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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, 1998
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.)
4265 Kellway Circle, Addison, Texas 75001
(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-B 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, 1999, was
approximately $5,218,000.
At March 31, 1999, the issuer had outstanding approximately 7,355,000 shares of
par value $.01 Common Stock.
Documents Incorporated by Reference:
Part III of this Annual Report on Form 10-K incorporates certain information by
reference from the definitive Proxy Statement for the registrant's Annual
Meeting of Stockholders to be held on June 4, 1999.
GREENBRIAR CORPORATION
Index to Annual Report on Form 10-K
Fiscal year ended December 31, 1998
Part I.....................................................................................................3
ITEM 1: DESCRIPTION OF BUSINESS.........................................................................3
ITEM 2: DESCRIPTION OF PROPERTIES......................................................................15
ITEM 3: LEGAL PROCEEDINGS..............................................................................15
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............................................15
Part II...................................................................................................16
ITEM 5: MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.......................................16
ITEM 6: SELECTED FINANCIAL DATA........................................................................16
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION......................................17
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK....................................22
ITEM 8: FINANCIAL STATEMENTS...........................................................................22
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE...........22
Part III..................................................................................................23
ITEMS 10-13:...........................................................................................23
Part IV...................................................................................................24
ITEM 14: EXHIBITS AND REPORTS ON FORM 8-K..............................................................24
2
PART I
ITEM 1: DESCRIPTION OF BUSINESS
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Overview and Background of Assisted Living Operations
Greenbriar Corporation (the "Company") is an assisted living company that
operates assisted and full service independent living communities designed to
serve the needs of the elderly population. Assisted living residents generally
comprise frail elderly persons who require assistance with the activities of
daily living such as ambulation, bathing, eating, personal hygiene, grooming and
dressing, but who do not generally require more expensive skilled nursing care.
Independent living residents typically require only occasional assistance but
receive other support services. In addition, the Company also develops and
operates communities for residents suffering from Alzheimer's or other forms of
dementia, a growing specialty within the assisted living industry.
As of March 31, 1999, the Company operated 31 communities in 11 states, with a
capacity of 2,830 residents, consisting of 20 communities that are owned and 11
that are leased from third parties. One of the Company's leased properties is
managed by a third party.
The Company existed from 1974 until 1989 as a real estate investment trust. In
late 1989, control of the Company changed to current management, who undertook
to dispose of its REIT properties and establish a new focus on services to and
products for the elderly. In 1991 the REIT was reorganized as a Nevada
Corporation. Until 1994, the Company's business was the acquisition, operation
and sale of retirement, nursing and other healthcare communities, as well as
commercial real estate and the manufacture and sale or lease of mobility
assistance equipment. In 1994 the Company decided to change its business
emphasis to the assisted living industry and by early 1996 it had sold its
existing nursing homes and retirement centers, most of its commercial real
estate and its mobility equipment subsidiaries.
Beginning in 1995 the Company began developing and constructing assisted living
communities; however, the significant growth that occurred was through
acquisitions that were completed in 1996 and 1997.
The Assisted Living Industry
The Company believes that the assisted living industry is emerging as a
preferred alternative to meet the growing demand for a cost-effective setting in
which to care for the elderly who do not require the 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 24-hour a day 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
may 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. There are some
assisted living communities, and this seems to be a growing trend who provide
care for higher levels of acuity. Generally, assisted living residents have
higher levels of need than residents of independent retirement communities but
lower than residents in skilled nursing centers. Annual expenditures in the
assisted living industry have been estimated to be approximately $13 billion,
including communities ranging from "board and care" to full-service assisted
living communities such as those operated by the Company.
The Company believes that assisted living is one of the fastest growing segments
of elderly care and will continue to experience significant growth due to the
following:
Consumer Preference - The Company believes that assisted living is
increasingly becoming the setting preferred by prospective residents
and their families in which to care for the frail elderly. Assisted
living offers residents greater independence in a residential setting
which the Company believes results in a higher quality of life than
that experienced in more institutional or clinical settings such as
skilled nursing centers.
Demographic & Social Trends - The target market for the Company's
services is generally persons 75 years and older, one of the fastest
growing segments of the U.S. population (the average age of a resident
in Assisted Living is typically aged 83 or older and that resident is
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either widowed or single). According to the U.S. Census Bureau, the
portion of the U.S. population age 75 and older is expected to increase
by 28.7%, from approximately 13.0 million in 1990 to over 16.8 million
by the year 2000, and the number of persons age 85 and older is
expected to increase 39.3% during the 1990s. This age group is
projected to increase by 33.2% between the years 2000 and 2010. It is
estimated by the United States Bureau of census that approximately 50%
of the population of seniors over age 85 need assistance with ADLs and
approximately 50% of such seniors develop Alzheimer's disease or other
forms of dementia. According to Claritas, Inc., a nationally recognized
demographics provider, over 54 % of those individuals 80 years of age
and older in 1997 had incomes of $15,000 and above and 35 percent had
incomes of $25,000 and above. Accordingly, the Company believes that
the number of seniors who are able to afford high-quality residential
environments, such as those offered by the Company, has increased in
recent years.
Lower Average Cost - The Company believes that the average annual cost
to residents receiving assisted living care in the Company's
communities is significantly less than the cost of receiving similar
care in a skilled nursing center. According to the Marion Merrell Dow
Inc. Managed Care Digest Series, Institutional Digest 1995, the average
annual cost per person in 1994 in the United States for private nursing
home care was approximately $36,000.
Changing Supply of Long-term Care Beds - Most of the states in which
the Company currently operates have enacted certificate of need ("CON")
or similar legislation that restricts the supply of licensed nursing
center beds. These laws generally limit the construction of nursing
centers and the addition of beds or services to existing nursing
centers, and hence tend to limit the available supply of traditional
nursing home beds. In addition, some long-term care centers have
started to convert traditional nursing home beds into sub-acute beds.
The Company also believes that high construction costs and limits on
government reimbursement for the full cost of construction and start-up
expenses also will constrain the growth and supply of traditional
nursing home centers and beds. The Company expects that this tightening
supply of nursing beds coupled with the aging population will create an
increased demand for assisted living communities.
Business Strategy
The Company believes that significant growth opportunities exist to provide
assisted living services to the rapidly growing elderly population. The Company
has expanded its operations through the acquisition of individual communities
and assisted living companies. The Company also seeks to improve the operating
performance of its communities through the continued enhancement of its
operations.
The majority of the Company's current communities are operated and marketed on a
private-pay, single occupancy basis. Most double occupancy is non-related people
who are state-assisted residents. Most of the Company's state-assisted residents
are in Texas and North Carolina communities. Texas is one of several states that
has a Medicaid waiver program currently operating. North Carolina has one of the
best reimbursement rates in the nation for assisted living and was a pioneer in
supporting the development of assisted living as one way of containing the cost
of caring for the state's aging population.
As America ages, the Company believes that more states will adopt a
reimbursement policy similar to those of Texas and North Carolina, which is
primarily a double occupancy approach. Some, however, may stress a single
occupancy approach. The Company believes that the assisted living industry will
continue as a private-pay industry for the foreseeable future, but may become
more price-sensitive as more people need assisted living for longer periods due
4
to increased life spans. Costs of caring for an aging America may become more of
a private-pay, state-assisted partnership than currently exists. However,
although Medicaid coverage is common, participation is not. Texas had only
approximately 1,300 people participating in its Medicaid assisted living program
in 1998.
The Company uses the same development strategy for special care units in
combined Alzheimer's and assisted living communities and dedicated special care
communities. The units and common space are designed for flexibility so that
they can be primarily single occupancy but also be used as double occupancy -
again, based on market demand.
The Company believes that this occupancy-flexible development strategy will
provide a competitive advantage over its competitors who do not have units and
common space large enough to readily accommodate double occupancy.
The Company's top management has extensive acquisition experience and contacts
in the assisted living and long-term care industry. The Company believes that
building by acquisition is the best way to meet its growth goals. Full service
retirement and assisted living industry is very fragmented and still primarily a
single proprietor business.
Acquisition Strategy - The Company may acquire one or more communities or entire
assisted living companies as a means of entry into new markets and may also make
acquisitions within its existing regions to gain further market share and
leverage its existing operating infrastructure. In reviewing acquisition
opportunities, the Company considers, among other things, the competitive
climate, the current reputation of the community or its operator, the quality of
its management, the need and costs to reposition the community in the
marketplace, the construction quality and any need for renovations of the
community and the opportunity to improve or enhance its operating results. The
Company also sells some of the communities it acquires when they don't fit with
the Company's long range strategy.
Operating Strategy - The Company's operating strategy is to achieve and sustain
a strong competitive position within its chosen markets as well as to continue
to enhance the performance of its operations. The Company will also seek to
enhance its current operations by (i) maintaining and improving occupancy rates
at its communities; (ii) opportunistically increasing resident service fees and
(iii) improving operating efficiencies.
Offer Residents Customized Care and Service Packages - The Company continually
seeks to expand its range of services to meet the evolving needs of its
residents. The Company offers each of its residents a personalized assisted
living service plan which may include any combination of basic support care,
personal care, supplemental services, wellness services and, if needed,
Alzheimer's and special care services, all subject to the level of services
allowed to be offered by the licensing in place at each community. By offering
services in an "unbundled" manner, charging only for the services needed and
involving the active participation of the resident, the Company is able to
customize its service plans to meet the specific needs of each resident. As a
result, the Company believes that it is able to maximize customer satisfaction
while avoiding the high cost of delivering all services to all residents without
regard to need or choice. The care plan for each resident is periodically
reviewed and updated by the Company, the resident, the resident's family and the
resident's physician. The Company also uses preferred home health agencies in
many of its communities to increase the level of services it can provide
residents.
Maintain and Improve Occupancy Rates - The Company also seeks to maintain and
improve occupancy rates by continuing to (i) attract new residents through
marketing programs directed towards family decision makers, namely adult
children and potential residents, (ii) actively seek referrals from hospitals,
rehabilitation hospitals, physicians clinics, home healthcare agencies and other
acute and sub-acute healthcare providers in the markets served by the Company
and (iii) develop new market niches such as respite care, adult day care and
other specialty care programs sought by caregivers.
Selectively Increase Service Pricing Levels - The Company regularly reviews
opportunities to increase resident service fees within its existing markets,
while maintaining competitive market positions. In keeping with this strategy,
the Company will continue to offer high quality assisted living services at
average to above average prices and generally target private-pay residents. The
Company's private-pay residents are typically seniors who can afford to pay for
services from both their own and their family financial resources. Such
resources may include social security, investments, proceeds from the sale of a
residence, contributions from family members and insurance proceeds from
long-term care insurance policies.
