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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, 2003
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.)
1755 Wittington Place, Suite 340, Dallas, Texas 75234
(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, 2004, was
approximately $3,732,000. At March 31, 2004, the issuer had outstanding
approximately 977,000 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, 2003
Part I 3
Item 1: Business and Properties 3
Item 2: Description of Properties 12
Item 3: Legal Proceedings 12
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 7(a): Quantitative And Qualitative Disclosures
About Market Risk 21
Item 8: Financial Statements 21
Item 9: Changes In And Disagreements With Accountants
On Accounting And Financial Disclosure 21
Item 9(a): Controls and Procedures 22
Part III 23
Item 10: Directors And Executive Officers 23
Item 11: Executive Compensation 24
Item 12: Security Ownership Of Certain Beneficial
Owners And Management 27
Item 13: Certain Relationships And Related Transactions 28
Item 14: Principal Accounting Fees and Services 30
Part IV 31
Item 15: Exhibits, Financial Statement Schedules
And Reports On Form 8-K 31
Exhibits 38
Exhibit 14 Code of Ethics for Senior Financial Officers 38
Exhibit 21.1: Subsidiaries of the Company 40
Exhibit 23.1: Consent of Farmer, Fuqua & Huff, P.C. 41
Exhibit 23.2: Consent of Grant Thornton, LLP 42
Exhibit 31.1 Certification of Chief Executive Officer and
Chief Financial Officer Pursuant to
Rule 13a-14(a) or Rule 15d-14(a) 43
EXHIBIT 32.1: Certification of Chief Executive Officer and
Chief Financial Officer Pursuant to
Rule 13a-14(b), 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 44
PART I
ITEM 1: BUSINESS AND PROPERTIES
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Website Access to Reports
Through our Internet website, www.greenbriar.com, we make available free of
charge our annual report on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, and amendments to those reports filed or furnished pursuant
to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as
soon as reasonably practicable after we electronically file such material with,
or furnish it to, the Securities and Exchange Commission.
Overview and Background of Operations
Greenbriar Corporation, its subsidiaries and affiliates (the "Company") is
principally a real estate company which owns or leases retirement specific real
estate and an outlet shopping mall. In addition the Company owns oil and gas
leases The Company strives to enhance the value of these properties by proper
operations and marketing. The Company can then, if it wishes, sell or lease the
properties at their appreciated value.
As of March 31, 2004, the Company owns or leases three retirement communities in
three states. The Company operates two of the retirement communities with a
capacity of 162 residents and leases one community to a third party. The Company
owns an outlet shopping mall in Gainesville Texas with approximately 315,000
square feet of retail space available for lease. In addition the Company owns
approximately 200 oil wells in East Texas. These are low production wells with
maximum production limits of 20 barrels of oil per day. As of March 31, 2004
there are 50 wells in operation.
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 Oil and Gas Industry
Gaywood Oil & Gas, LLC, of which the Company is the sole member, is in a very
narrow niche of the oil and gas industry. Gaywood has approximately 200 oil
wells in Gregg and Rusk counties in Texas of which 50 were operating as of March
31, 2004. Gaywood has no natural gas leases. Gaywood's only gas production is
totally incidental to its oil production and has no significant value. Gaywood's
leases are all wells whose potential or actual production is low, averaging
slightly over four barrels per day in March 2004. Gaywood's operation of low
volume wells is only feasible if the price of oil is above $24 per barrel.
Gaywood is neither a refiner nor a retailer of oil products. It sells its entire
production to companies who, in turn, either resell or use the products for
their own purposes.
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The oil and gas industry has experienced significant commodity price volatility
in recent years. Price decreases in 2002 were driven by weather patterns, a
recession and actions by OPEC. Price increases in 2000 and again in 2003 were
driven in part by several years of accentuated "boom and bust" cycles of
drilling activity, combined with strong growth in demand for energy commodities
and continued unrest in the Middle East.
The Company has no strategy, as such, for the acquisition of oil and gas
properties. Gaywood was an unusual opportunity and the Company decided to pursue
this particular acquisition to enhance cash flow and operating income streams.
Business Strategy
In choosing properties to invest in the Company's strategy is to choose a
property that can achieve and sustain a strong competitive position within a
chosen market. The Company also seeks to continue to enhance the performance of
the properties it operates directly. In its senior living properties 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.
In its oil and gas properties the Company seeks to keep producing wells properly
maintained and to recondition and, where economically feasible, bring into
production non-operating leases it owns.
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.
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Personal Care Services - These services include providing assistance with
activities of daily living (the ADLs) such as ambulation, bathing, eating,
dressing, personal hygiene and grooming.
Wellness Services - These services include assistance with the
administration of medication and health monitoring, 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.
Retirement 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, 2004. 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)
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 2018 and bear interest at fixed and variable interest rates
ranging from 7.5% to 12% as of December 31, 2003
(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 to a third party.
Repair and Maintenance - The Company conducts routine repairs and maintenance,
as needed, of its properties on a regular basis. The Company has no other
current plans for significant expenditures relating to its existing properties
and considers them to be in good repair and working order.
5
Retirement Community Description
The Company's existing communities as of March 31, 2004 range in size from 41 to
114 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.
Retirement Operations
In properties 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.
6
Summary Oil Reserve Data
The following table sets forth summary information concerning Gaywood's proved
oil reserves on December 31, 2003, based on a report prepared by Haas Petroleum
Engineering Services, Inc., an independent consulting and engineering firm.
Reserves were determined using year-end product prices, held constant for the
life of the properties. Estimates of economically recoverable reserves and
future net revenues are based on a number of variables, which may differ from
actual results.
Proved and Developed Reserves December 31, 2003
Oil (Mbbl) 14,890.91
Productive Wells
The following table summarizes our gross and net interests in productive oil
wells at March 31, 2004. Net interests represented in the table are "working
interests" which bear the cost of operations. All wells are in the State of
Texas.
Gross Wells Net Wells
53 50
Oil Well Description
The Company's oil wells have all been "abandoned" by the larger oil companies
and their leases have devolved to other persons or entities. The Company has
ninety nine of these leases with a range of 67.63% to 80% of ownership. The
wells produce from 70 to 360 barrels per month.
Oil Well Operations
The Company's oil wells are maintained by third party contractors, its
production is hauled by third party contractors and the entire production is
sold under contract to a subsidiary of Black Hills Corporation. This contract is
renegotiated annually and is based on the average daily closing price of oil for
the previous month as published by Koch Supply & Trading plus a premium of $3.06
per barrel.
Quality Assurance
In retirement and assisted living 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 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..
7
Regular Community Inspections - Community inspections are conducted by corporate
personnel 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.
In oil production, quality is a matter of proper separation of crude oil from
saltwater. These processes are automated at each well and the Company is not
aware of any complaints as to the quality of its crude oil.
Marketing
In retirement and assisted living 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.
In its oil business the Company sells its production of crude oil through a
contract as described above. The Company has no marketing efforts or
responsibility in this facet of its business.
Government Regulation
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.
One of the communities the Company operates is not required to have a license
for its independent retirement operation. The other community is required to be
licensed by the state in which it operates.
Any community acquired by the Company must be correctly licensed as required by
its state and local laws and must be in compliance with the Americans with
Disabilities Act ("ADA"). Such community must also be in compliance with the
Fair Housing Amendments Act.
In compliance with underlying state bond financing, rents at one community in
Oregon must be approved by an agency of the state.
The operations of any facility gathering, transporting, processing or storing
natural gas and crude oil is subject to stringent and complex laws and
regulations pertaining to health, safety and the environment. As an owner or
operator of these facilities, the Company must comply with federal, state and
local laws that relate to air and water quality, hazardous and solid waste
8
management and disposal, and other environmental matters. Costs of operating oil
wells must incorporate compliance with environmental laws, regulations and
safety standards. Failure to comply with these laws and regulations may trigger
a variety of administrative, civil and potentially criminal enforcement
measures.
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.
