153) 16,602 (220)
--------- --------- ---------
(651) 13,534 (3,737)
--------- --------- ---------
Earnings (loss) before income taxes (2,996) 9,559 (10,115)
Income tax expense 749 2,824 --
--------- --------- ---------
Earnings (loss) from continuing operations (3,745) 6,735 (10,115)
Discontinued operations
Loss from operations (627) (317) (508)
Loss on disposal, including taxes of $440 (4,001) -- --
--------- --------- ---------
Loss from discontinued operations (4,628) (317) (508)
--------- --------- ---------
NET EARNINGS (LOSS) (8,373) 6,418 (10,623)
Preferred stock dividend requirement (4) (160) (4,105)
--------- --------- ---------
Net earnings (loss) allocable to common stockholders $ (8,377) $ 6,258 $ (14,728)
========= ========= =========
Basic and diluted earnings (loss) per share
Continuing operations $ (9.76) $ 16.32 $ (37.82)
Discontinued operations (13.57) (.79) (1.35)
--------- --------- ---------
Net earnings (loss) per share $ (23.33) $ 15.53 $ (39.17)
========= ========= =========
Weighted average number of common shares outstanding:
Basic and diluted 359,000 403,000 376,000
The accompanying notes are an integral part of these statements.
F-4
Greenbriar Corporation and Subsidiaries
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Amounts in thousands)
Stock
Preferred stock Common stock Additional purchase
-------------------- ------------------- paid in Accumulated notes
Shares Amount Shares Amount capital deficit receivable Total
-------- -------- -------- -------- -------- -------- -------- --------
Balance at January 1, 2000 2,876 $ 289 365 $ 76 $ 61,520 $(36,798) $ (2,367) $ 22,720
Dividends on preferred stock,
including accretion of $2,649 -- -- -- -- 2,649 (4,105) -- (1,456)
Redemption of preferred stock (355) (35) -- -- (4,725) -- -- (4,760)
Reduction of redemption obligation -
preferred stock -- -- -- -- 775 -- -- 775
Net loss -- -- -- -- -- (10,623) -- (10,623)
-------- -------- -------- -------- -------- -------- -------- --------
Balance at December 31, 2000 2,521 254 365 76 60,219 (51,526) (2,367) 6,656
Accretion of redemption obligation -
preferred stock -- -- -- -- (179) -- -- (179)
Conversion of preferred stock to
common stock (1,845) (185) 53 11 174 -- -- --
Conversion of preferred stock
to debt (675) (68) -- -- (3,307) -- -- (3,375)
Dividends on preferred stock -- -- -- -- -- (160) -- (160)
Common stock acquired -- -- (59) (12) (79) -- -- (91)
Net earnings -- -- -- -- -- 6,418 -- 6,418
-------- -------- -------- -------- -------- -------- -------- --------
Balance at December 31, 2001 1 1 359 75 56,828 (45,268) (2,367) 9,269
Write-off of stock purchase notes
receivable -- -- (15) (3) (1,905) -- 1,905 (3)
Dividend on preferred stock -- -- -- -- -- (4) -- (4)
Other -- -- -- -- -- -- 12 12
Stock purchase notes receivable
reclassified as a reduction of
related party debt -- -- -- -- -- -- 450 450
Net loss -- -- -- -- -- (8,373) -- (8,373)
-------- -------- -------- -------- -------- -------- -------- --------
Balance at December 31, 2002 1 $ 1 344 $ 72 $ 54,923 $(53,645) $ -- $ 1,351
======== ======== ======== ======== ======== ======== ======== ========
The accompanying notes are an integral part of this statement.
F-5
Greenbriar Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
Year ended December 31,
--------------------------------
2002 2001 2000
-------- -------- --------
Cash flows from operating activities
Net earnings (loss) $ (8,373) $ 6,418 $(10,623)
Adjustments to reconcile net earnings (loss) to net
cash provided by (used in) operating activities
Depreciation and amortization 321 2,329 3,740
Loss from affiliate 612 -- --
(Gain) loss on sale of properties 3,561 (16,635) (49)
Employment contract termination -- 1,349 --
Write down of impaired assets 266 1,887 7,461
Deferred income taxes 1,189 2,400 --
Changes in operating assets and liabilities
Accounts receivable - trade 395 252 (288)
Other current and noncurrent assets (927) 809 (750)
Accounts payable and other liabilities (929) (1,391) 750
-------- -------- --------
Net cash provided by (used in)
operating activities (3,885) (2,582) 241
Cash flows from investing activities
Purchase of property and equipment (285) (24,294) (1,796)
Proceeds from sale of investments 1,098 -- --
Purchase of investments -- (1,098) --
Proceeds from sales of properties 7,460 33,550 1,014
-------- -------- --------
Net cash provided by (used in)
investing activities 8,273 8,158 (782)
Cash flows from financing activities
Proceeds from borrowings 1,730 15,788 3,956
Payments on debt (6,699) (18,045) (3,725)
Dividends on preferred stock (4) (160) (1,457)
Extinguishment of preferred stock redemption obligation -- (4,200) (4,760)
-------- -------- --------
Net cash used in financing activities (4,973) (6,617) (5,986)
-------- -------- --------
Net increase (decrease) in cash
and cash equivalents (585) (1,041) (6,527)
Cash and cash equivalents at beginning of year 1,246 2,287 8,814
-------- -------- --------
Cash and cash equivalents at end of year $ 661 $ 1,246 $ 2,287
======== ======== ========
The accompanying notes are an integral part of these statements.