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Improve Operating Efficiencies - The Company seeks to improve the operating
results of its communities by actively monitoring and managing its operating
costs. In addition, the Company believes that concentrating communities within
selected geographic regions may enable the Company to achieve operating
efficiencies through economies of scale, reducing corporate and regional
overhead and providing for more effective management supervision and financial
controls. The Company is also able to obtain volume discounts through enhanced
purchasing power for a variety of items including food, supplies, insurance,
equipment and other items.
Offer Alzheimer's and Other Dementia Services - As of March 1999, the Company
had 12 communities with distinct special care wings specifically designed to
serve the needs of individuals with Alzheimer's disease and other forms of
dementia. In some of its existing communities, the Company plans to convert a
portion of its existing units into a distinct Alzheimer's wing which will allow
the Company to offer services to the elderly with this disease and other forms
of dementia, will create an opportunity for residents to age in place within the
same community and will allow special security and support of Alzheimer's
residents. The Company believes this will allow it to continue serving residents
for a longer period of time and provide a desirable alternative for its
residents and their families. The Company's experience and research indicate
that Alzheimer's residents often respond better by sharing a suite with another
Alzheimer's resident rather than being in a single occupancy suite.
Consequently, the Company's Alzheimer's programs are designed to allow double
occupancy, although rooms are available on a single occupancy basis.
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
services they need. Management believes this provides the Company with a
competitive advantage over other industry service providers who offer discrete
levels of services and base their charges on the level of services offered
regardless of whether a resident requires or uses all of the services available
at a particular level.
The services offered by the Company can generally be categorized as follows:
Basic Support Services - These services include providing up to three
meals per day in a common dining room, special dietary planning,
laundry, general housekeeping, organized social and other activities,
transportation, maintenance, utilities (except telephone), security and
24-hour emergency call monitoring.
Supplemental Services - These services include performing, coordinating
or assisting with bill paying, banking, personal shopping,
transportation, appointments, pet care and reminder services.
Personal Care Services - These services include providing assistance
with activities of daily living (the ADL's) such as ambulation,
bathing, eating, dressing, personal hygiene and grooming.
Wellness Services - These services include assistance with the
administration of medication and health monitoring by a nurse, which
are provided as permitted by government regulation.
Alzheimer's and Special Care Services - The Company has a distinct
Alzheimer's special care wing in 12 of its existing communities.
Alzheimer's care includes a higher 24-hour staff ratio to provide
oversight and around-the-clock scheduled activities. The Alzheimer's
care wing is secured from the rest of the building.
Properties
Operating Communities - The following table sets forth certain information with
respect to communities that were operated by the Company at March 31, 1999. The
Company owns, or leases these communities. The Company considers its communities
to be in good operating condition and suitable for the purpose for which they
are being used.
6
EXISTING COMMUNITIES
Community
Care Resident Operations
Community Location Level Units Capacity(1) Commenced Ownership
-----------------------------------------------------------------------------------------------------------------
Berne Village New Bern, NC S, FE, DC 153 186 Oct-93 Owned (2)
Camelot Harlingen, TX S 57 57 Sep-94 Owned (2)
Camelot Assisted Living Harlingen, TX FE, DC 83 129 Jan-98 Leased (3)
Country Oaks of Chiefland Chiefland, FL FE 37 73 Dec-95 Owned (2)
Countrytime Inn Kings Mountain, NC FE, DC 31 62 Jun-95 Owned (2)
Crown Pointe Corona, CA S, FE 163 173 Jan-93 Owned (2,5)
Graybrier Southern Pines, NC FE, DC 55 110 Feb-94 Owned (2)
Greenbriar at Denison Denison, TX FE, DC 44 75 May-96 Owned (2)
Greenbriar at Muskogee Muskogee, OK FE 48 75 Mar-97 Owned (2)
Greenbriar at Sherman Sherman, TX FE 48 75 Mar-98 Owned (2)
La Villa Roswell, NM FE, DC 82 121 Nov-96 Leased (3)
Maranatha Manor Spartanburg, SC FE,DC 44 108 1997 Owned (2)
Meadowbrook Place Baker, OR FE 50 60 Dec-92 Owned (2)
Neawanna by the Sea Seaside, OR S, FE 58 59 Jan-90 Leased (4,6)
Oak Park, Ft Worth Fort Worth, TX FE 149 157 Jan-98 Leased (3)
Pacific Pointe King City, OR S 114 114 Jan-93 Leased (3)
Palm House Fort Worth, TX S 155 155 1985 Leased (3)
Rose Garden Estates Ritzville, WA FE 21 23 Nov-95 Owned (2)
Rose Tara Plantation King, NC FE 38 65 Sep-94 Owned (2)
Summer Hill Oak Harbor, WA FE 59 59 Feb-94 Owned (2)
Sweetwater Springs Lithia Springs, GA FE, DC 48 49 Oct-96 Leased (&)
Tandy Fort Worth, TX FE 84 164 1984 Leased (3)
The Terrace Portland, OR FE 65 73 May-91 Owned
Villa del Rey Merced Merced, CA S 92 92 Dec-79 Leased (3)
Villa del Rey Roswell Roswell, NM S, FE 135 150 Oct-88 Leased (4,6)
Villa del Rey Visalia Visalia, CA S 98 98 Dec-79 Leased (3)
Villa del Sol Roswell, NM S 12 12 Dec-95 Owned (2)
Wedgwood Terrace Lewiston, ID FE, DC 40 55 Nov-95 Owned (2)
Windsor House Florence Florence, SC FE, DC 26 41 Sep-98 Owned (2)
Windsor House Greenville Greenville, SC FE, DC 31 50 Nov-97 Owned (2)
Windsor House West Spartanburg, SC FE, DC 76 110 1991 Owned (2)
-----------------------------------------------------------------------------------------------------------------
Total 2196 2830
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 or deed of trust
securing a note payable to a bank, financial institution, individual
or other lender. The mortgages and deeds of trust mature between 1999
and 2018 and bear interest at fixed and variable interest rates
ranging from 7.5% to 11.35% as of December 31, 1998. The Crown Pointe
community is subject to a mortgage and note payable to the
Redevelopment Agency of the City of Corona, California, is payable
into a sinking fund semi-annually in increasing amounts from $65,000
to $420,000 through May 2015, and bears interest at a variable
interest rate equal to 5.4% at December 31, 1998. Future communities
owned and mortgaged by the Company will likely be pledged as
collateral for mortgage credit lines, which relate to more than one
community. See Item 6. "Management's Discussion and Analysis or Plan
of Operation - Liquidity and Capital Resources."
7
(3) Leased from third party individuals or partnership. Initial lease
terms generally range from 10 to 20 years, and mature between 1999 and
2011. The Company is responsible for all costs including repairs to
the community, property taxes and other direct operating costs of the
community. Leases generally include clauses that allow for rent to
increase over time based on a specified schedule or on an increase in
the consumer price index. Generally, the Company has an option to
purchase the community after a specified period, or at expiration of
the lease, at a price generally equal to market value.
(4) Community is leased from a Real Estate Investment Trust. The lease was
part of a sale - leaseback transaction. The lease commenced in 1994
and expires in 2009. The Company has an option to purchase the
community in 2004 and in 2009 for an amount equal to the greater of
the sales price or the current replacement cost less actual
depreciation.
(5) Company owns 60% of real estate and the lessee.
(6) Company owns 49% of lessee. Victor L. Lund, a director of the Company,
owns the other 51%, and the Company has an option to purchase his
interests in these entities for $10,000.
(7) Leased from a REIT for 15 years expiring in 2011.
Plans for Construction - The Company generally retains independent general
contractors to construct its communities. The Company approves all aspects of
development including, among other things, site selection, plans and
specifications, the proposed construction budget and selection of the architect
and general contractor. The Company estimates the average capitalized cost to
develop, construct and open a community (including land acquisition,
architectural and engineering, construction period interest and loan fees) to be
approximately $75,000 per unit, and average construction time for a typical
community to be approximately twelve to eighteen months, depending upon the
number of units. The Company estimates that, once opened, it takes approximately
twelve to eighteen months after licensure for each community to achieve a
stabilized occupancy level of 92% or higher. The Company anticipates that each
community will have an average operating loss (before depreciation) of
approximately $600,000 prior to reaching stabilized occupancy. Expansion
projects generally cost less to build and to fully lease.
Development and Construction Risks - The Company's growth strategy is dependent,
in part, on its ability to develop and construct additional communities.
Development projects generally are subject to various risks, including zoning,
permitting, healthcare licensing and construction delays that may result in
construction cost overruns, longer development periods and, accordingly, higher
than anticipated start-up losses. Although the Company has extensive development
experience, closely manages each development project and regularly monitors the
contractors constructing the Company's communities, project management is
subject to a number of contingencies over which the Company has little or no
control and which might adversely affect project costs and completion time. Such
contingencies include shortages of, or the inability to obtain, labor or
materials, the inability of contractors to perform under their contracts,
strikes, adverse weather conditions and changes in applicable laws or
regulations or in the method of applying such laws and regulations. The Company
intends to rely on third-party developers to construct some of the new assisted
living communities planned by the Company. There can be no assurance that the
Company will not experience difficulties in working with developers, project
managers, general contractors and subcontractors, any of which difficulties
could result in increased construction costs and delays. As a result of these
various factors, there can be no assurance that the Company will not experience
construction delays, that it will be successful in developing and constructing
currently planned or additional communities or that any developed community will
be economically successful. If the Company's planned development is delayed, the
Company's business, operating results and financial condition could be adversely
affected.
Need for Additional Financing; Risk of Rising Interest Rates, Development Delays
and Cost Overruns - To achieve its growth objectives, the Company will need
sufficient financial resources to fund its development, construction and
acquisition activities. Accordingly, the Company's future growth will depend on
its ability to obtain additional financing on acceptable terms. There can be no
assurance that any newly constructed communities will achieve a stabilized
occupancy rate and attain a resident mix that meets the Company's expectations
or generate sufficient positive cash flow to cover operating and financing costs
associated with such communities. The Company will, from time to time, seek
additional funding through public or private financing, including equity or debt
financing. If additional funds are raised or acquisitions are made in exchange
for equity securities, stockholders may experience dilution. Further, such
equity securities may have rights, preferences or privileges senior to those of
the Common Stock. To the extent the Company finances its activities through
8
debt, sale/leaseback or leasing arrangements, the Company may become subject to
certain financial and other covenants which may restrict its ability to pursue
its rapid growth strategy. There can be no assurance that adequate equity, debt,
sale/leaseback or lease financing will be available as needed or on terms
acceptable to the Company. A lack of available funds may require the Company to
delay, scale back or eliminate all or some of its development and acquisition
projects and could have a material adverse effect on the Company's business,
financial condition and results of operations. See Item 7. "Management's
Discussion and Analysis or Plan of Operation - Liquidity and Capital Resources."