Management is not aware of any non-compliance by the Company as regards
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. 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 the markets where the Company operates the level of competition
is has increased both from regional, national and local providers. 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 a material adverse
effect on the two properties the Company operates. 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 industry has
experienced a shortage of qualified professionals. The Company's operations
require some professionally certified (RN or LPN) services, primarily for
supervision and training of care staff. The Company has been able to retain the
services of an adequate number of professional third party contractors to staff
its communities appropriately and maintain its standards of quality care.
Insurance
The provision of personal 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 as regards dementia
care, offer residents a greater degree of independence in their daily lives.
This increased level of independence, however, may subject the resident and the
9
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
has diminished since 1999 and the costs of such insurance continues to escalate.
The Company also carries property insurance on each of its properties.
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
owned or leased properties. 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. The Company
is not aware of any such environmental liability. The Company believes that all
of its properties 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.
Control by Insiders
As of March 31, 2004, the Company's officers, directors and affiliated entities
owning more than 5% of the Company's outstanding stock owned approximately 62%
of the outstanding shares of Common Stock. Warwick Summit square, from
purchases, owns approximately 21% of the outstanding Common Stock of the
Company. 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 16 % of the outstanding
Common Stock of the Company. Victor L. Lund, a director of the Company and the
founder of Wedgwood Retirement Inns (a company acquired by the Company in 1996),
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beneficially owned approximately 12% of the outstanding shares of Common Stock.
Floyd Rhoades, as a result of the stock he received when the Company purchased
American Care Communities, Inc., beneficially owns approximately 6% of the
Company's outstanding stock. Gene S. Bertcher, Chairman of the Board of
Directors and Chief Executive Officer, from purchases owns approximately 7% 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
80,000 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) 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 (ii)
requiring holders of at least 80% of the outstanding Common Stock to join
together in requesting a special meeting of stockholders and (iii) 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, 2004, the Company employed 86 employees, including 39 full-time and
47 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.
Corporate Offices
The Company's principal office is approximately 2,500 square feet of leased
space in Dallas, Texas. The Company believes the leased space will meet the
Company's needs for the foreseeable future.
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ITEM 2: DESCRIPTION OF PROPERTIES
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See Item 1 for a discussion of properties owned or leased by the Company.
ITEM 3: LEGAL PROCEEDINGS
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Benetic Financial vs. Wedgwood et al:
This action is against a subsidiary of the Company as well as other corporate
and individual defendants. In 1993, Wedgwood Retirement Inns entered into a
financing arrangement with a third party lender. The plaintiff alleged that he
had a verbal brokerage agreement with Wedgwood and was entitled to a fee. The
Company acquired Wedgwood in 1996.
In a jury trial the plaintiff was awarded $150,000 on one count of his
complaint. However, the jury found for the defendants on all other counts. In
his final ruling the judge awarded the defendants legal fees that were in excess
of the judgment. The plaintiff appealed and on April 30, 2003 the California
Court of Appeals let the $150,000 stand but reversed the judge's award of legal
fees. Based upon the ruling of the Court of Appeals the defendants are obligated
for the judgment plus $165,093 in interest since 1993. The judgment is against
all the defendants as a group.
The defendants filed an appeal to the California Supreme Court but the appeal
was denied. There are no further legal defenses available. A 1995 sharing
arrangement exists whereby Wedgwood and Victor Lund, the former President of
Wedgwood and a current director of Greenbriar were obligated to pay 2/3 of any
judgment. Greenbriar had previously agreed to indemnify Mr. Lund for any losses
in this matter.
The Company has recorded its share of the loss in prior years.
Internal Revenue Service Pre-Assessment Letter
In December 1991 the Company sold four nursing homes to a not-for-profit
corporation in exchange for tax exempt bonds issued on behalf or the acquiring
corporation by government authorities. The bonds were issued in three lettered
series. The aggregate principal amount of the Series A bonds was $8,700,000, the
aggregate principal amount of the series B bonds was $1,000,000 and the
aggregate amount of the series C bonds was $6,700,000. Interest on the bonds was
payable semi-annually. A nationally recognized law firm opined that the interest
on the bonds would be tax-exempt.
In March 1992, pursuant to a plan promulgated and recommended by a nationally
recognized investment banking firm, the Series C bonds were converted to zero
coupon status and their value was enhanced by substituting higher grade
collateral. The substitute collateral, which consisted of zero coupon U.S.
Treasury obligations, was placed in trust to defease the Series C bonds, in
exchange for the underlying mortgage. The Series C bonds were then sold for
approximately $47,000,000. A gain was recorded equal to the proceeds received by
the Company of $6,252,000 after deducting transaction costs and the cost of the
higher grade collateral. A nationally recognized law firm opined that the
defeasance of the bonds would not adversely affect the tax exempt status.
In December 1992, again pursuant to a plan promulgated and recommended by a
nationally recognized investment banking firm, the Series A bonds were converted
to zero coupon status, their value enhanced by substituting zero coupon U.S.
12
Treasury obligations as collateral and the collateral placed in trust in
exchange for the mortgage underlying the Series A bonds in a transaction similar
to the sale of the Series C bonds. The Series A bonds were then sold for
approximately $20,000,000. A gain was recorded equal to the proceeds received by
the Company of $2,081,000 after deducting transaction costs and the cost of the
higher grade collateral.
On January 8, 2004 the Company was notified by the Internal Revenue Service
(IRS) in the form of a Section 6700 Pre-Assessment Letter that the IRS was
considering assessing penalties under Section 6700 of the Internal Revenue Code
as a result of the Company's organization or assistance in connection with the
issuance and sale of the Series A and Series C bonds.
In general, Section 6700 of the IRS Code imposes a penalty on any person or
organization who organizes or assists in organizing an entity or participates in
the sale of any interest in an entity and makes or furnishes or causes another
person to make or furnish a statement with respect to the allowably of any
deduction, the excludability of any income which the person knows or has reason
to know is false or fraudulent as to any material matter.
The penalty prescribed in Section 6700 is the lesser of 100% of the gross income
derived from the activity or $1,000 for each such activity. Each entity or
arrangement shall be treated as a separate activity.
If it is ultimately determined that the Company is subject to a fine that fine
would be the lesser of $1,000 per activity or the gross proceeds the Company
received. Effectively the fine would be calculated based upon a determination as
to what constitutes an activity. The IRS has informed the Company that the
Series A and C bonds were purchased by 266 individuals or entities. If the
penalty is computed by considering each sale an activity the maximum exposure to
the Company would be $267,000. However, neither Section 6700 nor, to the
Company's knowledge, relevant authorities specify what constitutes an activity.
The IRS has indicated that the $1,000 per activity should be computed in a
manner other than the number of individuals who purchased the bonds however they
have not indicated to the Company any basis or authority for their position. If
the IRS's assertions as to the number of activities exceeds 8,333 activities
then the Company believes the maximum exposure would be the total proceeds
received and income recorded of $8,333,000.
The transactions which the IRS is examining involved technically complex
financial and legal issues and were undertaken on the advice of and reliance on
the investment banking firm, the law firms that issued the tax exempt bond legal
opinions and other professionals. The Company believed in 1992 and still
believes that its actions were appropriate in all respects.
The Company and the IRS are engaged in negotiations regarding settling this
twelve year old matter. However, there is no assurance that any settlement will
be achieved. In the absence of a settlement, the Company intends to contest the
13
IRS's position in court. Any litigation may be expensive and time consuming.
However, if this matter is litigated the Company believes that it will prevail
on the merits. Should it not prevail in this matter the Company intends to
pursue actions against the professionals who advised the Company regarding the
sale of the bonds.
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 December 16, 2003. At that meeting the
shareholders elected three new 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 January 2002 stock dividend and the October 2003 stock split
2003 2002
High Low High Low
----------- ---------- ----------- ----------
First Quarter $8.30 7.25 $24.50 12.50
Second Quarter 9.00 7.30 21.00 8.00
Third Quarter 8.00 4.30 9.50 7.50
Fourth Quarter 13.00 2.60 10.00 5.50
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, 2004, was $3.82 per
share. As of March 31, 2004, there were 478 holders of record of the Company's
common stock.