F-6
Greenbriar Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
--------------------
Greenbriar Corporation's business consists of development and operation of
assisted living communities that provide housing, healthcare, hospitality
and personal services to elderly individuals. At December 31, 2002, the
Company had three communities in operation in three states.
A summary of the significant accounting policies applied in the preparation
of the accompanying consolidated financial statements follows:
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of Greenbriar
Corporation and its majority-owned subsidiaries (collectively, the Company)
and are prepared on the basis of accounting principles generally accepted
in the United States of America. All significant intercompany transactions
and accounts have been eliminated.
Assisted Living Community Revenue
---------------------------------
Assisted living community revenue is reported at the estimated net
realizable value based upon expected amounts to be recovered from
residents, third party payors, and others for services rendered. Services
provided by certain of the Company's communities are reimbursed under
various state assistance plans.
Depreciation
------------
Depreciation is provided for in amounts sufficient to relate the cost of
property and equipment to operations over their estimated service lives,
ranging from 3 to 40 years. Depreciation is computed by the straight-line
method.
Use of Estimates
----------------
In preparing financial statements in conformity with accounting principles
generally accepted in the United States of America, management is required
to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements and revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
F-7
NOTE A - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
Continued
Cash Equivalents
----------------
The Company considers all short-term deposits and money market investments
with a maturity of less than three months to be cash equivalents.
Impairment of Notes Receivable
------------------------------
Notes receivable are identified as impaired when it is probable that
interest and principal will not be collected according to the contractual
terms of the note agreements. The accrual of interest is discontinued on
such notes, and no income is recognized until all past due amounts of
principal and interest are recovered in full. No notes were deemed to be
impaired at December 31, 2001 and 2002.
Impairment of Long-Lived Assets
-------------------------------
The Company reviews its long-lived assets and certain identifiable
intangibles for impairment when events or changes in circumstances indicate
that the carrying amount of the assets may not be recoverable. In reviewing
recoverability, the Company estimates the future cash flows expected to
result from use of the assets and eventually disposing of them. If the sum
of the expected future cash flows (undiscounted and without interest
charges) is less than the carrying amount of the asset, an impairment loss
is recognized based on the asset's fair value.
The Company determines the fair value of assets to be disposed of and
records the asset at the lower of fair value less disposal costs or
carrying value. Assets are not depreciated while held for disposal.
Reclassifications
-----------------
Certain prior year amounts have been reclassified to conform with the
current year presentation.
Stock Options
-------------
The Company has elected to follow Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees (APB 25) in its primary
financial statements and has provided supplemental disclosures required by
Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting
for Stock-Based Compensation" and by Statement of Financial Accounting
Standards No. 148, "Accounting for Stock-Based Compensation - Transition
and Disclosure an Amendment of SFAS No. 123."
Options were granted at market during 2001 and 2000, are exercisable
immediately, and expire 10 years from date of grant.
SFAS 123 requires disclosure of pro forma net earnings (loss) and pro forma
net earnings (loss) per share as if the fair value method had been applied
in measuring compensation cost for stock-based awards.
F-8
NOTE A - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
Continued
Reported and pro forma net earnings (loss) and net earnings (loss) per
share amounts are set forth below (in thousands, except per share data):
2002 2001 2000
-------- -------- --------
Net earnings (loss) allocable to common stockholders
As reported $ (8,377) $ 6,258 $(14,728)
Deduct: total stock-based compensation under
fair value based method for all awards (464) (369) (325)
-------- -------- --------
Pro forma $ (8,841) $ 5,889 $(15,080)
======== ======== ========
Net earnings (loss) per share
As reported $ (23.33) $ 15.53 $ (39.17)
Pro forma $ (24.63) $ 14.61 $ (40.11)
The fair value of these options was estimated at the date of grant during
2001 and 2000 using the Black-Scholes option pricing model with the
following weighted-average assumptions: no dividends; expected volatility
of 317 percent in 2001, and 87 percent for 2000; risk-free interest rates
of 5.0 percent for 2001, and 5.6 percent for 2000; and weighted average
expected lives of 6.8 years.
Earnings (Loss) Per Common Share
--------------------------------
Basic earnings (loss) per common share is based on the weighted average
number of common shares outstanding. Diluted earnings (loss) per share is
computed based on the weighted average number of common shares outstanding
plus the number of additional common shares that would have been
outstanding if dilutive potential common shares had been issued. In 2002,
2001 and 2000, stock options for approximately 70,000 shares were excluded
from diluted shares outstanding because their effect was anti-dilutive.