Repair and Maintenance - The Company conducts routine repairs and maintenance,
as needed, of its communities on a regular basis. Several of the Company's
communities acquired in the Wedgwood, American Care and Villa acquisitions have
been in operation for ten years or more. The Company has no other current plans
for significant expenditures relating to its existing communities, and considers
them to be in good repair and working order.
Community Description
The Company's existing communities as of March 1999 range in size from 12 to 163
units, are from one to three stories and from 10,000 to 148,000 square feet.
Each community has 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 typically include a private bathroom, kitchenette,
closets, living and sleeping areas, a lockable door, emergency call system,
individual temperature controls and fire alarm and sprinkler system, among other
amenities.
Alzheimer's care units are approximately the same size as studios and contain
only sleeping, limited storage and, in some of the units, bathroom areas. Most
do not have emergency call systems but do have sprinkler and fire alarm systems.
Operations
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 Company also 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. Most building maintenance
services are performed by part or full-time employees, while elevator, HVAC
maintenance and landscaping services are generally performed by third party
contractors.
The Company's senior management and other personnel, located at the Addison,
Texas home office, provide support services to each of the Company's regions and
its communities, including development of operational standards, budgets and
quality assurance programs, recruiting, training and financial and accounting
services such as data processing, accounts payable, billing and payroll
services. Corporate personnel, regional 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, experienced
personnel. The Company has created formal training programs accompanied by
review and evaluation procedures to help ensure quality care for its residents.
The Company believes that education, training and development enhance the
effectiveness of its employees. 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, life skills programming and fiscal management. In
9
addition to some classroom training, the Company's communities provide new
employees with on the job training, utilizing experienced staff as trainers and
mentors.
Quality Assurance
The Company coordinates quality assurance programs at each of its communities
through its corporate headquarters staff and through its regional operations
staff. The Company's commitment to quality assurance is designed to achieve a
high degree of resident and family member satisfaction with the care and
services provided by the Company. In addition to ongoing training and
performance reviews of all employees, the Company's quality control measures
include:
The Greenbriar Way - At Greenbriar the foremost mission is excellence in service
to residents. To that end, the Company's leadership dedicates itself to
excellence in the supervision and professional development of employees whose
day-to-day duty is to provide that service.
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.
The Greenbriar Chaplaincy Program - The Company has employed a Chaplain as a
consultant and he has established a "Spirituality in Aging" program that helps
the Company's goal of meeting the emotional and spiritual needs of its
residents, their families, and the employees of Greenbriar. The Chaplain is
available for immediate support on a toll free number and visits the Company's
communities on a scheduled basis to conduct training seminars for residents,
families, employees and the public.
Family and Resident Feedback - The Company surveys residents on an annual basis
to monitor the quality of services provided to residents and the level of
satisfaction of residents and their families. The Company is presently
implementing surveys of family members of residents to monitor the quality of
services. The Company also plans to establish a toll free customer response
telephone line to encourage feedback from residents, family members, and other
visitors in its communities.
Regular Community Inspections - Community inspections are conducted by corporate
personnel (including the vice president of construction and maintenance, the
director of nutritional services and the director of medical services) and
regional staff 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. A detailed community
audit program is used to ensure the inspections are thorough and to facilitate
required corrective action.
Marketing
The Company's marketing and sales efforts are undertaken at corporate, regional
and local levels. This effort is intended to create awareness of the community
and its services among prospective residents, their families, other key
decision-makers and professional referral sources. The corporate marketing staff
develops overall strategies for promoting the community throughout its markets
and continuously assesses the success of its efforts. Most communities have, on
staff, a community relations coordinator dedicated to sales and marketing
activities who is guided and trained by corporate marketing personnel. For
smaller communities who do not have a community relations coordinator, the
Executive Director performs the sales and marketing functions.
Prior to opening new communities, the Company commences an aggressive marketing
campaign by opening a sales office in close proximity to the new community.
During this pre-opening marketing period, the Company's personnel actively
contact local referral sources, which generally account for a majority of
10
resident referrals. In addition, the Company typically engages in more
traditional types of marketing activities, such as direct mailings, print
advertising, signs and yellow page advertising. These marketing activities and
media advertisements are directed to potential residents and their adult
children, who often comprise the primary decision makers for placing a frail
elderly relative in an assisted living setting.
Government Regulation
Healthcare is an area of extensive and frequent regulatory change. The assisted
living industry is relatively new and, accordingly, the manner and extent to
which it is regulated at the federal and state levels is evolving at a steady
pace. Currently, twenty-three states have a licensure category or statute that
uses the term "assisted living". Several states have proposed regulations using
the term. Twenty-two 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, including Texas and
North Carolina have or are reviewing the licensure regulations and increasing
the role of state personnel in monitoring and controlling the assisted living
industry.
In the states in which the Company operates, a license is not required to
provide basic support services. Currently, assisted living and Alzheimer's care
communities are not specifically regulated as such by the federal government.
However, the Company's communities are subject to regulation and licensing by
state and local health and social service agencies and other regulatory
authorities. Although regulatory requirements vary from state to state, these
requirements generally address, among other things, staff education, training
and records; staffing levels; community services, including administration and
assistance with self-administration of medication; physical community
specifications; size and furnishing of community units and common areas; food
and housekeeping services; and emergency evacuation plans and resident rights
and responsibilities. Most of the Company's communities are required to possess
state licenses in order to provide the levels and types of services which they
offer. A limited number of the Company's communities are not required to possess
such licenses because they do not supply care and/or supervision to an extent
requiring them to be licensed under their respective state's laws. The Company's
communities are also subject to various state and local building codes and other
ordinances, including safety codes. Management anticipates that the states which
are establishing regulatory frameworks for assisted living communities will
require the licensing of assisted living communities and will establish varying
requirements with respect to such licensing. The Company has obtained all
required licenses for each of its communities. Each of the Company's licenses
must be renewed annually.
Currently, only a few states have CON requirements for assisted living
communities. If federal and state reimbursements increase or there is
overbuilding in the industry other states may initiate CON requirements. If this
occurs, the operators who can grow rapidly in the next few years could have a
distinct advantage, in as much as this barrier to entry could limit overbuilding
and competition such as occurred in some nursing home markets in the past.
Like healthcare centers, assisted living communities are subject to periodic
survey or inspection by governmental authorities. From time to time in the
ordinary course of business, the Company receives deficiency reports. The
Company reviews such reports and takes appropriate corrective action. Although
most inspection deficiencies are resolved through a plan of correction, the
reviewing agency typically is authorized to take action against a licensed
community where deficiencies are noted in the inspection process. Such action
may include imposition of fines, imposition of a provisional or conditional
license or suspension or revocation of a license or other sanctions. Any failure
by the Company to comply with applicable requirements could have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company believes that its communities are in substantial
compliance with all applicable regulatory requirements.
As noted earlier, many states have already elected to participate in the
Medicaid Home and Community Care Options Act of 1990 ("MHCCOA") and several
other states are studying the program. Texas, where the Company is
headquartered, is one of the states that has already elected to participate in
the program. Under MHCCOA, states now have the option to use Medicaid funds to
support services for low income, frail older persons, in places of residence
other than nursing centers. The program allows the state to amend its Medicaid
statutes to use funds in this manner, thus avoiding the repeated process of
obtaining a Medicaid waiver. Any community participating in this payment program
must meet all applicable state and federal rules and regulations.
11
The Company participates in federal and state reimbursement programs. However,
the Company expects the bulk of its revenues to come from private payments.
Conversely, if the proposed Medicaid block grants are signed into law, the
Company could experience a dramatic increase in revenues from these sources,
particularly with respect to its double occupancy units. Many of the Company's
existing communities can accommodate double occupancy and still provide a
quality lifestyle.
The Americans with Disabilities Act ("ADA"), enacted July 26, 1990, has had and
will continue to have a major effect on the full service residential retirement
and assisted living industry. The communities developed or acquired by the
Company must be in compliance with this act. The Fair Housing Amendments Act of
1988 also prohibits discrimination against the handicapped in the sale or rental
of a dwelling, or in the provision of services or communities in connection with
such a dwelling. This intensifies the need to be in compliance with ADA.
Regulation of the industry is likely to increase, particularly for those
providers accepting Medicaid reimbursements.
Federal and state governments regulate various aspects of the Company's
business. The Company is subject to federal and state anti-remuneration laws,
such as the federal health care program anti-kickback law which governs various
types of financial arrangements among health care providers and others who may
be in a position to refer or recommend patients to these providers. This law
prohibits direct and indirect payments that are intended to induce the referral
of patients to, the arranging of services by, or the recommending of a
particular provider of health care items or services. The federal health care
program anti-kickback law has been interpreted to apply to some contractual
relationships between health care providers and sources of patient referral.
Similar state laws vary from state to state, are sometimes vague and have rarely
been interpreted by courts or regulatory agencies. Violation of these laws can
result in loss of licensure, civil or criminal penalties and exclusion of health
care providers or suppliers from furnishing covered items or services to
beneficiaries of the federal health care program. The Company cannot be sure
that these laws will be interpreted consistently with its practices.
In compliance with underlying state bond financing, rents at one community in
Oregon must be approved by an agency of the state. Two other communities
financed with loans guaranteed by the Department of Housing and Urban
Development ("HUD") have rents requiring approval by HUD.
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 most markets where the Company operates or plans to operate the
level of competition is rapidly increasing both from regional, national and
local providers. The Company expects this trend to continue and some markets may
be overbuilt and more will be overbuilt in the future. If reimbursement
programs, such as the Medicaid waiver program, increase assisted living
competition will grow from existing and new companies focusing primarily on
assisted living. Nursing home centers that provide long-term care services are
also a source of competition for the Company, particularly with respect to
Alzheimer's care services. Many of the Company's present and potential
competitors have, or may have access to, greater financial, management and other
resources than those of the Company. There can be no assurance that competitive
pressures will not have a material adverse effect on the Company.
The Company competes with other providers of elderly residential care on the
basis of the breadth and quality of its services, the quality of its communities
and price. The Company believes that it competes favorably in these areas and in
its recruitment and retention of qualified healthcare personnel and reputation
among local referral sources. The Company also competes with other providers of
long-term care in the acquisition and development of additional communities.
12
As noted, the Company competes with other providers of long-term care. This also
applies to attracting and retaining qualified and skilled personnel. In recent
years, the healthcare industry has experienced a shortage of qualified
healthcare professionals. The Company's operations require few professionally
certified (RN or LPN) staff, primarily for supervision of care staff. While the
Company has been able to retain the services of an adequate number of
professionals to staff its communities appropriately and maintain its standards
of quality care, there can be no assurance that continued shortages will not
affect the ability of the Company to maintain the desired staffing levels. In
some markets, non-licensed staff have become a recruitment challenge.