ITEM 6: SELECTED FINANCIAL DATA
- -------------------------------
2003 2002 2001 2000 1999
Operating revenue $ 5,034 $ 4,422 $ 23,568 $ 33,482 $ 33,587
Operating expenses 5,811 6,767 27,543 6,378 33,606
Operating profit (loss) (777) (2,345) (3,975) (10,115) (19)
Earnings (loss) from continuing
operations before income taxes
$ 222 $ (2,996) $ 9,559 $ (10,115) $ 709
Income tax expense 749 2,824 -- --
Earnings (loss) from
continuing operations
222 (3,745) 6,735 (10,115) 709
Loss from
discontinued operations
(4,628) (317) (508) (627)
NET EARNINGS (LOSS)
222 (8,373) 6,418 (10,623) 82
15
Earnings (loss) per common
Share-basic and diluted
$ 0.31 $ (23.32) $ 15.53 $ (39.17) $ (12.33)
BALANCE SHEET DATA:
Total assets $ 18,131 $ 12,624 $ 44,022 $ 102,588 $ 119,908
Long-term debt 2,053 8,479 16,693 50,887 50,477
Total liabilities 15,577 11,273 34,753 68,944 69,425
Preferred stock redemption 26,988 27,763
obligation
Total stockholders' equity 2,554 1,351 9,269 6,656 22,720
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Overview
As of March 31, 2004 the Company owns one assisted living community and leases
one community in two states with total capacity of 204 residents.. In addition
the Company owns one community that is operated by an independent third party
with a capacity of 41 residents. The Company also owns 200 oil wells in East
Texas and a 315,000 square foot outlet mall in Gainesville, Texas
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 several years 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
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 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
16
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 2003 as Compared to Fiscal 2002
Revenues and Operating Expenses from Assisted Living Operations: Revenues were
$4,585,000 in 2003 compared to $4,422,000 in 2002. Community operating expenses,
which consist of assisted living operations expense, lease expense and
depreciation and amortization, were $4,131,000 in 2003 as compared to $3,872,000
in 2002.
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. On
November 1, 2002 the Company reacquired a property that had been previously
leased to a third party.
On a same store basis for properties held for all of 2003 and 2002 Revenues were
$3,587,000 in 2003 and $3,500,000 in 2002. Community operating expenses were
$3,149,000 in 2003 and $3,145,000 in 2002.
Revenues and Operating Expenses from Oil & Gas Operations: The Company acquired
it's oil & gas operations effective August 1, 2003. Revenues were $449,000,
operating expenses were $400,000 and depletion and depreciation was $41,000.
Corporate General and Administrative Expenses: These expenses were $1,111,000 in
2003 as compared to $2,329,000 in 2002. 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. The downsizing also resulted in an overall decrease in almost
all general and administrative cost categories.
Write-off of Impaired Assets and Related Expenses: During 2002 the Company wrote
down the recorded value of a property it was attempting to sell.
Interest and Dividend Income Interest and dividend income was $304,000 in 2003
as compared to $412,000 in 2002. The decrease in interest and dividend income is
a result of a reduction in the notes receivable held by the Company
Interest Expenses: These expenses decreased to $705,000 in 2003 as compared to
$840,000 in 2002. The decrease is due primarily to the reduction in the number
of Communities.
Gain on Sale of Assets: In 2001 the Company sold a property and received
proceeds of both cash and a bond bearing interest at 9.5%. The payment of both
principal and interest on the bond was based exclusively on the cash flow from
the property sold. For financial statement purposes the bond was valued at zero.
In August 2003 the Company exchanged the bond for 100% of Gaywood Oil and Gas
LLC. Gaywood was valued by independent engineers as having a fair market value
of $1,169,000 which was recorded as a gain by the Company. In September 2003 the
Company sold land it was holding for $125,000 cash and recorded a loss of
$111,000 on the sale.
17
In November 2002 the Company sold its 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 ( Expense): Other income was $342,000 in 2003 and ($1,153,000) in
2002
Other income in 2003 includes reimbursement of a prior year insurance claim, the
settlement of a lawsuit as well as settlements for certain prior year accounts
payable.
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. Operating expenses for the six properties were approximately
$5,325,000 in 2002.
The loss on sale of these six properties in 2002 was $4,001,000which includes
income tax expense of $440,000.
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.
18
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 $155,052 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.
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 Expense: 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 Assets: In August 2003 the Company exchanged a bond, which had a
zero value for accounting purposes for 100% of Gaywood Oil & Gas LLC. Gaywood
was valued by independent engineers as having a fair market value of $1,169,000
which was recorded as a gain by the Company. In September 2003 the Company sold
land it was holding for $125,000 cash and recorded a loss of $111,000 on the
sale
In November 2002 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.
19
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 $4,001,000 which includes
income tax expense of $440,000.
Liquidity and Capital Resources
At December 31, 2003 the Company had current assets of $3,421,000 and current
liabilities of $12,328,000.
In December 2003 the Company acquired the Gainesville Outlet Mall in
Gainesville, Texas. The Company paid approximately $800,000 in cash and a short
term obligation to pay the seller approximately $5,571,000. The Company has
negotiated long term financing and anticipates closing on or before April 30,
2004.
Also included in current liabilities is an obligation of principal and accrued
interest to Sylvia Gilley, wife of the former President of the Company, for
$2,580,000. The terms of this obligation are similar to that of preferred stock
whereby the Company can only pay this obligation out of available earned
surplus.
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
20
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.
ITEM 7(A): 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
--------------------
Effective February 5, 2004, the Company's Board of Directors engaged the Plano,
Texas firm of Farmer, Fuqua& Huff, P.C. as the independent accountant to audit
Greenbriar's financial statements. During the Registrant's two most recent
fiscal years, and any subsequent interim period, Greenbriar did not consult with
Farmer, Fuqua & Huff, PC. or any of its members about the application of
accounting principles to any specified transaction or any other matter. The
engagement effective February 5, 2004, of Farmer, Fuqua & Huff, P.C. as a new
independent accountant for Greenbriar necessarily results in the termination or
dismissal of the principal accountant which audited Greenbriar's financial
statements in the past two fiscal years ended December 31, 2001 and 2002, Grant
Thornton, LLP. During the Registrant's two most recent fiscal years and any
subsequent interim period, Grant Thornton's report on Greenbriar's financial
statements for those two years did not contain an adverse opinion or disclaimer
of opinion, nor was such opinion qualified or modified as to uncertainty, audit
scope or accounting principles, and no disagreement existed between the
Registrant and Grant Thornton concerning any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure. The
decision to change accountants was approved by the Company's Audit Committee
consisting of Dan Locklear, Chairman, James Huffstickler and Victor Lund.
21
ITEM 9(A): 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.
22
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS
- ----------------------------------------------
Term Expires in 2004
Gene S. Bertcher Mr. Bertcher was elected President and Chief Executive
Age 55 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
Roz Campisi Beadle Ms. Beadle has a background in public relations and
Age 47 marketing. She is self employed and has, in the past five
years, worked with III Forks Restaurant and RB Ranch. Ms.
Beadle is also extremely active in various civic and
community services and is currently working with the
Congressional Medal of Honor Society and on the Medal of
Honor Host City Committee (Gainesville, Texas, USA). Ms.
Beadle is a Cutting Horse breeder specializing in the
registration, buying, selling and veterinary care of the
breed.
James E. Mr. Huffstickler is Chief Financial Officer of Sunchase
Huffstickler America, Ltd., a multi-state property management company. He
Age 61 is a graduate of the University of South Carolina and has
worked for Southmark Management, Inc., a nationwide real
estate management company. Mr. Huffstickler is a certified
public accountant.
Dan Locklear Mr. Locklear is chief financial officer of Sunridge
Age 51 Management Group, a real estate management company. Mr.
Locklear has worked for Johnstown Management Company, Inc.
and Trammel Crow Company. Mr. Locklear is a certified public
accountant and a licensed real estate broker in the State of
Texas.
Term Expires in
2005
Victor L. Lund Mr. Lund has been a director of the Company since 1996 when
Age 75 a company he founded, Wedgwood Retirement Inns, Inc.