Investment in Affiliate
-----------------------
The Company accounts for its investment in affiliate, in which it is a
limited partner, by the equity method of accounting.
F-9
NOTE A - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
Continued
Stock Split and Stock Dividend
------------------------------
The Company declared a one-for-twenty-five reverse stock split effective
December 1, 2001. Due to the reduced stock float available in the public
market, the Company declared a twenty-five percent stock dividend to
stockholders of record on January 25, 2002. All share data has been
restated to give effect to the stock split and stock dividend.
Sales of Real Estate
--------------------
Gains on sales of real estate are recognized to the extent permitted by
SFAS No. 66, "Accounting for Sales of Real Estate." Until the requirements
of SFAS No. 66 have been met for full profit recognition, sales are
accounted for by the installment or cost recovery method, whichever is
appropriate.
New Accounting Pronouncements
-----------------------------
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which addresses how and when
to measure impairment on long-lived assets and how to account for
long-lived assets that an entity plans to dispose of either through sale,
abandonment, exchange, or distribution to owners. The Company adopted SFAS
No. 144 as of January 1, 2002. See Note O for a discussion of the impact on
the Company from the adoption of SFAS No. 144.
In January 2003, the FASB issued FIN 46, "Consolidation of Variable
Interest Entities." FIN 46 clarifies the application of Accounting Research
Bulletin 51, "Consolidated Financial Statements." For certain entities that
do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other
parties or in which equity investors do not have the characteristics of a
controlling financial interest ("variable interest entities"). Variable
interest entities within the scope of FIN 46 will be required to be
consolidated by their primary beneficiary. The primary beneficiary of a
variable interest entity is determined to be the party that absorbs a
majority of the entity's expected losses, receives a majority of its
expected returns, or both. FIN 46 applies immediately to variable interest
entities created after January 31, 2003, and to variable interest entities
in which an enterprise obtains an interest after that date. It applies in
the first fiscal year or interim period beginning after June 15, 2003, to
variable interest entities in which an enterprise holds a variable interest
that it acquired before February 1, 2003. Our initial determination is that
the adoption of the provisions of FIN 46 will not have a material impact
upon our financial condition or results of operations.
F-10
NOTE A - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
Continued
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" (FIN 45). FIN 45 requires that upon
issuance of a guarantee, a guarantor must recognize a liability for the
fair value of an obligation assumed under a guarantee. FIN 45 also requires
additional disclosures by a guarantor in its interim and annual financial
statements about the obligations associated with guarantees issued. The
recognition provisions of FIN 45 are effective for any guarantees issued or
modified after December 31, 2002. The disclosure requirements are effective
for financial statements of interim or annual periods ending after December
15, 2002. The adoption of FIN 45 is not expected to have a material effect
on the Company's financial position or results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure." SFAS No. 148 amends SFAS No.
123, "Accounting for Stock-Based Compensation," to provide alternative
methods of transition for a voluntary change to the fair value based method
of accounting for stock-based employee compensation. In addition, SFAS No.
148 amends the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect
of the method used on reported results. SFAS No. 148 is effective for
fiscal years beginning after December 15, 2002. The interim disclosure
provisions are effective for financial reports containing financial
statements for interim periods beginning after December 15, 2002. The
Company has adopted the disclosure provisions of this statement.
NOTE B - CASH FLOW INFORMATION
Supplemental information on cash flows is as follows (in thousands):
Year ended December 31,
------------------------
2002 2001 2000
------ ------ ------
Interest paid $2,215 $4,958 $5,752
Income taxes paid 129 82 13
Noncash investing and financing activities (in thousands):
Assets transferred in settlement of preferred stock
redemption obligations, net of mortgage loans
of $36,981 -- 6,837 --
Notes received from sale of assets 1,050 6,400 --
Note given in connection with purchase of
property by affiliated partnership 1,600 --
Common stock received in payment of note receivable 80 --
Common stock received in settlement of preferred stock
obligation 11 --
F-11
NOTE C - EMPLOYEE STOCK PURCHASE NOTES RECEIVABLE
December 31,
---------------
2002 2001
------ ------
(In thousands)
Note from James R. Gilley, chief executive officer, principal
and interest at 5.50%, due November 2008 $ -- $2,250
Others -- 117
------ ------
$ -- $2,367
====== ======
On November 19, 1993 the company sold 10,000 unregistered shares of its
common stock to The April Trust, a grantor trust for the benefit of James
R. Gilley, former Chairman, President and Chief Executive Officer of the
company, and his wife, at a price equal to the closing price of the shares
on the American Stock Exchange on that date ($281.25) per share for
consideration consisting of a $2,250,000 promissory note (for which Mr.