Unemployment rates are significantly below the national average in a few
markets.
The Company is seeking sites and acquisition candidates primarily in
non-metropolitan communities located in the western, southern and southeastern
regions of the United States that are not currently served or are under served.
The Company is identifying these markets and intends to provide premier services
and amenities at average to above average prices. It is also providing special
care services in a residential setting for those with memory loss and
Alzheimer's, the primary cause of memory loss. These residents are not mixed
with other assisted living residents. The Company believes that this combination
of target markets and services may improve its ability to compete with
non-specialized assisted living communities and nursing homes.
Insurance
The provision of personal and healthcare services entails an inherent risk of
liability compared to more institutional long-term care communities, assisted
living communities of the type operated by the Company, especially its dementia
care communities, offer residents a greater degree of independence in their
daily lives. This increased level of independence, however, may subject the
resident and the Company to certain risks that would be reduced in more
institutionalized settings. The Company currently maintains liability insurance
intended to cover such claims which it believes is adequate based on the nature
of the risks, its historical experience and industry standards. The Company also
carries property insurance on each community in amounts that it believes to be
adequate and standard in the industry.
Environmental Matters
Under various federal, state and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real estate may be
required to investigate and clean up hazardous or toxic substances or petroleum
product releases at the property, and may be held liable to a governmental
entity or to third parties for property damage and for investigation and clean
up costs incurred by such parties in connection with the contamination. Such
laws typically impose clean up responsibility and liability without regard to
whether the owner or operator knew of or caused the presence of the contaminants
and the liability under such laws has been interpreted to be joint and several
unless the harm is divisible and there is a reasonable basis for allocation of
responsibility. The costs of investigation, remediation or removal of such
substances may be substantial and the presence of such substances, or the
failure to remediate properly such property may adversely affect the owner's
ability to sell or lease the property or to borrow using the property as
collateral. In addition, some environmental laws create a lien on the
contaminated site in favor of the government for damages and costs it incurs in
connection with the contamination. Persons who arrange for the disposal or
treatment of hazardous or toxic substances also may be liable for the costs of
removal or redemption of such substances at the disposal or treatment community,
whether or not such community is owned or operated by that person or
corporation. Finally, the owner or operator of a site may be subject to common
law claims by third parties based on damages and costs resulting from
environmental contamination emanating from a site.
The Company has conducted environmental assessments on most of its existing
communities that it operates plus one community it leases that is operated by a
third party. 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 or is the Company aware of any such
environmental liability. Wedgwood operated, for periods ranging from 2 to 19
years, nine communities for which environmental assessments have not been
13
obtained. The Company believes that all of its communities are in compliance in
all material respects with all federal, state and local laws, ordinances and
regulations regarding hazardous or toxic substances or petroleum products. The
Company has not been notified by any governmental authority, and is not
otherwise aware, of any material non-compliance, liability or claim relating to
hazardous or toxic substances or petroleum products in connection with any of
its communities.
Control by Insiders
As of March 31, 1999, the Company's officers, directors and affiliated entities
owning more than 5% of the Company's outstanding stock owned approximately 61.1%
of the outstanding shares of Common Stock. Mr. James R. Gilley, President, Chief
Executive Officer and Chairman of the Board of the Company, a corporation wholly
owned by him and his spouse, beneficially owned an aggregate of approximately
30.9% of the outstanding Common Stock of the Company. Mr. Victor L. Lund, a
director of the Company and the founder of Wedgwood, beneficially owned
approximately 15.9% of the outstanding shares of Common Stock. Floyd B. Rhoades,
a director of the Company and founder of American Care, beneficially owned
approximately 10.7% of the outstanding shares of Common Stock. In addition, the
Gilley family owns series D Voting Preferred Stock, which for stockholder votes
is the equivalent of 675,000 Common Shares. Accordingly, such individuals will
have the ability, by voting their shares in concert, to control or 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 Company's officers and directors, including James R. Gilley,
currently hold options or conversion rights to acquire 1,594,990 shares of
Common Stock, certain of which options are subject to vesting requirements. The
issuance of additional shares of Common Stock pursuant to the exercise of these
stock options granted to management under the Company's stock option plan would
increase the number of shares held by the Company's executive officers and
directors in the future.
Anti-Takeover Provisions
The Company's Articles of Incorporation and Bylaws contain, among other things,
provisions (i) establishing a classified board of directors (ii) authorizing
shares of preferred stock with respect to which the Board of Directors has the
power to fix the rights, preferences, privileges and restrictions without any
further vote or action by the stockholders (iii) requiring holders of at least
80% of the outstanding Common Stock to join together in requesting a special
meeting of stockholders and (iv) prohibiting removal of a director other than
for "cause" and then only if the holders of at least 80% of the outstanding
Common Stock vote for such removal. The Company is also subject to Sections
78.411-78.444 of the Nevada Revised Statutes (the "Control Act") which in
general prohibits any business combination involving the Company and a person
that beneficially owns 10% or more of the outstanding Common Stock or an
affiliate or associate of the Company who within the past three years was the
beneficial owner, directly or indirectly, or 10% or more of the outstanding
Common Stock, except under certain circumstances. The application of the Control
Act and/or the provisions of the Company's Articles of Incorporation and Bylaws
could delay, deter or prevent a merger, consolidation, tender offer or other
business combination or change of control involving the Company that some or a
majority of the Company's stockholders might consider to be in their personal
best interests, including offers or attempted takeovers that might otherwise
result in such stockholders receiving a premium over the market price of the
Common Stock and may adversely affect the market price of and the voting and
other rights of, the holders of Common Stock.
Employees
At March 31, 1999, the Company employed 1184 employees, including 754 full-time
and 430 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.
14
Corporate Offices
The Company's principal office is a 27,500 square foot building that it owns in
Addison, Texas. The Company's Addison office will meet the Company's needs for
the foreseeable future.
ITEM 2: DESCRIPTION OF PROPERTIES
- ---------------------------------
See Item 1 for a discussion of properties owned or leased by the Company.
ITEM 3: LEGAL PROCEEDINGS
- -------------------------
The Company is involved from time to time in legal proceedings that are
incidental to its business. The following are the legal proceedings that are
pending at March 1999.
Southern Care Corp. vs Greenbriar, et al.
In Southern Care Corp. v. Medical Resource Companies of America, (former name of
Greenbriar) Civil Action No. 94-1132-K, Superior Court of Chatham County,
Georgia, the plaintiff seeks damages exceeding $1,500,000 relating to the
management and operation of four nursing homes the Company sold to plaintiff.
The Company has filed a counterclaim for breach of the management contract
between the homes and a Company subsidiary.
The Company does not believe it has breached any obligation to Plaintiff
regarding management of the nursing homes and does not believe Plaintiff will
prevail on the merits, although there can be no assurance in this regard. At the
same time that Plaintiff unilaterally and without notice terminated the
management contract, the Plaintiff also claimed that indebtedness of
approximately $6.7 million assigned to the Company was discharged.
In 1995 the plaintiff and the Company each filed cross motions for summary
judgment on the issue of whether the indebtedness was discharged. On December 3,
1997 the Georgia Court of Appeals granted Greenbriar's motion for summary
judgment where they determined that the indebtedness was not discharged. In
February 1998 the Georgia Supreme Court refused to hear the matter. The amount
of indebtedness, including accrued interest, is approximately $11 million. The
Company's basis for financial statement purposes in the indebtedness, net of
related deferred gains, is approximately $ 4.2 million.
The Company has been named as 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 of the Company.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -----------------------------------------------------------
No matters were submitted to a vote of security holders during the fourth
quarter of the year ended December 31, 1998.
15
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:
1998 1997
High Low High Low
----------- ---------- ----------- ----------
First Quarter $17.38 $13.75 $19.25 $13.88
Second Quarter 12.88 8.94 23.00 18.13
Third Quarter 8.75 1.63 23.25 19.50
Fourth Quarter 3.94 1.37 21.00 17.63
The Company has not paid cash dividends on its Common Stock during at least the
last ten fiscal years and, for the foreseeable future, the Company expects to
retain all earnings 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.
No dividends can be paid on the Company's common stock if dividends are in
arrears on the Company's preferred stock.
The closing price on the Company's common stock on March 31, 1999, was $2.19 per
share. As of March 31, 1999, there were 2,953 holders of record of the Company's
common stock.
ITEM 6: SELECTED FINANCIAL DATA
- --------------------------------
(Amounts in thousands, except per share data)
For the Years Ended December 31,
1998 1997 1996 1995 1994
-------------- ------------- ------------- ------------- --------------
Operating revenue $ 53,521 $ 38,979 $ 29,785 $ 7,964 $ 11,840
Operating expenses 55,216 39,958 34,719 9,568 12,176
-------------- ------------- ------------- ------------- --------------
Operating income (loss) (1,695) (979) (4,934) (1,604) (336)
Income (loss) from continuing operations
before income taxes $ (10,602) $ (10,297) $ (7,995) $ 5,286 $ (78)
Basic and diluted income (loss) per common
share $ (1.86) $ (.92) $ (.99) $ 1.04 $ .24
BALANCE SHEET DATA:
Total assets $ 130,353 $ 151,243 $ 116,701 $ 47,756 $ 45,224
Long-term debt $ 58,154 $ 54,851 $ 54,717 $ 16,485 $ 1,110
Total liabilities $ 78,516 $ 88,726 $ 80,549 $ 23,131 $ 23,080
Preferred stock redemption obligation $ 21,748 - - - -
Total stockholders equity $ 30,089 $ 62,517 $ 36,152 $ 24,625 $ 22,144
16
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
- -----------------------------------------------------------------
Overview
During 1994 the Company began a series of steps to focus its business on the
development, management and ownership of assisted living properties. The
Company's historical businesses during the past five years have included
ownership and operation of skilled nursing and retirement centers, real estate
investments and manufacture and leasing of electric convenience vehicles and
wheelchairs. The nursing and retirement centers and convenience vehicle
businesses have been sold and the real estate investments are being liquidated.
During 1994, the Company began independently to develop its assisted living
business, began construction of its first assisted living community in July
1995, and opened that community to residents on May 30, 1996. By July 1, 1996,
the Company (not including the communities of Wedgwood and American Care) had
three additional assisted living communities under construction. In order to
increase the Company's presence in the assisted living industry, create
geographic diversity and obtain experienced personnel, the Company acquired
Wedgwood in March 1996, American Care in December 1996, Windsor in October 1997
and Villa in December 1997. The acquisitions of Wedgwood, Windsor and Villa have
been accounted for as purchases, and the historical financial statements of the
Company do not include any revenues or earnings (losses) attributed to those
operations prior to the acquisition. The American Care acquisition has been
accounted for as a pooling of interests and, accordingly, the Company's
financial statements have been restated to include the accounts and operations
of American Care for all periods prior to the acquisition. At December 31, 1997
the Company operated 55 communities which were owned, leased or managed for
third parties.