(Wedgwood), became a wholly owned subsidiary of the Company.
At the time the Company acquired Wedgwood, Mr. Lund was
Chairman of the Board, President and CEO
23
Oscar Smith Other Executive Officers and Business Experience Mr. Smith
Age 61 has been Secretary of the Company 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 Dan Locklear - Chairman
Roz Campesi Beadle
James Huffstickler
Compensation James E. Huffstickler, Chairman
Roz Beadle
Dan J. Locklear
Victor L. Lund
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.
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, 2003, 2002 and 2001 to the
Chief Executive Officer of the Company and to the other executive officers of
the Company whose total annual salary in 2003 exceeded $100,000, the number of
options granted to any of such persons during 2003 and the value of the
unexercised options held by any of such persons on December 31, 2003.
Summary Compensation Table
Long Term Compensation-
Number of
Name and Shares of
Principal Common Stock
Position Annual Underlying All
Compensation- Options Other
Year Salary Compensation(1)
- ------------------------------ ---- -------- -------- --------
Gene S. Bertcher, 2003 134,000 -- $ 6,500
Chairman, President and Chief 2002 14,000 -- 6.500
Executive Officer since 1/3/03 2001 155,000 -- 8,000
and Chief Financial Officer
James R. Gilley, 2002 $ 12,000 -- $ 5,500
Chairman, President and Chief 2001 386,000 10,000 8,000
24
Executive Officer
(1) Constitutes directors' fees paid by the Company to the named individuals.
Option Grants Table
(Option Grants in Last Fiscal Year)
- --------------------------- ------------------- ------------------------- ------------------ -------------------
Percent of
Number of Total Options Exercise or
Securities Granted to Employees in Base Price Expiration
Name Underlying Fiscal Year Per Share Date
Options
Granted
- --------------------------- ------------------- ------------------------- ------------------ -------------------
NONE
- --------------------------- ------------------- ------------------------- ------------------ -------------------
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
Shares Acquired Value Options at 2002 FY-End FY-End
---------------------- ------
Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ---------------------- ------------------- -------------- --------------------------------- -------------------------------
- ---------------------- ------------------- -------------- -------------- ------------------ -------------- ----------------
NONE
- ---------------------- ------------------- -------------- -------------- ------------------ -------------- ----------------
Stock Option Plan
The Board of Directors administers the Company's 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. Under the two 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's stock plans
total 50,000 shares of common stock under the 1997 Plan and 50,000 shares of
common stock under the 2000 Plan. As of March 31, 2004 options have been granted
for all shares reserved under the 1997 Plan and 10,000 shares for the 2000 Plan.
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 . Performance Graph The following graph
compares the cumulative total return on a $100 investment in the company's
common stock on December 31, 1999 through December 31, 2003, based on the
company's closing stock price on December 31, for each of those years. The same
information is provided using the Standard & Poor's 500 index and for an
industry peer group1.
[GRAPHIC OMITTED][GRAPHIC OMITTED]
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of March 31, 2004, 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 2003 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, the company's one for four stock dividend on
February 4, 2002 and the Company's 2 for 1 stock split on October 20, 2003.
Common Stock
------------------------------------
Name and Address Number Percent
of Beneficial Owner of of
Shares Class
- -----------------------------------------------------------------
Sylvia M. Gilley(1 & 2) 186,884 17.7%
6211 Georgian Court
Dallas TX 75240
Victor L. Lund(3) 121,496 12.2%
816 NE 87th Avenue
Vancouver WA 98664
Floyd B. Rhoades(4) 78,023 7.7%
95 Argonaut Street
Aliso Viego CA 92656
Gene S. Bertcher(5) 72,811 7.3%
1755 Wittington Place
Dallas TX 75234
Warwick Summit Square, Inc..(6) 200130 20.2%
TacCo Financial, Inc.(7) 28,596 2.9%
One Hickory Center
1800 Valley View Lane
Dallas TX 75234
International Health Products, 9,970 1.0%
Inc.(7)
One Hickory Center
1800 Valley View Lane
Dallas TX 75234
All executive officers and 194,307 19.5%
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 92,284 shares of common stock owned by JRG Investments Co.,
Inc., a corporation wholly owned by Sylvia M. Gilley ("JRG"); 11,000 shares of
common stock owned by a grantor trust for the benefit of Sylvia M. Gilley,
53,600 shares of common stock owned of record by Mrs. Gilley options to James R.
Gilley to purchase 20,000 shares of common stock at $6.90 per share exercisable
through December 31, 2009; options to James R. Gilley to purchase 20,000 shares
of common stock at $3.75 per share, exercisable through December 31, 2010;
options to James R. Gilley to purchase 20,000 shares of common stock at $6.40
per share, exercisable through December 31, 2011;.
The shares owned by JRG are pledged to TacCO Financial, Inc.
(formerly known as Institutional Capital Corporation and more 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 121,496 shares of common stock owned by Mr. Lund.
(4) Consists of 58,023 shares of common stock owned by Mr. Rhoades, options to
Mr., Rhoades to purchase 20,000 shares of common stock at $175.00 per share, and
58 shares owned by his spouse. Mr. Rhoades disclaims beneficial ownership of
shares owned by his spouse.
(5) Consists of 72,811 shares of common stock owned by Mr. Bertcher
(6) Consists of 200130 shares of common stock owned by Warrick Summit Square,
Inc (Warrick).
(7) Based on a Schedule 13D, dated March 17, 2004, 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 acknowledge they filed such Schedule 13D as a "group".
According to the Schedule 13D, TacCo Financial, Inc. may be deemed to
beneficially own 28,596 shares. and International Health Products, Inc. may be
deemed to beneficially own 9,970 shares. The Schedule 13D further indicates that
Warrick has a note payable to a subsidiary of TacCo Financial, Inc. in the
amount of $1,752,984.The note is secured by a pledge of all the outstanding
shares of Warwick .
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 1999 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 sales contract
that obligated the lessee 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 Sylvia Gilley to transfer its 56% interest to the Sylvia Gilley
in exchange for a reduction in the debt of $1,120,000, which reduced its
obligation to Sylvia Gilley 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: PRINCIPAL ACCOUNTING FEES AND SERVICES
Audit Fees
Farmer, Fuqua & Huff's fees for our 2003 annual audit and review of interim
financial statements is estimated to be $40,000.
All Other Fees
Grant Thornton's fees for all other professional services rendered to the
Company during 2003 were $136,783, including audit related services of $94,259
and non-audit services of $42,524. Audit related services included fees for
statutory audits, lender required audits and accounting consultations. Non-audit
services included fees for tax preparation and tax consultations.
Audit Committee
Under the Sarbanes-Oxley Act of 2002 (the "SO Act"), and the rules of the
Securities and Exchange Commission (the "SEC"), the Audit Committee of the Board
of Directors is responsible for the appointment, compensation and oversight of
the work of the independent auditor. The purpose of the provisions of the SO Act
and the SEC rules for the Audit Committee role in retaining the independent
auditor is two-fold. First, the authority and responsibility for the
appointment, compensation and oversight of the auditors should be with directors
who are independent of management. Second, any non-audit work performed by the
auditors should be reviewed and approved by these same independent directors to
ensure that any non-audit services performed by the auditor do not impair the
independence of the independent auditor. To implement the provisions of the SO
Act, the SEC issued rules specifying the types of services that an independent
may not provide to its audit client, and governing the Audit Committee's
administration of the engagement of the independent auditor. As part of this
responsibility, the Audit Committee is required to pre-approve the audit and
non-audit services performed by the independent auditor in order to assure that
they do not impair the auditor's independence. Accordingly, the Audit Committee
has adopted a pre-approval policy of audit and non-audit services (the
"Policy"), which sets forth the procedures and conditions pursuant to which
services to be performed by the independent auditor are to be pre-approved.