Gilley is a co-maker) for the full purchase price thereof, of which
$450,000 of the principal amount of the note is a recourse obligation of
Mr. Gilley and the grantor trust, and the balance of the note is
non-recourse. The note bears interest at a rate of 5.5% per annum, which
accrues and is payable along with all principal upon maturity on November
18, 2008, and is secured by a pledge of the stock back to the company to
hold as collateral for payment of the note pending payment in full. The
stock purchase note was presented in the balance sheet as a deduction from
stockholders' equity as of December 31, 2001.
Effective December 31, 2002, the Company canceled the nonrecourse portion
of stock purchase note receivable. The 10,000 shares were returned to the
Company. The $450,000 recourse portion of the note was realized through an
agreement of the parties to offset the Company's receivable against its
note payable to Mr. Gilley.
NOTE D - DEFERRED GAINS ON SALE OF PROPERTY
During 2001, the Company sold three properties for cash of $30,804,000 and
three tax-free notes for a total of $6,400,000 bearing interest at 9.5%.
The notes mature on April 1, 2032, March 20, 2037, and August 1, 2031.
The repayment of the notes is limited to the cash flow of the respective
properties either from operations, refinancing or sale. The Company has
deferred gains in the amount of $6,127,000 and $6,090,000 in 2002 and 2001,
respectively. The deferred gains and interest income will be recognized as
cash is received.
F-11
NOTE E - EMPLOYMENT CONTRACT TERMINATIONS
In January 1997, the Company negotiated employment contracts with the Chief
Executive Officer (CEO) and Chief Financial Officer (CFO) of the Company.
Both individuals had been employed by the Company since 1989. The
employment contracts called for combined annual salaries of $640,000 per
year and provided that, if the contracts were terminated or amended, the
individuals would be entitled to a cash payment of three years salary for
the CEO and two years salary for the CFO. In light of the reduced size of
the Company, the independent directors and the officers in October 2001
agreed to modify the employment agreements with the two officers. The two
officers each agreed to continue their roles in the Company for $12,000 per
year for three years. The revisions in the contracts triggered contract
termination payments requiring the Company to immediately pay the two
officers $1,740,000. However, the two officers agreed to accept
non-interest bearing notes due December 31, 2004. These notes have certain
acceleration provisions if the Company violates the terms of the revised
employment contracts. For accounting purposes, interest has been imputed on
the notes at 8.5%, resulting in a discount of $391,000. The net amount of
the notes of $1,349,000 was expensed in 2001. At December 31, 2002, the
balance of the notes payable, net of discount of $260,000, was $1,048,000.
NOTE F - AFFILIATED PARTNERSHIPS
In October 2001, the Company became a 56% limited partner in Corinthians
Real Estate Investors LP (CREI), a partnership formed to acquire two
properties. The general partner is a limited liability corporation whose
controlling member was James Gilley. Mr. Gilley was the former CEO of the
Company. Mr. Gilley's estate has a 25.9% interest, the general partner has
a .1% interest, the Company's chief financial officer has a 10.5% interest,
and other employees of the Company have interests aggregating 7.5%. In
October 2001, CREI acquired a retirement community for approximately
$9,100,000 and in January 2002, it acquired an assisted living community
for approximately $2,800,000.
The Company issued a $1,600,000 note to the seller in 2001 as partial
payment for the purchase of the retirement community. CREI gave the Company
a $1,600,000 note in consideration for payment of that amount of the
purchase price. The note bears interest at 8.75% and was due December 30,
2003. The balance of the purchase price was funded by borrowings by CREI
from a third party in the amount of $7,840,000, which was guaranteed by the
Company. CREI also had debt in the amount of $3,975,000 at December 31,
2001 collateralized by the assisted living community that was guaranteed by
the Company. CREI paid both of the latter two amounts in 2002.
The Company accounts for its investment in CREI by the equity method. The
Company recorded losses of $692,338 and $95,947 for 2002 and 2001,
respectively. The Company had a receivable of $311,000 at December 31,
2001, resulting from advances to CREI.
In September 2002, CREI sold its two properties for cash and notes and paid
off its debt. As part of the proceeds, CREI received a note for $1,600,000
which was transferred to the Company in satisfaction of its $1,600,000 note
receivable from CREI. CREI also assigned to the Company a $400,000
participation in another note in payment of other CREI debt to the Company.
F-12
NOTE F - AFFILIATED PARTNERSHIPS - Continued
The Company transferred the $1,600,000 note it received in 2002 to the
original owner of the retirement community in payment of the Company's
$1,600,000 debt. The Company guaranteed payment of the $1,600,000 note.
CREI recognized a gain on sale in the amount of $1,322,000. The Company has
deferred recognition of its share ($740,000) of the gain because of the
aforementioned guaranty. CREI has deferred a gain on sale in the amount
$994,000 that will be recognized on the installment method.