During the third quarter of 1998 the Company made several strategic decisions as
to its future direction. It was decided that the Company redirect itself with
the following objectives:
o Terminate existing management contracts whereby the Company would
manage communities for a fee. As of January 1, 1998 the Company had 2
such contracts.
o Reduce the percentage of residents in the Company's communities who
were dependent on direct assistance from governmental agencies for
payment of their fees. As of January 1, 1998 approximately 50% of the
residents at the Company's communities received government assistance.
o Move toward direct ownership of the communities operated by the
Company as opposed to long term lease arrangements. As of January 1,
1998 approximately 50% of the Company's communities were operated
under long-term lease arrangements.
o Divest of communities with limited future profit potential or
geographic locations that were isolated from other Company operations.
As of December 31, 1998 the Company had terminated its management contracts to
manage for others and reduced to 31 the number of Communities that it operated.
The Company owns or has current options to purchase all but five of its
communities. The percentage of residents who are private pay is approximately
90%.
Fiscal 1998 as Compared to Fiscal 1997
Revenues and Operating Expenses from Assisted Living Operations. Revenues
increased to $53,521,000 in 1998 as compared to $38,979,000 in 1997. Community
operating expenses, which consist of assisted living community expense, lease
expense and depreciation and amortization, were $49,924,000 in 1998 as compared
to $34,306,000 in 1997. The primary reason for the increase was the acquisitions
of Windsor and Villa. Windsor and Villa were acquired in the fourth quarter of
1997 in transactions that were accounted for as purchases. The revenue and
related expenses for the communities acquired through these acquisitions are not
included in the amounts for 1997. The revenues and related expenses for these
communities for 1998 were $12,651,000 and $9,746,000 respectively. The balance
of the increase is due to the opening by the Company of new communities during
1998 and increased census at the existing communities.
17
Corporate General and Administrative Expenses. These expenses were $5,292,000 in
1998 as compared to $5,652,000 in 1997. The overall decrease, despite the growth
of the Company, was due to the reorganization of the regional and corporate
office that resulted in the elimination of one of the regional offices and a
reduction in Corporate staff in the third quarter of 1998.
Interest and Dividend Income. Interest and dividend income was $1,094,000 in
1998 as compared to $479,000 in 1997. In the first quarter of 1998, the Company
received proceeds from the sale of preferred stock of $22,000,000. The increase
in interest and dividend income is due to an increase in cash available for
investment purposes.
Interest Expenses. These expenses decreased to $6,432,000 in 1998 as compared to
$6,801,000 in 1997. The decrease is reflective of the sale of an owned community
in 1998 as well as the payoff of approximately $2,500,000 of debt in the first
quarter of 1998.
Other Income (Expense). Other income (expense) for 1998 was ($3,569,000). This
expense is a result of the divestiture of 22 communities in six separate
transactions with third parties and the termination of 3 agreements to manage
communities for third parties. Nine leased communities in North Carolina, whose
primary reimbursement source was Medicaid, were transferred to a Florida based
company for no consideration. The leases on two other North Carolina
communities, whose primary pay or source was Medicaid, were terminated. One
other owned North Carolina community was sold to a company for proceeds of
$5,800,000. A leased community in Florida was sold to a Tennessee based company
for proceeds of $375,000. Eight leased communities in Texas, whose primary
reimbursement source was Medicaid were transferred to a Fort Worth based company
for no consideration. One other owned community in Oregon was subleased to a
local operator.
The transaction involving the transfer of the eight Texas leased communities was
a three party transaction since all of the eight communities were leased from
one REIT. In this transaction, the Company obtained an option to purchase the
remaining five communities leased from this REIT for $28,000,000.
The loss on these divestitures is a result of the book values of these
properties being in excess of any consideration received.
Discontinued Operations. Earnings from discontinued operations consist of real
estate operations that are classified for sale. The real estate operations had a
net operating loss of ($34,000) in 1998 and net operating income of $153,000 in
1997. The decrease in 1998 was the result of the sales of the North Carolina
shopping center in April of 1997 and a Georgia shopping center in June of 1998.
The sale in 1998 resulted in a loss of ($169,000) net of income tax.
Fiscal 1997 as Compared to Fiscal 1996
Revenues and Operating Expenses from Assisted Living Operations. Revenues
increased to $38,979,000 in 1997 as compared to $29,785,000 in 1996. The primary
reasons for the increase were the acquisition of Wedgwood and the continued
growth of Greenbriar. Wedgwood was acquired effective March 31, 1996 and as such
the financial statements for 1996 reflect nine months of Wedgwood operations as
compared to twelve months of operations in 1997. In addition, the Company's
total owned or leased communities increased from 32 at December 31, 1996 to 52
at December 31, 1997. Community operating expenses, which consist of assisted
living community expenses, lease expense and depreciation and amortization, were
$34,306,000 in 1997 as compared to $25,152,000 in 1996. The primary reasons for
these increases, as discussed above, are the acquisition of Wedgwood and the
continued growth of Greenbriar.
18
(Amounts in thousands)
Year Ended, December 31, 1997
Stabilized Start-up
Communities(1) Communities(2) Total
-----------------------------------------------------
Assisted Living Community Income $ 35,926 $ 3,053 $ 38,979
Assisted Living Community Operating Expenses 23,197 3,113 26,310
-----------------------------------------------------
Gross Operating Income 12,730 (61) 12,669
Lease Expense 4,285 378 4,663
Community Depreciation & Amortization 2,614 719 3,333
-----------------------------------------------------
Income (Loss) from Community Operations $ 5,830 $ (1,157) $ 4,673
(1) Stabilized communities are those communities that have been operating
for one year or have achieved stabilized occupancy of 92% or more.
(2) Start-up communities are those communities that have not been
operating for one year or have not achieved a stabilized occupancy of
92% or more.
Corporate General and Administrative Expenses - These expenses were $5,652,000
in 1997 as compared to $6,731,000 in 1996. The overall decrease, despite the
growth of the Company, was due to the consolidation of accounting and
administrative functions into the Dallas office. During 1996 Greenbriar,
Wedgwood and American Care were operated as three separate companies. Each
company had its own corporate office, executive officers, corporate staff,
accounting department and other related costs. In the first quarter of 1997 all
of these corporate functions were centralized in Dallas.
Interest and Dividend Income - Interest and dividend income was $479,000 in 1997
as compared to $771,000 in 1996. The decrease is due to a decrease in cash
available for investment.
Interest Expense. These expenses increased to $6,801,000 in 1997 as compared to
$4,457,000 in 1996. The increase is due to the increase in the number of
communities the Company owned in 1997 as compared to in 1996.
Other income (expenses)
(Amounts in thousands)
Year ended December 31,
1997 1996
----------------- ---------------
Write-off of note receivable $ (2,000) $ -
Write-off of investment securities (2,100) -
Gain of settlement of litigation 2,409 -
Prepayment penalty on mortgage payable (1,300) -
Other (5) 625
----------------- ---------------
$ (2,996) $ 625
In December 1997 management determined that it was in the best interests of the
Company to exchange its note receivable of $2,000,000 for certain of the
borrower's trade receivables. Due to the uncertainty as to the value of the
trade receivables the Company has fully written off the note and has placed no
value on the trade receivables. Further, the Company has preferred stock of
$2,300,000 in the above borrower. Due to deteriorating financial condition of
the borrower the Company has fully written off its investment.
When the Company acquired Wedgwood certain representations were made by the
seller. Subsequent to the acquisition two lawsuits were filed against the
Company and the seller. In October 1977 the Company and the seller entered into
an agreement whereby the Company would indemnify the seller for any damages
resulting from the lawsuits and agreed to assume responsibility for all legal
fees associated with the lawsuits. In return the seller agreed to give the
Company 125,000 shares of Greenbriar stock. Subsequent to the agreement both the
defendants were awarded a summary judgment and a directed verdict, including
legal fees, by the respective courts. The Company has recorded a gain on the
transaction of the fair market value of the stock, net of legal fees.
19
In October the Company agreed to an early payoff on a loan on three of its
communities. The loan, which was refinanced at a lower rate of interest had a
prepayment penalty.
Discontinued Operations - Earnings from discontinued operations consist of the
real estate operations that are classified for sale. The real estate operations
had net earnings of $153,000 in 1997 and $238,000 in 1996. The decrease in 1997
was a result of the sale of the North Carolina shopping center in April 1997.
The sale resulted in a gain of $322,000, net of income tax, in 1997.
Liquidity and Capital Resources
At December 31, 1998, the Company had current assets of $8,323,000 and current
liabilities of $7,802,000.
In December 1997 the Company sold Series F and Series G preferred shares for
$22,000,000 less selling and offering costs of $453,000. Payment was received in
January 1998.
The Series F voting preferred stock has a liquidation value of $10.00 per share
and each share is convertible into 5.7 shares of common stock. The holder has
the option to convert beginning in January 2000 and must convert by January
2001. Cumulative dividends are payable in cash at a rate of 6%.
The Series G preferred stock has a liquidation value of $10.00 per share and
each share is convertible into 5.7 shares of common stock. The holder has the
option to convert beginning in January 2000 and must convert by January 2001.
Cumulative dividends are payable in cash at a rate of 6%.
In connection with the sale, the Company entered into an agreement which
provides that, on the date of conversion, if the value of the Company's common
stock has not increased at the annual rate of at least 14% during the period the
preferred shares are outstanding, the Company is required to make a cash payment
("Cash Payment") to the preferred stockholders equal to the market price
deficiency on the shares received upon conversion.
The 14% guaranteed return is being accreted by a charge to accumulated deficit.
The amount of the Cash Payment that would be required assuming conversion at
each balance sheet date will be transferred from stockholders equity to
temporary equity. At December 31, 1998, a Cash Payment of $21,748,000 would have
been due assuming conversion took place.
The Series F & G preferred stockholders have the option to convert beginning in
January 2000. The Company has no information as to whether or not such early
conversion will occur. Further, any Cash Payment that might be required will be
determined by price of the Company's common stock when such conversion occurs.
Should the Series F & G preferred stockholders elect to convert in January 2000
and should the price of the Company's common stock remain the same as is was on
December 31, 1998, the Cash Payment obligation as of January 2000 would be
approximately $ 24,800,000.