Consistent with the SEC rules establishing two different approaches to
pre-approving non-prohibited services, the Policy of the Audit Committee covers
Pre-approval of audit services, audit-related services, international
administration tax services, non-U.S. income tax compliance services, pension
and benefit plan consulting and compliance services, and U.S. tax compliance and
planning. At the beginning of each fiscal year, the Audit Committee will
evaluate other known potential engagements of the independent auditor, including
the scope of work proposed to be performed and the proposed fees, and the
approve or reject each service, taking into account whether services are
permissible under applicable law and the possible impact of each non-audit
service on the independent auditor's independence from management. Typically, in
addition to the generally pre-approved services, other services would include
due diligence for an acquisition that may or may not have been known at the
beginning of the year. The Audit Committee has also delegated to any member of
the Audit Committee designated by the Board or the financial expert member of
the Audit Committee responsibilities to pre-approve services to be performed by
the independent auditor not exceeding $25,000 in value or cost per engagement of
audit and non-audit services, and such authority may only be exercised when the
Audit Committee is not in session.
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 Farmer, Fuqua & Huff, P.C......................F-1
Report of Grant Thornton, LLP............................F-1a
Consolidated Balance Sheets..............................F-2
Consolidated Statement of Operations.....................F-4
Consolidated Statement of Changes in Stockholders' EquityF-5
Consolidated Statements of Cash Flows....................F-6
Notes to Consolidated Financial Statements...............F-8
(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.
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).
25
26
10.4 Form of Umbrella Agreement between Greenbriar Corporation, James R. Gilley and Jon Harder,
Sunwest Management, Inc. et al.
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).
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.
14* Code of Ethics for Senior Financial Officers
16.1 Letter from Grant Thornton, LLP agreeing with statements filed with the Company's Form
8-K, dated February 9, 2004 and incorporated herein by reference.
21.1* Subsidiaries of Registrant.
23.1* Consent of Farmer, Fuqua & Hunt, P.C.
23.2* Consent of Grant Thornton, LLP
31.1* Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Rule
13a-14(a) or Rule 15d-14(a)
32.1* Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Rule
13a-14(b), 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
99.1 Press Release regarding a pre-assessment letter from the
Internal Revenue Service dated January 8, 2004, filed
with the Company's Form 8-K on January 8, 2004, and
incorporated herein by reference.
* Filed herewith.
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 ORPORATION
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/ Gene S. Bertcher___________
--------------------
Gene S. Bertcher, President, Chief
Executive Officer and Director
April 11, 2003 ___/s/ Roz Campesi Beadle________
----------------------
Roz Campesi Beadle, Director
April 11, 2003 ___/s/ James Huffstickler__________
James Huffstickler, Director
April 11, 2003 ___/s/ Dan Locklear______________
Dan Locklear, Director
April 11, 2003 ___/s/ Victor Lund_______________
Victor. Lund, Director
27
Report of Independent Certified Public Accountants
Board of Directors and Stockholders
Greenbriar Corporation
We have audited the accompanying consolidated balance sheet of Greenbriar
Corporation (a Nevada corporation) and subsidiaries as of December 31, 2003 and
the related consolidated statements of operations, changes in stockholders'
equity and cash flows for the year ended December 31, 2003. 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 audit 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, 2003, and the consolidated
results of their operations and their consolidated cash flows for the year ended
December 31, 2003, in conformity with accounting principles generally accepted
in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note P to the
consolidated financial statements, the Company was notified by the Internal
Revenue Service of potential penalties that may be assessed against the Company
as a result of the sale of certain bonds in 1992. The Company is currently in
discussions with the Internal Revenue Service to resolve the matter. The Company
cannot predict the outcome of these discussions, nor the ultimate amount of
penalties, if any, which may be assessed. This condition raises substantial
doubt about the Company's ability to continue as a going concern. These
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ FARMER, FUQUA & HUFF, P.C.
Plano, Texas
April 13, 2004
Report of Independent Certified Public Accountants
Board of Directors and Stockholders
Greenbriar Corporation
We have audited the accompanying consolidated balance sheet of Greenbriar
Corporation (a Nevada corporation) and subsidiaries as of December 31, 2002, and
the related consolidated statements of operations, changes in stockholders'
equity and cash flows for each of the two 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 the consolidated
results of their operations and their consolidated cash flows for each of the
two 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 18, 2003
Greenbriar Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
December 31,
ASSETS 2003 2002
-------- --------
CURRENT ASSETS
Cash and cash equivalents $ 688 $ 661
Accounts receivable - trade 100 22
Notes receivable 2,435 1,238
Other current assets, net 198 323
-------- --------
Total current assets 3,421 2,244
NOTES RECEIVABLE, from sale of properties 4,107 7,997
Less deferred gains (3,720) (6,127)
-------- --------
387 1,870
PROPERTY AND EQUIPMENT, AT COST
Land and improvements 2,758 678
Buildings and improvements 9,410 6,850
Equipment and furnishings 1,317 1,387
Proven oil and gas properties (full cost method) 1,361 --
-------- --------
14,846 8,915
Less accumulated depreciation, depletion, and amortization (2,233) (2,282)
-------- --------
12,613 6,633
DEFERRED INCOME TAX BENEFIT 1,161 1,161
DEPOSITS 232 311
OTHER ASSETS, NET 317 405
-------- --------
$ 18,131 $ 12,624
======== ========
F-2
Greenbriar Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS - CONTINUED
(Amounts in thousands, except share amounts)
December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 2003 2002
-------- --------
CURRENT LIABILITIES
Current maturities of long-term debt, including amounts
To related parties of $2,783,000 $ 4,690 $ 113
Current notes payable 5,571 --
Accounts payable - trade 503 405
Accrued expenses 633 367
Other current liabilities 931 668
-------- --------
Total current liabilities 12,328 1,553
LONG-TERM DEBT 2,053 8,479
INVESTMENT IN AFFILIATE -- 46
DEFERRED GAIN 740 740
OTHER LONG-TERM LIABILITIES 456 455
-------- --------
Total liabilities 15,577 11,273
CONTINGENCIES -- --
STOCKHOLDERS' EQUITY
Preferred stock (liquidation value of $100) 1 1
Common stock, $.01 par value; authorized, 4,000,000
shares; issued and outstanding, 977,000 shares in 2003
and 688,000 in 2002 10 7
Additional paid-in capital 55,966 54,988
Accumulated deficit (53,423) (53,645)
-------- --------
2,554 1,351
-------- --------
$ 18,131 $ 12,624
======== ========
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,
2003 2002 2001
-------- -------- --------
Revenue
Assisted living operations $ 4,585 $ 4,422 $ 23,568
Oil and gas operations 449 -- --
-------- -------- --------
5,034 4,422 23,568
-------- -------- --------
Operating expenses
Assisted living operations 2,522 2,233 15,006
Oil and gas operations 400 -- --
Lease expense 1,412 1,618 2,391
Depreciation, depletion, and amortization 331 321 2,035
Termination of employment contracts -- -- 1,349
General and administrative 1,111 2,329 4,875
Management fees 35 -- --
Write-down of assets -- 266 1,887
-------- -------- --------
5,811 6,767 27,543
-------- -------- --------
Operating loss (777) (2,345) (3,975)
Other income (expense)
Interest and dividend income 304 412 212
Interest expense (705) (840) (3,280)
Net gain on sale of assets 1,058 930 --
Other income (expense), net 342 (1,153) 16,602
-------- -------- --------
999 (651) 13,534
-------- -------- --------
Earnings (loss) before income taxes 222 (2,996) 9,559
Income tax expense -- 749 2,824
-------- -------- --------
Earnings (loss) from continuing operations 222 (3,745) 6,735
Discontinued operations
Loss from operations -- (627) (317)
Loss on disposal, including taxes of $440 -- (4,001) --
-------- -------- --------
Loss from discontinued operations -- (4,628) (317)
-------- -------- --------
NET EARNINGS (LOSS) 222 (8,373) 6,418
Preferred stock dividend requirement -- (4) (160)
-------- -------- --------
Net earnings (loss) allocable to common stockholders $ 222 $ (8,377) $ 6,258
======== ======== ========
The accompanying notes are an integral part
of these statements.