In January 2002 the Company became a 56% limited partner in a partnership,
Muskogee Real Estate Investors (MREI), which acquired two assisted living
communities in Muskogee, OK, including one community acquired from the
Company. In September 2002 MREI leased the two communities to a third party
for three years. The lessee has committed to purchase the two properties
during the three-year period for $6,000,000. The current debt on the
property is approximately $4,000,000.
The Company had a note to Sylvia M. Gilley, wife of the former CEO of the
Company, for $3,375,000. In November 2002, the Company transferred its 56%
interest in MREI to Mrs. Gilley in exchange for a reduction of $1,120,000
on the debt and a one-year extension on the due date of the Company's note
to Mrs. Gilley. The Company recognized a gain of $929,956 on the
transaction.
The Company accounted for its investment in MREI using the equity method.
The Company recorded income of $80,215 during 2002.
In September 2002 the Company entered into an agreement with an independent
third party to jointly acquire properties in the future. The third party
entity is affiliated with the various entities that acquired or leased the
properties from CREI and MREI mentioned above. Affiliates of this group
also purchased properties in Harlingen, TX and Sherman, TX from the Company
on September 30, 2002 and acquired the Company's interest in entities that
operated properties in Roswell, NM and Seaside, OR.
The agreement provides that the Company will be allowed to participate in
the acquisition of twelve communities and receive a 50% partnership
interest. The Company has agreed to pay $660,000, payable at $55,000 per
month from October 2002 through September 2003, to cover the due diligence
expenses incurred by the third party. The Company's $660,000 obligation has
been accrued and charged to expense in 2002. The agreement further provides
that at any time during the twenty-four months subsequent to the formation
of a partnership and the acquisition of properties, the third party can
purchase the Company's partnership interest in each of the 12 properties
for a stipulated amount per property.
F-13
NOTE F - AFFILIATED PARTNERSHIPS - Continued
Following are unaudited condensed financial statements of CREI at December
31, 2001 and 2002 and the period from October 1, 2001 through December 31,
2001 and the year ended December 31, 2002 (in thousands):
Balance Sheets
2002 2001
------- -------
Current assets $ 67 $ 93
Property and equipment -- 9,358
Notes receivable 994 --
Other assets 171 361
------- -------
$ 1,232 $ 9,812
======= =======
Current liabilities $ 248 $ 67
Other liabilities -- 401
Note payable to Greenbriar Corporation -- 1,600
Deferred gain 994 --
Mortgage payable -- 7,840
------- -------
1,242 9,908
Partners' deficit (10) (96)
------- -------
$ 1,232 $ 9,812
======= =======
Statements of Operations
Revenue $ 2,233 $ 347
Expenses
Operating 1,284 171
Depreciation 747 46
General and administrative 111 22
Interest 1,328 204
------- -------
3,470 443
------- -------
Gain on sale of properties 1,322 --
------- -------
Net income (loss) $ 85 $ (96)
======= =======
F-14
NOTE G - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to
estimate values at December 31, 2002 and 2001:
Cash and cash equivalents - The carrying amount approximates fair value
because of the short maturity of these instruments.
Long-term debt - The fair value of the Company's long-term debt is
estimated based on market rates for the same or similar issues. The
carrying value of long-term debt approximates its fair value.
Notes receivable - The fair value of the note receivable from an affiliate
partnership is estimated to approximate fair value based on its short
maturity. It is not practical to estimate the fair value of notes
receivable from sale of properties because no quoted market exists and
there are no comparable debt instruments to provide a basis for valuation.
NOTE H - LONG-TERM DEBT
Long-term debt is comprised of the following (in thousands):
December 31,
---------------
2002 2001
------ ------
Notes payable to financial institutions maturing through 2015; fixed and
variable interest rates ranging from 5.25% to 10.5% ; collateralized
by real property, fixtures, equipment and the assignment of rents $3,956 $8,947
Notes payable to individuals and companies maturing through 2023;
variable and fixed interest rates ranging from 7% to 12%;
collateralized by real property, personal property, fixtures,
equipment and the assignment of rents 1,753 1,655
Mortgage notes payable to financial institutions maturing through 2010;
interest rates ranging from 7.5% through 14.5%;
collateralized by real property and equipment -- 5,253
Notes payable to wife of former Chief Executive Officer, bearing
interest at 10% and maturing on July 1, 2004 2,255 3,375
Notes payable to executive officers, noninterest-bearing and maturing
December 31, 2004, net of discount of $260 and $391 at December 31,
2002 and 2001, respectively, representing interest imputed at 8.5% 598 1,349
NOTE H - LONG-TERM DEBT
December 31,
-----------------
2002 2001
------- -------
Line of credit with bank, bearing interest at 7.94% and maturing
April 1, 2002; collateralized by certificates of deposit $ -- $ 430
Line of credit with bank, bearing interest at 8% and maturing
March 31, 2005 30 --
------- -------
8,592 21,009
Less current maturities 113 4,316
------- -------
$ 8,479 $16,693
======= =======
Aggregate annual principal maturities of long-term debt at December 31,
2002 are as follows (in thousands):
2003 $ 113
2004 5,154
2005 131
2006 143
2007 922
Thereafter 2,579
-------
$ 9,042
=======
NOTE I - FINANCING OBLIGATIONS
The Company operated two communities that are financed through
sale-leaseback obligations. At the end of the tenth year of the
fifteen-year leases, the Company has options to repurchase the communities
for the greater of the sales prices or their current replacement costs less
depreciation plus land at current fair market values. Accordingly, these
transactions have been accounted for as financings, and the Company has
recorded the proceeds from the sales as financing obligations, classified
the lease payments as interest expense and continues to carry the
communities on its books and record depreciation. Payments under the lease
agreements are $1,167,000 for each year through 2009. The Company sold its
interest in entities that operated these communities during 2002.