The Company is proceeding with a plan to refinance its existing portfolio of
Communities. At current interest rates and property values the Company believes
it can refinance its existing Communities and if necessary sell certain
Communities and obtain cash sufficient to meet the potential Cash Payment. In
addition the Company will seek out additional third party financing. While the
Company believes it will be able to meet any potential Cash Payment requirement
there can be no assurance that the Company's plan will be successful.
At December 31, 1998 and since the date of issuance of the Series F and G
preferred stock, the Company was not in compliance with one of the financial
ratio covenants of the stock purchase agreement. The Company believes this
situation stems from a computational mistake that was made at the time this
particular ratio test was originally determined.
The Company has brought this mistake to the attention of the representative of
the preferred shareholder and anticipates that the ratio will be modified to
reflect the original intentions of the parties. The representatives have not
indicated to the Company that they consider that a default has occurred.
However, an event of default (1) permits the holder to elect a number of persons
to the board of directors that will constitute 70% of the board, (2) gives the
holder, upon giving the Company written notice of an event of default, the right
20
(Put Right) to require the Company to repurchase, "out of funds legally
available therefor," any or all of the preferred stock for an amount equal to
the liquidation value ($22,000,000 in the aggregate) plus accumulated but unpaid
dividends, plus a premium of 20%, and (3) entitles the holder to additional
dividends of $1.20 per share (an aggregate of $660,000 per quarter). Any
additional dividends paid pursuant to this provision would reduce the amount of
the Cash Payment resulting from the aforementioned 14% guaranteed return.
Future development activities of the Company are dependent upon obtaining
capital and financing through various means, including financing obtained from
sale/leaseback transactions, construction financing, 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.
Year 2000
The Company has assessed the potential impact of Year 2000 ("Y2K") issues as
regards its business, results of operations and financial condition. Critical
information systems and equipment are purchased from third party vendors and
each has assured the Company that its particular component is Y2K compliant.
Internal tests have confirmed these assessments. The Company is evaluating other
Y2K implications associated with the infrastructure of its individual
communities such as HVAC, security, elevator and community specific utility
systems and believes it will have substantially completed any remediation needed
by the end of the second quarter of 1999.
Y2K's potential impact on the Company's operations is also dependent on third
party vendors for such services as utilities, banking services and food.
Communication with the significant providers of these services has been
initiated but it is not possible, at present, to project the effect on the
Company if third party remediation efforts are not successful.
While the Company expects to adequately resolve all Y2K issues, a "reasonably
likely worst case" scenario would include supplier disruption, potential delay
in state reimbursement programs and minor utility disruptions. The Company
intends to address the possible consequences of these issues through
community-specific contingency plans and a prudent level of liquidity.
Although the Company cannot quantify the potential effect of Y2K issues on its
operating results, liquidity or financial position it is reasonably certain that
the total cost of compliance will not be material and can easily be funded
through operating cash flows as problems are incurred.
Effect of Inflation
The Company's principal sources of revenues are from resident fees from
Company-owned or leased assisted living communities and management fees from
communities operated by the Company for third parties. The operation of the
communities is affected by rental rates that are highly dependent upon market
conditions and the competitive environment in the areas where the communities
are located. Compensation to employees is the principal cost element relative to
the operations of the communities. Although the Company has not historically
experienced any adverse effects of inflation on salaries or other operating
expenses, there can be no assurance that such trends will continue or that
should inflationary pressures arise that the Company will be able to offset such
costs by increasing rental rates or management fees.
Forward Looking Statements
Certain statements included in this Management's Discussion and Analysis are
forward looking statements that predict the future development of the Company.
The realization of these predictions will be subject to a number of variable
contingencies and there is no assurance that they will occur or be realized in
the time frame proposed. The risks associated with the potential actualization
of the Company's plans include: contractor delays, the availability and cost of
financing, availability of managerial oversight and regulatory approvals, to
name a few.
21
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -------------------------------------------------------------------
The Company is subject to market risk from exposure to changes in interest rates
based on its financing, investing, and cash management activities. The Company
utilizes a balanced mix of debt maturities along with both fixed-rate and
variable-rate debt to manage its exposures to changes in interest rates. (See
Management's Discussion and Analysis - Liquidity and Capital Resources appearing
elsewhere in this Form 10-K.) If market interest rates average 1% (100 basis
points) more in 1999 than they did in 1998, the Company's interest expense would
increase and income before income taxes would decrease by approximately
$400,000. The Company does not expect changes in interest rates to have a
material effect on income or cash flows in fiscal 1999, although there can be no
assurances that interest rates will not significantly change.
The Company is also exposed to risks from changes in the market price of its
common stock. As discussed above, the amount of the Cash Payment to the holders
of the Series F and G preferred stock fluctuates with the market price of the
Company's common stock. An increase in the market price of $1 per share will
decrease the amount of the Cash Payment by $1,257,000. A decrease of $1 per
share will increase the amount of the Cash Payment by $1,257,000.
ITEM 8: FINANCIAL STATEMENTS
- ----------------------------
The financial statements required by this Item begin at page F-1 hereof.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
- ------------------------------------------------------------------------
None.
22
PART III
ITEMS 10-13:
The information required by Items 9, 10, 11 and 12 is incorporated by reference
into this Form 10-K from the Company's definitive Proxy Statement for its Annual
Meeting of Stockholders to be held June 4, 1999, which definitive Proxy
Statement will be filed with the Securities and Exchange Commission on or before
April 30, 1999.
23
PART IV
ITEM 14: EXHIBITS AND REPORTS ON FORM 8-K
- ------------------------------------------
(a) The following exhibits required to be filed by Item 601 of Regulation S-B
are filed as part of this Annual Report on Form 10-KSB:
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).
2.2.1 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.
2.2.6 Agreement on Form of Promissory Note between Registrant
and Lone Star Opportunity Fund, L.P filed as Exhibit
2.2.6 of Registrant's Form 10-KSB for the year ended
December 31, 1997.
2.2.7 Form of Promissory Note agreed to by Registrant and Lone
Star Opportunity Fund, L.P. filed as Exhibit 2.2.7 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).
24
Exhibit
Number Description of Exhibit
-------------- --------------------------------------------------------
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 Certificate of Designations, Preferences and Rights of
Preferred Stock dated October 7,
1992 relating to Registrant's Series A Preferred Stock
(filed as Exhibit 4.1 to Registrant's Form S-4
Registration Statement, Registration No. 33-55968, and
incorporated herein by this reference).
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.
4.1.3 Certificate of Designations, Preferences and Rights of
Preferred Stock dated August 18, 1993, relating to
Registrants' Series C Preferred Stock (filed as Exhibit
4.1.3 to Registrant's Form 10-KSB for the year ended
December 31, 1993).
4.1.3.1 Amendment to Certificate of Designations, Preferences
and Rights of Preferred Stock dated August 18, 1993,
relating to Registrants' Series C Preferred Stock.
4.1.4 Certificate of Designations, Preferences and Rights of
Preferred Stock dated March 15, 1996, relating to
Registrants' Series D Preferred Stock.
4.1.5 Certificate of Designations, Preferences and Rights of
Preferred Stock dated March 15, 1996, relating to
Registrants' Series E 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.
4.3.2 Registration Rights Agreement dated April 27, 1990
between Registrant's predecessor and International
Health Products, Inc. (assumed by Registrant), which has
been assigned to JRG Investments, Inc., relating to
4,150,000 shares (830,000 post December 1995 shares) of
Registrant's Common Stock, the benefits of which were
further assigned to Professional Investors Insurance,
Inc. as to 600,000 shares (120,000 post December 1995
shares) in November 1992 (filed on June 5, 1990, as an
Exhibit to the Registrant's predecessor's Current Report
on Form 8-K and incorporated herein by reference).
4.3.3 Form of Assignment of Registration Rights Agreement
dated September 30, 1992 between JRG Investments, Inc.
and Professional Investors Insurance, Inc. relating to
600,000 shares (120,000 post December 1995 shares) of
Registrant's Common Stock (filed as Exhibit 4.3.3 to
Registrant's Form S-4 Registration Statement,
Registration No. 33-55968, and incorporated herein by
this reference).
4.4 Form of Registration Rights Agreement dated December 1,
1991 between Registrant and W. Michael Gilley (filed as
Exhibit 4.4 to Registrant's Form S-4 Registration
Statement, Registration No. 33-55968, and incorporated
herein by this reference).
4.9.3 Registration Rights Agreement dated December 30, 1996
between Registrant and Floyd B. Rhoades.
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).
25
Exhibit
Number Description of Exhibit
-------------- --------------------------------------------------------
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 (Nonrecourse)
between Gene S. Bertcher and Registrant securing the
Promissory Note referenced in Exhibit 13.3.2. (Filed as
Exhibit 10.3.4 to Registrant's Form S-4 Registration
Statement, Registration No. 33-55968, and incorporated
herein by this reference).
10.4.2 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 (Nonrecourse)
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 (Nonrecourse)
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 (Nonrecourse)
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).
10.8.1 Form of Stock Option to purchase 80,000 shares (16,000
post December 1995 shares) of Registrant's Common Stock
issued to Dennis McGuire on October 1, 1992 (filed as
Exhibit 10.8.1 to Registrant's Form S-4 Registration
Statement, Registration No. 33-55968, and incorporated
herein by this reference).
10.8.2 Form of $40,000 Promissory Note dated October 1, 1992
payable to Registrant by Dennis McGuire representing the
purchase price for 80,000 shares (16,000 post December
1995 shares) of Registrant's Common Stock (filed as
Exhibit 10.8.2 to Registrant's Form S-4 Registration
Statement, Registration No. 33-55968, and incorporated
herein by this reference).
26
Exhibit
Number Description of Exhibit
-------------- --------------------------------------------------------
10.8.3 Form of Security Agreement - Pledge (Nonrecourse)
between Registrant and Dennis McGuire securing the
Promissory Note referenced in Exhibit 10.8.2 (filed as
Exhibit 10.8.3 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 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).
10.21.1 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 E xhibit 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).
27
10.36 Stock Option Agreement dated December 31, 1996 between
Registrant and James R. Gilley covering 200,000 shares
of Common Stock.
10.37 Employment Agreements dated December 31, 1996
10.38 Stock Purchase Warrant dated December 31, 1996 between
registrant and The April Trust
21.1* Subsidiaries of Registrant.
23.1* Consent of Grant Thornton.
27.1* Financial Data Schedule required by Item 601(c) of
Regulation S-K.
* Filed herewith.
(b) Reports on Form 8-K - none
28
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934
(the "Act"), the Company has duly caused this Annual Report on Form 10-K to be
signed on its behalf by the undersigned, thereunto duly authorized.