F-4
Greenbriar Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS - Continued
(Amounts in thousands, except share amounts)
Year ended December 31,
2003 2002 2001
----------- ----------- -----------
Basic and diluted earnings (loss) per share
Continuing operations $ .31 $ (4.88) $ 8.15
Discontinued operations -- (6.79) (.39)
----------- ----------- -----------
Net earnings (loss) per share $ .31 $ (11.67) $ 7.76
=========== =========== ===========
Weighted average number of common shares outstanding:
Basic and diluted
706,000 718,000 806,000
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)
Preferred stock Common stock
-------------------- --------------------
Shares Amount Shares Amount
-------- -------- -------- --------
Balance at January 1, 2001 2,521 254 730 7
Accretion of redemption obligation -
preferred stock -- -- -- --
Conversion of preferred stock to
common stock (1,845) (185) 106 1
Conversion of preferred stock
to debt (675) (68) -- --
Dividends on preferred stock -- -- -- --
Common stock acquired -- -- (118) (1)
Net earnings -- -- -- --
-------- -------- -------- --------
Balance at December 31, 2001 1 1 718 7
Write-off of stock purchase notes receivable -- -- (30) --
Dividend on preferred stock -- -- -- --
Other -- -- -- --
Stock purchase notes receivable reclassified
as a reduction of related party debt -- -- -- --
Net loss -- -- -- --
-------- -------- -------- --------
Balance at December 31, 2002 1 1 688 7
Dividend on preferred stock -- -- -- --
Conversion of obligation to common stock -- -- 23 --
Common stock acquired -- -- (5) --
Common stock issued -- -- 271 3
Net earnings -- -- -- --
-------- -------- -------- --------
Balance at December 31, 2003 1 $ 1 977 $ 10
======== ======== ======== ========
The accompanying notes are an integral part
of this statement.
F-5
Greenbriar Corporation and Subsidiaries
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Amounts in thousands)
Stock
Additional purchase
paid in Accumulated notes
capital deficit receivable Total
-------- -------- -------- --------
Balance at January 1, 2001 60,288 (51,526) (2,367) 6,656
Accretion of redemption obligation -
preferred stock (179) -- -- (179)
Conversion of preferred stock to
common stock 184 -- -- --
Conversion of preferred stock
to debt (3,307) -- -- (3,375)
Dividends on preferred stock -- (160) -- (160)
Common stock acquired (90) -- -- (91)
Net earnings -- 6,418 -- 6,418
-------- -------- -------- --------
Balance at December 31, 2001 56,896 (45,268) (2,367) 9,269
Write-off of stock purchase notes receivable (1,908) -- 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 54,988 (53,645) -- 1,351
Dividend on preferred stock -- -- -- --
Conversion of obligation to common stock -- -- -- --
Common stock acquired (9) -- -- (9)
Common stock issued 987 -- -- 990
Net earnings -- 222 -- 222
-------- -------- -------- --------
Balance at December 31, 2003 $ 55,966 $(53,423) $ -- $ 2,554
======== ======== ======== ========
Greenbriar Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
Year ended December 31,
--------------------------------
2003 2002 2001
-------- -------- --------
Cash flows from operating activities
Net earnings (loss) $ 222 $ (8,373) $ 6,418
Adjustments to reconcile net earnings (loss) to net
cash provided by (used in) operating activities
Depreciation and amortization 330 321 2,329
(Gain) loss from affiliate (131) 612 --
(Gain) loss on sale of properties (1,058) 3,561 (16,635)
Employment contract termination -- -- 1,349
Write down of impaired assets -- 266 1,887
Deferred income taxes -- 1,189 2,400
Changes in operating assets and liabilities
Accounts receivable - trade (45) 395 252
Other current and noncurrent assets 174 (927) 809
Accounts payable and other liabilities 22 (929) (1,391)
-------- -------- --------
Net cash provided by (used in)
operating activities (486) (3,885) (2,582)
Cash flows from investing activities
Purchase of property and equipment (1,225) (285) (24,294)
Net repayment of notes receivable 334 -- --
Proceeds from sale of investments -- 1,098 --
Purchase of investments -- -- (1,098)
Proceeds from sales of properties 126 7,460 33,550
-------- -------- --------
Net cash provided by (used in)
investing activities (765) 8,273 8,158
The accompanying notes are an integral part
of these statements.
F-7
Greenbriar Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
(Amounts in thousands)
Year ended December 31,
---------------------------------------------
2003 2002 2001
-------- -------- --------
Cash flows from financing activities
Proceeds from common stock issuance 792 -- --
Proceeds from borrowings 500 1,730 15,788
Payments on debt (90) (6,699) (18,045)
Distributions from equity partnership's
financing cash flow 85 -- --
Dividends on preferred stock -- (4) (160)
Repurchase of common stock (9) -- --
Extinguishment of preferred stock redemption obligation -- -- (4,200)
-------- -------- --------
Net cash provided by (used in)
financing activities 1,278 (4,973) (6,617)
-------- -------- --------
Net increase (decrease) in cash
and cash equivalents 27 (585) (1,041)
Cash and cash equivalents at beginning of year 661 1,246 2,287
-------- -------- --------
Cash and cash equivalents at end of year $ 688 $ 661 $ 1,246
======== ======== ========
F-8
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, its subsidiaries and affiliates (the "Company") is
principally a real estate company which owns or leases retirement specific
real estate and an outlet shopping mall. In addition the Company owns oil
and gas leases. The Company strives to enhance the value of these
properties by proper operations and marketing. The Company can then, if it
wishes, sell or lease the properties at their appreciated value.
As of December 31, 2003, the Company owns or leases three retirement
communities in three states. The Company operates two of the retirement
communities with a capacity of 162 residents and leases one community to a
third party. The Company owns an outlet shopping mall in Gainesville, Texas
with approximately 315,000 square feet of retail space available for lease.
In addition the Company owns approximately 200 oil wells in East Texas.
These are low production wells with maximum production limits of 20 barrels
of oil per day. As of March 31, 2004 there are 50 wells in operation.
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.
F-9
Greenbriar Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE A - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
Continued
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.
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, 2002 and 2003.
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.
F-10
NOTE A - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
Continued
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 2003 and 2001, are exercisable
immediately, and expire 5 and 10 years from date of grant, respectively.
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.
Reported and pro forma net earnings (loss) and net earnings (loss) per
share amounts are set forth below (in thousands, except per share data):
2003 2002 2001
------- ------- -------
Net earnings (loss) allocable to common stockholders
As reported $ 222 $(8,377) $ 6,258
Deduct: total stock-based compensation under
fair value based method for all awards (43) (464) (369)
------- ------- -------
Pro forma $ 179 $(8,841) $ 5,889
======= ======= =======
Net earnings (loss) per share
As reported $ .31 $(11.67) $ 7.76
Pro forma $ .25 $(12.31) $ 7.31
The fair value of these options was estimated at the date of grant during
2003 and 2001 using the Black-Scholes option pricing model with the
following weighted-average assumptions: no dividends; expected volatility
of 20 percent in 2003, and 317 percent in 2001; risk-free interest rates of
4.24 percent for 2003, 5.0 percent for 2001; and weighted average expected
lives of 5 years for 2003 and 6.8 years for 2001.
F-11
NOTE A - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
Continued
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 2003,
2002 and 2001, stock options for approximately 140,000, 280,000, and
280,000 shares, respectively, 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.
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 and a two-for-one stock split on
October 31, 2003. 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.
F-12
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.
In December 2003, the FASB issued a revised 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 December 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
March 15, 2003, to variable interest entities in which an enterprise holds
a variable interest that it acquired before January 1, 2004. Our
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-13
NOTE B - CASH FLOW INFORMATION
Supplemental information on cash flows is as follows (in thousands):
Year ended December 31,
------------------------
2003 2002 2001
------ ------ ------
Interest paid $ 515 $2,215 $4,958
Income taxes paid -- 129 82
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
Notes given in connection with purchase of property 5,804 -- --
Common stock received in payment of note receivable -- -- 80
Common stock received in settlement of preferred stock
obligation -- -- 11
Common stock issued in connection with satisfaction
of note to executive officer 198 -- --
Purchase of oil and gas property in exchange
for note receivable 1,169 -- --
NOTE C - DEFERRED GAINS ON SALE OF PROPERTY
As a result of the sale of two communities in 2001 the Company holds
tax-exempt notes for a total of $4,030,000 bearing interest at 9.5%. The
notes mature on April 1, 2032, and August 1, 2031 respectively.