F-15
NOTE J - OPERATING LEASES
The Company leases certain communities under operating leases which expire
through 2011 and has operating leases for equipment and office space. The
leases generally provide that the Company pay property taxes, insurance,
and maintenance.
Future minimum payments following December 31, 2002 are as follows (in
thousands):
2003 $ 1,620
2004 1,620
2005 1,620
2006 1,426
2007 1,365
Thereafter 7,187
--------
$ 14,838
========
Lease expense in 2002, 2001 and 2000 was $1,650, $3,139 and $4,912,
respectively.
NOTE K - INCOME TAXES
At December 31, 2002, the Company had net operating loss carryforwards of
approximately $19,300,000, which expire between 2002 and 2020. However,
approximately $7,900,000 of these net operating loss carryforwards have
limitations that restrict utilization to approximately $1,530,000 for any
one year.
The following is a summary of the components of income tax expense of
continuing operations (in thousands):
Year ended
December 31,
------------------------------
2002 2001 2000
-------- -------- --------
Current - state $ -- $ 424 $ --
Deferred - federal 749 2,400 --
-------- -------- --------
$ 749 $ 2,824 $ --
======== ======== ========
F-16
NOTE K - INCOME TAXES - Continued
Deferred tax assets and liabilities were comprised of the following (in
thousands):
December 31,
2002 2001
-------- --------
Deferred tax assets:
Net operating loss carryforwards $ 7,308 $ 6,554
Note receivable 680 680
Alternative minimum tax credit carryforwards 235 235
Accounts receivable -- 20
Accrued expenses 2,285 604
Financing obligations -- 1,802
Other 583 493
-------- --------
Total deferred tax assets 11,091 10,388
Deferred tax liabilities - property and equipment (3,198) (5,021)
Valuation allowance (6,732) (3,017)
-------- --------
Net deferred tax asset $ 1,161 $ 2,350
======== ========
Following is a reconciliation of income tax expense attributable to
continuing operations with the amount of tax computed at the federal
statutory rate of 34% (in thousands):
Year ended December 31,
-----------------------------
2002 2001 2000
------- ------- -------
Tax expense (benefit) at the statutory rate $(1,019) $ 3,250 $(3,439)
State taxes net of federal benefit -- 380 --
Expiration of carryforwards -- -- 433
Change in deferred tax asset valuation allowance,
attributable to continuing operations 1,768 (431) 2,071
Nondeductible loss on write-down of properties -- -- 400
Nondeductible amortization -- -- 150
Other -- (375) 385
------- ------- -------
Tax expense $ 749 $ 2,824 $ --
======= ======= =======
Changes in the deferred tax valuation allowance result from assessments
made by the Company each year of its expected future taxable income
available to absorb its carryforwards. The Company believes that it is more
likely than not that the net deferred tax asset at December 31, 2002 of
$1,161,000 will be realized. However, this evaluation is inherently
subjective as it requires estimates that are susceptible to significant
revision as more information becomes available. Accordingly, the ultimate
realization of the net deferred tax asset could be less than the carrying
amount.
F-17
NOTE L - STOCKHOLDERS' EQUITY
Outstanding Preferred Stock
Preferred stock consists of the following (amounts in thousands):
Year ended
December 31,
---------------
2002 2001
------ ------
Series B cumulative convertible preferred stock, $.10 par value; liquidation
value of $100; authorized, 100 shares; issued and outstanding, 1 share $ 1 $ 1
====== ======
The Series B preferred stock has a liquidation value of $100 per share and
is convertible into common stock over a ten-year period at prices
escalating from $500 per share in 1993 to $1,111 per share by 2002. The
right to convert expires April 30, 2003. Dividends at a rate of 6% are
payable in cash or preferred shares at the option of the Company.