GREENBRIAR CORPORATION
March 30, 1999 By: /s/ Gene S. Bertcher
---------------------------------
Gene S. Bertcher
Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
29
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Act of 1934, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
GREENBRIAR CORPORATION
March 30, 1999 By: /s/James R. Gilley
-------------------------------------------------------
James R. Gilley, 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.
March 30, 1999 /s/ James R. Gilley
--------------------
James R. Gilley, President, Chief Executive Officer
and Chairman of the Board of Directors
March 30, 1999 /s/ Don C. Benton
------------------
Don C. Benton, Director
March 30, 1999 /s/ Paul G. Chrysson
---------------------
Paul G. Chrysson, Director
March 30, 1999 /s/ Matthew G. Gallins
-----------------------
Matthew G. Gallins, Director
March 30, 1999 /s/ Victor L. Lund
-------------------
Victor L. Lund, Director
March 30, 1999 /s/ Michael E. McMurray
------------------------
Michael E. McMurray, Director
March 30, 1999 /s/ Floyd B. Rhoades
---------------------
Floyd B. Rhoades, Director
March 30, 1999 /s/ William A. Shirley, Jr.
----------------------------
William A. Shirley, Jr., Director
30
Report of Independent Certified Public Accountants
Board of Directors and Stockholders
Greenbriar Corporation
We have audited the accompanying consolidated balance sheets of Greenbriar
Corporation and subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1998. These
financial statements are the responsibility of the Company's management.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe 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, 1998 and 1997, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles.
GRANT THORNTON LLP
Dallas, Texas
March 26, 1999
F-1
Greenbriar Corporation
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
December 31,
ASSETS 1998 1997
-------- --------
CURRENT ASSETS
Cash and cash equivalents $ 6,024 $ 23
Accounts receivable - trade 448 1,162
Stock subscription receivable -- 22,000
Other current assets 1,851 1,317
-------- --------
Total current assets 8,323 24,502
REAL ESTATE OPERATIONS HELD FOR SALE,
at lower of cost or market 1,000 3,097
DEFERRED INCOME TAX BENEFIT 4,750 2,632
INVESTMENT IN SECURITIES, AT COST 2,046 2,025
MORTGAGE NOTE RECEIVABLE, net of deferred
gain of $3,083 3,617 3,617
PROPERTY AND EQUIPMENT, AT COST
Land and improvements 11,651 12,114
Buildings and improvements 84,097 80,758
Equipment and furnishings 5,996 5,898
Construction in progress -- 4,864
-------- --------
101,744 103,634
Less accumulated depreciation 7,921 5,486
-------- --------
93,823 98,148
DEPOSITS 3,422 3,619
LEASE RIGHTS AND OTHER INTANGIBLES 12,511 12,129
OTHER ASSETS 861 1,474
-------- --------
$130,353 $151,243
======== ========
The accompanying notes are an integral part of these statements.
F-2
Greenbriar Corporation
CONSOLIDATED BALANCE SHEETS - CONTINUED
(Amounts in thousands, except per share amounts)
December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
--------- ---------
CURRENT LIABILITIES
Current maturities of long-term debt $ 2,278 $ 13,403
Notes payable - affiliate -- 1,479
Accounts payable - trade 1,787 1,883
Accrued expenses 2,471 3,345
Other current liabilities 1,266 1,798
--------- ---------
Total current liabilities 7,802 21,908
MORTGAGE NOTE COLLATERALIZED BY
REAL ESTATE HELD FOR SALE 883 893
LONG-TERM DEBT 58,154 54,851
FINANCING OBLIGATIONS 10,815 10,815
OTHER LONG-TERM LIABILITIES 862 259
--------- ---------
Total liabilities 78,516 88,726
PREFERRED STOCK REDEMPTION OBLIGATION 21,748 --
STOCKHOLDERS' EQUITY
Preferred stock 289 289
Common stock, $.01 par value; authorized, 20,000 shares;
issued and outstanding, 7,514 in 1998 and 7,300 in 1997 76 73
Additional paid-in capital 64,261 83,339
Accumulated deficit (32,170) (18,669)
--------- ---------
32,446 65,032
Less stock purchase notes receivable (including $2,250 from
related parties) (2,367) (2,515)
--------- ---------
30,089 62,517
--------- ---------
$ 130,353 $ 151,243
========= =========
The accompanying notes are an integral part of these statements.
F-3
Greenbriar Corporation
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except share data)
Year ended December 31,
1998 1997 1996
-------- -------- --------
Revenue
Assisted living operations $ 53,428 $ 38,824 $ 29,673
Other 93 155 112
-------- -------- --------
53,521 38,979 29,785
Operating expenses
Assisted living operations 35,965 26,310 19,439
Lease expense 9,552 4,663 3,712
Facility depreciation and amortization 4,407 3,333 2,001
General and administrative 5,292 5,652 6,731
Merger and transition expense -- -- 2,836
-------- -------- --------
55,216 39,958 34,719
-------- -------- --------
Operating loss (1,695) (979) (4,934)
Other income (expense)
Interest and dividend income 1,094 479 771
Interest expense (6,432) (6,801) (4,457)
Other income (expense), net (3,569) (2,996) 625
-------- -------- --------
(9,110) (9,318) (3,061)
-------- -------- --------
Loss from continuing operations
before income taxes (10,602) (10,297) (7,995)
Income tax benefit (1,896) (4,115) (2,400)
-------- -------- --------
Loss from continuing operations (8,706) (6,182) (5,595)
Discontinued operations
Earnings (loss) from operations, net of income taxes (34) 153 238
Gain (loss) on disposal, net of income taxes (169) 322 520
-------- -------- --------
NET LOSS (8,909) (5,707) (4,837)
Preferred stock dividend requirement (4,600) (334) (365)
-------- -------- --------
Loss allocable to common stockholders $(13,509) $ (6,041) $ (5,202)
======== ======== ========
Income (loss) per share - basic and diluted
Continuing operations $ (1.83) $ (.99) $ (1.13)
Discontinued operations (.03) .07 .14
-------- -------- --------
Net loss $ (1.86) $ (.92) $ (.99)
======== ======== ========
Weighted average number of common shares outstanding 7,275 6,582 5,259
The accompanying notes are an integral part of this statement.
F-4
Greenbriar Corporation
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Amounts in thousands)
Stock
Additional purchase
Preferred stock Common stock paid in Accumulated notes
Shares Amount Shares Amount capital deficit receivable Total
-------- -------- -------- -------- --------- --------- ---------- -------
Balances at January 1, 1996 34 $ 3 4,752 $ 48 $ 34,565 $ (7,418) $ (2,573) $ 24,625
Issuance of preferred stock 2,625 264 -- -- 15,938 -- -- 16,202
Conversion of preferred stock (1,970) (197) 1,731 17 180 -- -- --
Purchase of common stock -- -- (12) -- (123) -- -- (123)
Dividends on preferred stock 1 -- -- -- 72 (387) -- (315)
Capital contribution -- -- -- -- 600 -- -- 600
Net loss -- -- -- -- -- (4,837) -- (4,837)
-------- -------- -------- -------- -------- -------- -------- --------
Balances at December 31, 1996 690 70 6,471 65 51,232 (12,642) (2,573) 36,152
Issuance of common stock under stock
option plans -- -- 28 -- 318 -- -- 318
Issuance of common stock for acquisitions -- -- 851 8 12,919 -- -- 12,927
Issuance of preferred stock 2,200 220 -- -- 21,327 -- -- 21,547
Purchase of common stock -- -- (125) (1) (2,408) -- -- (2,409)
Payments on stock purchase notes receivable -- -- -- -- -- -- 58 58
Conversion of preferred stock (14) (1) 75 1 -- -- -- --
Dividends on preferred stock -- -- -- -- -- (320) -- (320)
Net loss -- -- -- -- -- (5,707) -- (5,707)
Other -- -- -- -- (49) -- -- (49)
-------- -------- -------- -------- -------- -------- -------- --------
Balances at December 31, 1997 2,876 289 7,300 73 83,339 (18,669) (2,515) 62,517
Issuance of common stock -- -- 250 2 435 -- -- 437
Purchase of common stock -- -- (36) 1 (472) -- -- (471)
Dividends on preferred stock, including
accretion of $2,970 -- -- -- -- 2,970 (4,592) -- (1,622)
Issuance costs for preferred stock -- -- -- -- (263) -- -- (263)
Redemption obligation - preferred stock -- -- -- -- (21,748) -- -- (21,748)
Reduction of stock purchase notes receivable -- -- -- -- -- -- 148 148
Net loss -- -- -- -- -- (8,909) -- (8,909)
-------- -------- -------- -------- -------- -------- -------- --------
Balance at December 31, 1998 2,876 $ 289 7,514 $ 76 $ 64,261 $(32,170) $ (2,367) $ 30,089
======== ======== ======== ======== ======== ======== ======== ========
The accompanying notes are an integral part of this statement.
F-5
Greenbriar Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
Year ended December 31,
--------------------------
1998 1997 1996
------ ------ ------
Cash flows from operating activities
Net loss $(8,909) $(5,707) $(4,837)
Adjustments to reconcile net loss to net
cash used in operating activities
Discontinued operations 203 (475) (758)
Depreciation and amortization 4,407 3,333 2,001
Gain on settlement of litigation -- (2,409) --
Loss on sale of property 2,924 -- --
Loss on sale of real estate held for sale -- -- 19
Write down of property 560 -- --
Write-off of note receivable -- 2,000 --
Write-off of investment securities -- 2,100 --
Stock dividends on investment securities -- (39) (133)
Capital contributions as payment for services -- -- 600
Deferred income taxes (2,118) (4,115) (1,979)
Changes in operating assets and liabilities,
net of effect of acquisitions
Accounts receivable 714 (572) 255
Other current and noncurrent assets (3,206) 1,338 905
Accounts payable and other liabilities (312) (2,007) 2,893
------- ------- -------
Net cash used in operating activities of
continuing operations (5,737) (6,553) (1,034)
Net cash provided by (used in) operating activities
of discontinued operations 93 66 (85)
------- ------- -------
Net cash used in operating activities (5,644) (6,487) (1,119)
The accompanying notes are an integral part of these statements.