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 $3,720,000 and $6,127,000 in 2003 and 2002,
respectively. The deferred gains and interest income will be recognized as
cash is received.
F-14
NOTE D - EMPLOYMENT CONTRACT TERMINATIONS
In January 1997, the Company negotiated employment contracts with James
Gilley (the then Chief Executive Officer) and Gene Bertcher (the then Chief
Financial Officer) 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 Gilley and two years salary for Bertcher. 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.
In 2002, the notes were reduced by $881,600 as an offset for amounts due
the company. During 2003, the note to Bertcher was satisfied by issuing
stock in the amount of $197,809, net of discount of $29,591. At December
31, 2003, the balance of the notes payable to Gilley, net of remaining
discount of $103,000, was $528,000.
NOTE E - 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 income of $131,733 in 2003 and losses of $692,338 and
$95,947 for 2002 and 2001, respectively. These amounts are included in
other income (expense), net in the accompanying financial statements.
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-15
NOTE E - 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. The Company
will realize its $577,000 (56%) portion of the $944,000 upon collection of
the notes held by CREI. The notes are due September 30, 2004.
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-17
NOTE E - AFFILIATED PARTNERSHIPS - Continued
Following are unaudited condensed financial statements of CREI at December
31, 2002 and 2003 and the years ended December 31, 2002 and December 31,
2003(in thousands):
Balance Sheets
2003 2002
------- -------
Current assets $ 63 $ 67
Notes receivable 994 994
Other assets 165 171
------- -------
$ 1,222 $ 1,232
======= =======
Current liabilities $ 228 $ 248
Deferred gain 994 994
------- -------
1,222 1,242
Partners' equity (deficit) 142 (10)
Distributions (142) --
------- -------
$ 1,222 $ 1,232
======= =======
Statements of Operations
Revenue $ 164 $ 2,233
Expenses
Operating -- 1,284
Depreciation -- 747
General and administrative 12 111
Interest -- 1,328
------- -------
152 3,470
------- -------
Gain on sale of properties -- 1,322
------- -------
Net income $ 152 $ 85
======= =======
F-18
NOTE F - 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, 2003 and 2002:
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 G - ACQUISITION AND SALE OF ASSETS
ACQUISITION OF GAYWOOD OIL AND GAS, LLC
Effective August 1, 2003 the Company acquired Gaywood Oil & Gas, LLC
(Gaywood) a company that has oil and gas leases in the East Texas Field.
The oil wells in this field have low but steady oil production. The Texas
Railroad Commission, which regulates the oil & gas industry in Texas,
limits production in this field to 20 barrels of oil per day for each
operating well. There are approximately 200 existing wells on the leases
owned by Gaywood. At December 31, 2003 Gaywood had 50 operating wells,
generating approximately 4,000 barrels of oil per month.
Greenbriar has elected to account for it's oil and gas operations using the
full cost method of accounting.
Gaywood was formed and acquired the leases in October 2002 however the
production was insignificant until January of 2003. The following pro forma
financial information reflects Greenbriar as if Gaywood had been acquired
on January 1, 2003.
Twelve
Months
Ended
December 31, 2003
-----------------
Revenue $5,723,000
Net Earnings $ 247,000
Net Earnings per share $ .35
F-19
ACQUISITION OF GAYWOOD OIL AND GAS, LLC - Continued
The Company purchased Gaywood with 9.5% interest bearing bonds which were
carried at zero in the Company's financial statements. Gaywood was valued
by independent reserve engineers as having a fair market value of
$1,169,000 which was recorded as a gain by the Company. The purpose of this
acquisition was to acquire a cash flowing asset with future potential value
in excess of purchase price.
Gaywood was acquired from a trust for the benefit of Mr. Gene E. Phillips'
spouse and children. On October 16, 2003 Mr. Phillips and six other
entities filed a Schedule 13D with the Securities and Exchange Commission
indicating that the six entities owned, in total, 55,000 shares
(approximately 8% of the Company's outstanding common stock) and the entire
group may be deemed to constitute a person within the meaning of Section
13d of the Securities act of 1934.
SALE OF UNDEVELOPED LAND
On September 10, 2003 the Company sold on acre of undeveloped land for
$125,000 in cash to an entity which has been deemed to be an affiliate of
Gene E. Phillips. The sale resulted in a loss of approximately $111,000.
ACQUISITION OF GAINESVILLE OUTLET MALL, LLC
Effective December 10, 2003 the Company acquired Gainesville Outlet Mall,
LLC (Gainesville) a company that has approximately 315,000 square feet of
retail space available for lease in Gainesville, Texas. At the time of
acquisition Gainesville had approximately 65% of its retail space leased,
generating approximately $180,000 of gross rent revenue per month.
The Company paid approximately $800,000 in cash at closing, $200,000 in
earnest money and due diligence fees, and two short term obligations to pay
the seller approximately $5,571,000. The Company has negotiated long term
financing and anticipates closing on or before April 30, 2004.
NOTE H - NOTES PAYABLE
LONG TERM DEBT
Long-term debt is comprised of the following (in thousands):
December 31,
--------------------
2003 2002
------ ------
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 $2,090 $3,956
F-20
LONG TERM DEBT - Continued
December 31,
---------------
2003 2002
------ ------
Notes payable to individuals and companies maturing through 2023;
variable and fixed interest rates ranging from 7% to 14%;
collateralized by real property, personal property, fixtures,
equipment and the assignment of rents 1,851 1,753
Notes payable to wife of former Chief Executive Officer, bearing
interest at 10% and maturing on July 1, 2004 2,255 2,255
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% 528 598
Line of credit with bank, bearing interest at 8% and maturing
March 31, 2005 19 30
------ ------
6,743 8,592
Less current maturities 4,690 113
------ ------
$2,053 $8,479
====== ======
Aggregate annual principal maturities of long-term debt at December 31, 2002
are as follows (in thousands):
2004 4,690
2005 95
2006 104
2007 890
2008 96
Thereafter 868
-------
$ 6,743
CURRENT NOTES PAYABLE
The Company has two notes payable to institutions of $4,800,000 and
$771,000 at December 31, 2003, bearing interest at a rate of 15% and is
presently due by April 30, 2004, as prescribed under the extension terms of
the original notes. These notes are secured by real estate and fixtures
with a net book value of $6,800,000, as well as an assignment of rents and
leases associated with said property.
F-21
NOTE I - 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, 2003 are as follows (in
thousands):
2004 $ 827
2005 827
2006 827
2007 844
2008 853
Thereafter 3,588
------
$7,766
Lease expense in 2003, 2002 and 2001 was $1,412, $1,650, and $3,139,
respectively.
NOTE J - INCOME TAXES
At December 31, 2003, the Company had net operating loss carryforwards of
approximately $21,500,000, which expire between 2003 and 2021. 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,
------------------------
2003 2002 2001
------ ------ ------
Current - state $ -- $ -- $ 424
Deferred - federal -- 749 2,400
------ ------ ------
$ -- $ 749 $2,824
====== ====== ======
F-22
NOTE J - INCOME TAXES - Continued
Deferred tax assets and liabilities were comprised of the following (in
thousands):
December 31,
--------------------
2003 2002
-------- --------
Deferred tax assets:
Net operating loss carryforwards $ 7,163 $ 7,308
Note receivable 680 680
Alternative minimum tax credit carryforwards 235 235
Accounts receivable -- --
Accrued expenses 2,241 2,285
Financing obligations -- --
Other 583 583
-------- --------
Total deferred tax assets 10,902 11,091
Deferred tax liabilities - property and equipment (3,198) (3,198)
Valuation allowance (6,543) (6,732)
-------- --------
Net deferred tax asset $ 1,161 $ 1,161
======== ========
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,
------------------------------
2003 2002 2001
------- ------- -------
Tax expense (benefit) at the statutory rate $ 75 $(1,019) $ 3,250
State taxes net of federal benefit -- -- 380
Change in deferred tax asset valuation allowance,
attributable to continuing operations (75) 1,768 (431)
Other -- -- (375)
------- ------- -------
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, 2003 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-23
NOTE K - STOCKHOLDERS' EQUITY
Outstanding Preferred Stock
---------------------------
Preferred stock consists of the following (amounts in thousands):
Year ended
December 31,
-----------
2003 2002
---- ----
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.