Preferred Stock Redemptions
---------------------------
Series D preferred stock had a liquidation value of $5 per share and was
convertible into common stock at $200 per share. Dividends were payable in
cash at a rate of 9.5%. The stock was exchanged for a $3,375,000 note in
2001. See Note H.
Series F and Series G preferred shares were sold to LSOF Pooled Equity,
L.P. (LSOF) in December 1997 for $22,000,000, less selling and offering
costs of $716,000. In connection with the sale, the Company entered into an
agreement which provided that, on the date of conversion, if the value of
the Company's common stock has not increased at an annual rate of at least
14% during the period the preferred shares are outstanding, the Company is
required to make a cash payment (the Cash Payment) to LSOF equal to the
market price deficiency on the shares received upon conversion. Conversion
was required by January 2001.
The 14% guaranteed return was accreted by a charge to accumulated deficit.
The amount of the Cash Payment that would be required assuming conversion
at each balance sheet date is transferred from stockholders' equity to
Preferred Stock Redemption Obligation.
During 2000, the Company made payments totaling $4,760,000 to redeem
355,150 shares of the Series G preferred stock, pursuant to an agreement
that it would redeem additional shares from the proceeds generated from the
sale of assets or from refinancings.
F-18
NOTE L - STOCKHOLDERS' EQUITY - Continued
The Company received a notice dated October 30, 2000 from LSOF, advising
that it was electing to convert the outstanding shares of preferred stock
into common stock. Such notice set forth LSOF's position that, as a result
of certain employee stock options issued by the Company, the conversion
price of the preferred stock had been reduced from $350 per share to $13.80
per share, and that the Company was required to issue 1,373,768 shares of
common stock upon conversion.
The Company did not agree that the conversion price should be adjusted, and
LSOF brought a lawsuit against the Company. In October 2001, LSOF and the
Company entered into a settlement agreement. Pursuant to the agreement, (1)
the Company transferred 11 assisted living communities to LSOF subject to
the assumption by LSOF of debt in the amount of $36,981,000, (2) the
Company paid LSOF $4,000,000 in cash, (3) LSOF transferred to the Company
the 53,000 common shares received upon conversion of the Series F and G
preferred shares, (4) the preferred stock redemption obligation of
$27,167,000 was cancelled, and (5) each agreed to release all claims
against the other. The Company recognized a gain of $16,129,000 on the
transfer of assets to LSOF.
Stock Options
-------------
In 1992, the Company established a long-term incentive plan (the 1993 Plan)
for the benefit of certain key employees. Under the 1993 Plan, up to 10,875
shares of the Company's common stock are reserved for issuance. Options
granted to employees under the 1993 Plan become exercisable over a period
as determined by the Company and may be exercised up to a maximum of 10
years from date of grant. In 1997, the Company adopted the 1997 Stock
Option Plan, under which up to 25,000 shares of the Company's common stock
are reserve for issuance. In 2000, the Company adopted the 2000 Stock
Option Plan, under which up to 25,000 shares of the Company's common stock
are reserve for issuance.
The Company has also granted options to an officer during 1996 through 2001,
aggregating 50,000 shares not covered by either plan. These options were
granted at market, were exercisable immediately, and expire 10 years from
date of grant.
F-19
NOTE L - STOCKHOLDERS' EQUITY - Continued
Information with respect to stock option activity is as follows:
Weighted
average
exercise
Shares price
-------- -------
Outstanding at January 1, 2000 113,615 $144.20
Granted 10,000 7.60
Cancelled, rescinded, or annulled (53,090) 65.40
Forfeitures (100) 315.00
-------- -------
Outstanding at December 31, 2000 70,425 $183.80
Granted 10,000 12.80
-------- -------
Outstanding at December 31, 2001 80,425 $162.56
Expired (2,525) 365.15
-------- -------
Outstanding at December 31, 2002 77,900 $155.99
======== =======
Options exercisable at December 31, 2000 70,250 $183.20
======== =======
Options exercisable at December 31, 2001 80,425 $162.56
======== =======
Options exercisable at December 31, 2002 77,900 $155.99
======== =======
Weighted average fair valufe per share of options granted during 2001 and
2000 was $7.60 and $6.00, respectively.
Additional information about stock options outstanding at December 31, 2002
is summarized as follows:
Options outstanding and exercisable
-------------------------------------------------
Weighted average
Number remaining Weighted average
Range of exercise prices outstanding contractual life exercise price
------------------------ ----------- ------------------ ----------------
$7.50 to $13.80 30,000 8.0 $ 11.37
$13.81 to $50.00 10,000 6.0 50.00
$200.00 to $265.60 17,900 3.6 240.84
$350.00 20,000 5 350.00
F-20
NOTE M - OTHER INCOME (EXPENSE)
Other income (expenses) consists of the following: (amounts in thousands)
Year ended December 31,
--------------------------------
2002 2001 2000
-------- -------- --------
Gain on sale of properties $ -- $ 16,635 $ --
Property acquisition due diligence expenses (660) -- --
Other (493) (33) (220)
-------- -------- --------
$ (1,153) $ 16,602 $ (220)
======== ======== ========
NOTE N - WRITE-OFF OF IMPAIRED ASSETS
In 1992, the Company sold four nursing homes to Southern Care Corporation
(Southern Care), and a subsidiary of the Company entered into a management
agreement to manage the nursing homes. In 1994, Southern Care terminated
the management agreement and informed the Company that they believed the
notes due to the Company from the sale of the nursing homes in 1992 were
invalid. The matter has been in the courts since 1995 and legal issues were
resolved in June 2000 when Greenbriar was awarded a judgment of $18,688,000
for the notes, interest, amounts due for the management contract and
reimbursement of legal fees. The assets had a recorded value of $4,525,000.
The Company was informed during 2000 that the financial condition of
Southern Care had deteriorated, that it was delinquent on mortgage payments
on the homes, and that the first mortgage holder foreclosed on the homes in
June 2000. The Company wrote off the entire $4,525,000 during 2000.
The Company decided to dispose of two assisted living communities in 2000
that were not meeting operating performance expectations. These communities
were written down to net realizable value at June 30, 2000. One of these
communities was disposed of in the quarter ending September 30, 2000 with
no additional write-off required. Also, a third community whose operations
have deteriorated was written down based on management's estimate of future
cash flows pursuant to the provisions of Statement of Financial Accounting
Standards No. 121. In addition, certain receivables associated with these
properties were written off. These write-offs substantially account for the
remainder of the write-off of impaired assets and related expenses in 2000.
F-21
NOTE N - WRITE-OFF OF IMPAIRED ASSETS - Continued
During 2001, the Company identified four properties that were not meeting
performance expectations. These properties are in a geographic region
where, after the transfer to LSOF, the Company does not have a significant
presence. In the fourth quarter of 2001, the Company wrote these properties
down to their net realizable value of $5,066,000 with a charge to earnings
of $1,887,000. One of these properties was sold in 2002. The Company
continues to hold the other three properties.
During 2002, the Company wrote off $266,000 related to a property it is
attempting to sell.
NOTE O - DISCONTINUED OPERATIONS AND SALES OF REAL ESTATE
In October 2001, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No.
144 supersedes FASB SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of" and the
accounting and reporting provisions for disposals of a segment of a
business as addressed in APB Opinion No. 30, "Reporting the Results of
Operations-Reporting the Effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions". SFAS No. 144 establishes a single accounting model for
long-lived assets to be disposed of by sale and addresses various
implementation issues of SFAS No. 121. In addition, SFAS No. 144 extends
the reporting requirements of discontinued operations to include components
of an entity that have either been disposed of or are classified as held
for sale. The Company adopted SFAS No. 144 as of January 1, 2002.
During 2002, the Company disposed of six properties. Revenues for the six
properties were $4,698,000, $7,293,000, and $7,779,000 in 2002, 2001, and
2000, respectively.
The Company's adoption of SFAS No. 144 resulted in the presentation of the
net operating results of these qualifying properties sold during 2002, as
loss from discontinued operations for all periods presented. Losses on sale
of these properties totaling $4,001,000 (including income tax expense of
$440,000) are reflected as losses on sales of real estate from discontinued
operations in the accompanying consolidated statements of operations.
Financial statements for 2000 and 2001 have been reclassified to reflect
the operations of these properties as discontinued operations. The adoption
of SFAS No. 144 did not have an impact on net earnings or loss.
Pursuant to SFAS No. 144, the results of operations and gains or losses on
properties sold prior to the adoption of SFAS No. 144, are not reflected in
discontinued operations. Therefore, the presentation of results of
operations for 2002 is not comparable with 2000 and 2001.
F-22
NOTE P - CONTINGENCIES
The Company is defendant in various lawsuits generally arising in the
ordinary course of business. Management of the Company is of the opinion
that these lawsuits will not have a material effect on the consolidated
results of operations, cash flows or financial position of the Company.
As discussed in Note F, the Company is guarantor of debt of a third party in
the amount of $1,600,000.
NOTE Q - QUARTERLY DATA (UNAUDITED)
The table below reflects the Company's selected quarterly information for
the years ended December 31, 2002 and 2001. Certain 2002 and 2001 amounts
have been reclassified to conform to the current presentation of
discontinued operations.
Year ended December 31, 2002
----------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Revenue $ 1,237 $ 1,185 $ 1,035 $ 965
Operating expenses 1,810 1,634 1,520 1,803
Net loss (458) (1,037) (4,473) (2,405)
Loss allocable to common shareholders (458) (1,037) (4,473) (2,405)
Loss per common share - basic and diluted (1.28) (2.89) (12.46) (6.69)
Year ended December 31, 2001
----------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Revenue $ 8,164 $ 7,448 $ 6,398 $ 1,558
Operating expenses 8,122 8,278 6,604 4,539
Net earnings (loss) (276) (1,611) (480) 8,785
Preferred stock dividend requirement (80) (80) -- --
Net earnings (loss) allocable to common shareholders (356) (1,691) (480) 8,785
Net earnings (loss) per common share - basic and diluted (.85) (4.05) (1.15) 24.51
F-23