Stock Options
-------------
In 1997, the Company established a long-term incentive plan (the 1997 Plan)
for the benefit of certain key employees. Options granted to employees
under the 1997 Plan become exercisable over a period as determined by the
Company and may be exercised up to a maximum of 5 years from date of grant.
The 1997 Plan allowed up to 50,000 shares of the Company's common stock to
be reserved for issuance. In 2000, the Company adopted the 2000 Stock
Option Plan, under which up to 50,000 shares of the Company's common stock
are reserve for issuance.
The Company granted options to two officers during 1996 through 2001,
aggregating 80,000 shares not covered by either plan. These options were
granted at market, were exercisable immediately, and expire 10 years from
date of grant.
NOTE K - STOCKHOLDERS' EQUITY - Continued
Information with respect to stock option activity is as follows:
Weighted
average
exercise
Shares price
------- --------
Outstanding at January 1, 2001 140,850 $ 91.90
Granted 20,000 6.40
- ------- --------
Outstanding at December 31, 2001 160,850 $ 81.28
Expired (5,050) 182.58
- ------- --------
Outstanding at December 31, 2002 155,800 $ 78.00
Granted 60,000 2.60
Cancelled, rescinded, or annulled (70,800) 109.27
Expired (3,000) 112.50
Outstanding at December 31, 2003 142,000 $ 30.27
= ======= ========
Options exercisable at December 31, 2001 160,850 $ 81.28
= ======= ========
Options exercisable at December 31, 2002 155,800 $ 78.00
= ======= ========
Options exercisable at December 31, 2003 142,000 $ 30.27
= ======= ========
Weighted average fair value per share of options granted during 2003 and 2001
was $0.71 and $7.60, respectively.
Additional information about stock options outstanding at December 31, 2003 is
summarized as follows:
Options outstanding and exercisable
---------------------------------------------------
Weighted average
Number remaining Weighted average
Range of exercise prices outstanding contractual life exercise price
- ------------------------ ----------- ------------------ ----------------
$2.60 60,000 5.0 $ 2.60
$3.75 to $6.90 60,000 7.0 5.68
$100.00 to $150.39 2,000 2.0 150.39
$175.00 20,000 4.0 175.00
F-25
NOTE L - OTHER INCOME (EXPENSE)
Other income (expenses) consists of the following: (amounts in thousands)
Year ended December 31,
--------------------------------
2003 2002 2001
-------- -------- --------
Gain on sale of properties $ -- $ -- $ 16,635
Equity Earnings in CREI 131 -- --
Property acquisition due diligence expenses -- (660) --
Accrued tenant revenue 121 -- --
Other 90 (493) (33)
-------- -------- --------
$ 342 $ (1,153) $ 16,602
======== ======== ========
NOTE M - WRITE-OFF OF IMPAIRED ASSETS
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. As of December 31, 2003 the Company is not aware of
further impairment of remaining assets.
F-26
NOTE N - 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 and $7,293,000 in 2002 and 2001, 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 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 2001.
NOTE O - SEGMENTS
The Company and its subsidiaries are principally engaged in the business of
acquiring, enhancing and selling real estate properties. Since 1996 those
activities have, almost exclusively, involved assisted living facilities.
Effective August 1, 2003 the Company acquired 100% of the stock in Gaywood
Oil & Gas LLC, a limited liability company that owns working interests in
certain oil producing wells. The acquisition was done for investment
purposes and substantially all costs associated with the oil and gas
operations are operating expenses incurred directly by Gaywood. The Company
continues to allocate all of its corporate overhead expenses to its core
real estate operation.
F-27
NOTE O - SEGMENTS - Continued
Segment information and reconciliation to income (loss) from operations are
as follows:
Twelve months ended December 31, 2003 (amounts in thousands)
-------------------------------------
Real Estate Oil & Gas
Operations Operations Consolidated
-------------------------------------
Revenue $ 4,585 $ 449 $ 5,034
Depletion, depreciation and amortization 290 41 331
Net income 214 8 222
Total assets 16,626 1,361 17,987
NOTE P - CONTINGENCIES
BENETIC FINANCIAL VS. WEDGWOOD ET AL:
This action is against a subsidiary of the Company as well as other
corporate and individual defendants who are unrelated to the Company. In
1993, Wedgwood Retirement Inns entered into a financing arrangement with a
third party lender. The plaintiff alleged that he had a verbal brokerage
agreement with Wedgwood and was entitled to a fee. The Company acquired
Wedgwood in 1996.
In a jury trial the plaintiff was awarded $150,000 on one count of his
complaint. However, the jury found for the defendants on all other counts.
In his final ruling the judge awarded the defendants legal fees that were
in excess of the judgment. The plaintiff appealed and on April 30, 2003 the
California Court of Appeals let the $150,000 stand but reversed the judge's
award of legal fees. Based upon the ruling of the Court of Appeals the
defendants are obligated for the judgment plus $165,093 in interest since
1993. The judgment is against all the defendants as a group.
The defendants have filed an appeal to the California Supreme Court but the
appeal was denied. There are no further legal defenses available. There
remains the issue of the allocation of the award among the defendants.
Management has provided a reserve that it believes is sufficient to cover
its expected liability in this matter.
F-28
INTERNAL REVENUE SERVICE EXAMINATION
In December 1991 the Company sold four nursing homes to a not-for-profit
corporation in exchange for tax exempt bonds issued on behalf or the
acquiring corporation by government authorities. In 1992, the bonds were
converted to zero coupon status and their value was enhanced by
substituting higher grade collateral. The substitute collateral which
consisted of zero coupon U.S. Treasury obligations was placed in trust to
defease the bonds, in exchange for the underlying mortgage. The bonds were
then sold for approximately $67,000,000. A gain was recorded equal to the
proceeds received by the Company of $8,333,000 after deducting transaction
costs and the cost of the higher grade collateral.
On January 8, 2004 the Company was notified by the Internal Revenue Service
(IRS) in the form of a Section 6700 Pre-Assessment Letter that the IRS was
considering assessing penalties under Section 6700 of the Internal Revenue
Code as a result of the Company's organization or assistance in connection
with the issuance and sale of the bonds.
The transactions which the IRS is examining involved technically complex
financial and legal issues and were undertaken on the advise of and
reliance on the investment banking firm, the law firms that issued the tax
exempt bond legal opinions and other professionals. The Company believed in
1992 and still believes that its actions were appropriate in all respects.
The Company and the IRS are engaged in negotiations regarding settling this
twelve year old matter, however there is no assurance that any settlement
will be achieved. In the absence of a settlement, the Company intends to
contest the IRS's position in court. Any litigation may be expensive and
time consuming however if this matter is litigated the Company believes
that it will prevail on the merits. If the Company were unsuccessful in
their negotiations or litigation, the loss could range from $267,000 to
$8,333,000.
OTHER
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.
F-29
NOTE Q - QUARTERLY DATA (UNAUDITED)
The table below reflects the Company's selected quarterly information for
the years ended December 31, 2003 and 2002. Certain 2003 and 2002 amounts
have been reclassified to conform to the current presentation of
discontinued operations.
Year ended December 31, 2003
----------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Revenue $ 1,070 $ 1,118 $ 1,342 $ 1,774
Operating expenses 1,266 1,235 1,491 1,819
Net income (loss) (262) (177) 855 (194)
Income (loss) allocable to common shareholders (262) (177) 855 (194)
Income (loss) per common share - basic and diluted (.38) (.26) 1.21 (.27)
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 (.64) (1.45) (6.23) (3.35)
F-30