F-6
Greenbriar Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(Amounts in thousands)
Year ended December 31,
--------------------------------
1998 1997 1996
-------- -------- --------
Cash flows from investing activities
Collections of notes receivable $ -- $ 126 $ 123
Purchase of property and equipment (4,843) (3,970) (16,534)
Additions to notes receivable -- -- (23)
Investing activities of discontinued operations 1,500 2,941 --
Net cash received in acquisition of business -- -- 739
-------- -------- --------
Net cash used in investing activities (3,343) (903) (15,695)
Cash flows from financing activities
Proceeds from borrowings 18,539 4,705 15,461
Payments on debt (23,195) (17) (1,426)
Dividends on preferred stock (1,622) (320) (315)
Purchase and retirement of common stock (471) -- (123)
Deposits on financing obligations -- -- (1,622)
Exercise of stock options -- 318 --
Financing activities of discontinued operations -- (8) --
Collection of stock subscription receivable 21,737 -- --
Other -- (49) --
-------- -------- --------
Net cash provided by financing activities 14,988 4,629 11,975
-------- -------- --------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 6,001 (2,761) (4,839)
Cash and cash equivalents at beginning of year 23 2,784 7,623
-------- -------- --------
Cash and cash equivalents at end of year $ 6,024 $ 23 $ 2,784
======== ======== ========
The accompanying notes are an integral part of these statements.
F-7
Greenbriar Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Nature of Operations
--------------------
Greenbriar Corporation's business consists of development and operation of
assisted living communities located throughout the United States, which
provide housing, hospitality and personal and healthcare services to elderly
individuals. At December 31, 1998, the Company had 31 communities in
operation in 11 states with a total capacity for 2,830 residents.
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).
All significant intercompany transactions and accounts have been eliminated.
Assisted Living Community Revenue
---------------------------------
Assisted living community revenue is reported at the estimated net
realizable value based upon expected amounts to be recovered from residents,
third party payors, and others for services rendered. Services provided by
certain of the Company's communities are reimbursed under various state
assistance plans.
Depreciation
------------
Depreciation is provided for in amounts sufficient to relate the cost of
property and equipment to operations over their estimated service lives,
ranging from 3 to 40 years. Depreciation is computed by the straight-line
method.
Use of Estimates
----------------
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the
financial statements and revenues and expenses during the reporting period.
Actual results could differ from those estimates.
F-8
Greenbriar Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE A - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES - Continued
Cash Equivalents
----------------
The Company considers all short-term deposits and money market investments
with a maturity of less than three months to be cash equivalents.
Impairment of Notes Receivable
------------------------------
A note receivable is identified as impaired when it is probable that
interest and principal will not be collected according to the contractual
terms of the note agreement. 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.
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.
Stock Options
-------------
The Company has elected to follow Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees (APB 25) and related
interpretations in accounting for its employee stock options. Under APB 25,
because the exercise price of employee stock options equals the market price
of the underlying stock on the date of grant, no compensation expense is
recorded. The Company has adopted the disclosure-only provisions of
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (SFAS 123).
Lease Rights and Other Intangibles
----------------------------------
Lease rights are amortized by the straight-line method over the lives of the
related leases. Goodwill is being amortized by the straight-line method over
a period of fifteen years. Deferred financing costs are being amortized over
the terms of the related borrowings under a method which approximates the
interest method.
Earnings (Loss) Per Common Share
--------------------------------
Basic earnings (loss) per common share is based on the weighted average
number of common shares outstanding. Diluted earnings 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 1998, 1997 and 1996,
all potential common shares were anti-dilutive.
F-9
Greenbriar Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE B - ACQUISITIONS AND DISPOSITIONS
Acquisitions
Wedgwood Retirement Inns, Inc. and Affiliates
---------------------------------------------
In March 1996, the Company acquired substantially all of the assets and
liabilities of a number of companies under common control and managed by
Wedgwood Retirement Inns, Inc. (Wedgwood). The business of these companies
consists of the operation of 15 assisted living and Alzheimer's communities.
To structure the Wedgwood acquisition as a tax-free exchange, the Company
also acquired a shopping center in North Carolina from James R. Gilley and
members of his family (the Gilley Group). Due to the fact that the Gilley
Group is a majority stockholder of Greenbriar and owner of the shopping
center, the property was recorded at the Gilley Group's historical cost
basis of approximately $2,300,000. Consideration given was 675,000 shares of
Series D preferred stock. Wedgwood's assets were valued at an aggregate
value of approximately $58,000,000 ($54,000,000 of property and equipment)
and liabilities assumed were approximately $44,000,000. In exchange,
Greenbriar issued 1,949,950 shares of Series E preferred stock, valued at
approximately $14,000,000, to the Wedgwood shareholders. In 1996, the
stockholders of the Company granted conversion rights to the series E
preferred stock and it was converted into approximately 1,600,000 shares of
the Company's common stock. The operations of Wedgewood have been reflected
in the consolidated financial statements of the Company since April 1, 1996.
Windsor Group LLC and Affiliates
--------------------------------
In October 1997, the Company acquired all of the assets and liabilities of
Windsor Group LLC (Windsor) and all of the common stock of three companies
who were affiliates of Windsor. The business of these companies consists of
the operation of three assisted living communities in South Carolina.
Consideration given was 130,000 shares of the Company's common stock valued
at approximately $2,533,000. Additionally, upon completion of a community
under construction, the Company will issue 28,531 additional shares of its
common stock. Assets acquired were valued at approximately $12,100,000 and
liabilities assumed were approximately $9,567,000. The operations of Windsor
and affiliates have been reflected in the consolidated financial statements
of the Company since October 1, 1997.
Villa Residential Care Homes, Inc.
----------------------------------
On December 31, 1997, the Company acquired all of the outstanding common
stock of Villa Residential Care Homes, Inc. (Villa). Additionally, through a
newly created partnership, the Company acquired lease rights and assumed
certain liabilities of a number of entities affiliated with Villa. The
business of these entities consists of the operation of 12 assisted-living
communities throughout Texas. Consideration given was 184,476 shares of the
Company's common stock and 10,464,321 units of the partnership valued at
approximately $10,394,000. The operating partnership units are convertible
after a one-year holding period into 536,990 shares of the Company's common
stock. For accounting purposes, the common shares into which the operating
units will be converted have been included in outstanding common shares.
Assets acquired, which consist primarily of lease rights, were valued at
$11,100,000 and liabilities assumed were approximately $706,000.
F-10
Greenbriar Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE B - ACQUISITIONS AND DISPOSITIONS - Continued
The following table presents pro forma unaudited consolidated results of
operations for the year ended December 31, 1997, assuming that the
acquisitions of Windsor and Villa and affiliates had taken place at the
beginning of 1997 . The pro forma results are not necessarily indicative of
the results of operations that would have occurred had the acquisitions been
made at the beginning of the periods presented, or of future results of
operations of the combined companies (in thousands, except per share data):
Year ended
December 31,
1997
------------
Revenue $49,701
Loss from continuing operations $(6,801)
Net loss $(6,326)
Preferred stock dividend requirement $ (334)
Loss from continuing operations allocable
to common stockholders $(7,135)
Loss allocable to common stockholders $(6,660)
Loss per share
Continuing operations $(.96)
Net loss $(.90)
American Care Communities, Inc.
-------------------------------
On December 31, 1996, the Company issued 1,300,000 shares of its common
stock in exchange for all of the outstanding common stock of American Care
Communities, Inc. (American Care). At the date of acquisition, American
Care, owned or leased 15 assisted living communities with approximately
1,350 units, located primarily in North Carolina. The merger has been
accounted for as a pooling of interests and accordingly, the Company's
consolidated financial statements have been restated to include the
operations of American Care for all periods prior to the merger.
In connection with the merger, a shareholder of American Care settled
certain of American Care's obligations in exchange for approximately 45,000
shares of the Company's common stock received in the merger. For accounting
purposes, this transaction, valued at $600,000, has been reflected as a
contribution of capital with a corresponding charge to operations.
Additionally, the Company incurred expenses related to the merger of
$983,000, expenses related to attempted capital market activities of
$774,000 and accrued severance costs related to the closure of the
administrative offices of American Care and Wedgwood of $1,079,000. These
amounts have been included in the statement of operations as merger and
transition expense.
F-11
NOTE B - ACQUISITIONS AND DISPOSITIONS - Continued
Separate results of operations for the period prior to the merger with
American Care are as follows (in thousands):
Year ended
December 31, 1996
-----------------
Revenue
Greenbriar $13,523
American Care 16,262
-------
Combined $29,785
=======
Earnings (loss) from continuing operations
Greenbriar $(3,483)
American Care (2,112)
-------
Combined $(5,595)
=======
Net earnings (loss)
Greenbriar $(2,725)
American Care (2,112)
-------
Combined $(4,837)
=======
Dispositions
In 1998, management decided to reduce the percentage of residents in the
Company's communities who were dependent on direct assistance from
government agencies for payment of their fees, and to dispose of certain
communities that were not profitable. As a result, the Company sold two
communities located in North Carolina and Florida for consideration of
$6,175,000; assigned the leases on seventeen communities located in North
Carolina and Texas to third parties for no consideration, terminated the
leases on two communities located in North Carolina and subleased one
community located in Oregon to a third party. The aforementioned sales and
disposals resulted in an aggregate loss of $2,924,000.
NOTE C - DISCONTINUED OPERATIONS
In 1995, management decided to sell the mobility products segment. The
segment was sold in February 1996 for 8% preferred stock, which is not
marketable, and notes valued at approximately $4,300,000, based upon fair
value as determined by the Board of Directors. A gain of approximately
$788,000, less applicable income taxes of $268,000 was recorded in 1996.
In 1996, the Company entered into negotiations to sell its remaining
non-assisted living real estate assets. Accordingly, the Company's
non-assisted living real estate operations have been reflected as
discontinued operations. Management expects that the proceeds from the sales
will be at least equal to the carrying value of the real estate assets. In
1997, the Company sold one of its real estate assets and recorded a gain of
$491,000, less applicable income taxes of $169,000. In 1998, the company
sold one of its real estate assets and recorded a loss of $255,370.
F-12
Greenbriar Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE C - DISCONTINUED OPERATIONS - Continued
The operations of the non-assisted living real estate segment have been
presented in the accompanying financial statements as discontinued
operations.
Summarized operating results of these segments are as follows (in
thousands):
Year ended
December 31,
-------------------------------
1998 1997 1996
------- ------- -------
Revenues $170 $702 $864
=== === ===
Earnings (loss) before income taxes $(34) $235 $361
Income tax expense - 82 123
--- --- ---
Net earnings (loss) $(34) $153 $238
=== === ===
NOTE D - CASH FLOW INFORMATION
Supplemental information on cash flows and noncash investing and financing
transactions is as follows (in thousands):
Year ended December 31,
---------------------------------
1998 1997 1996
------- ------- --------
Supplemental cash flow information
Interest paid $ 6,333 $ 6,981 $ 4,460
Income taxes paid 25 23 95
Supplemental data on noncash investing and financing activities
Dividend paid on preferred shares in stock 1,597 - 72
Preferred stock subscribed - 22,000 -
Purchase of common stock in exchange for
assumption of liabilities - 2,409 -
Sale of subsidiary
Securities and note received $ - $ - $ (4,300)
Assets sold - - 3,780
Gain (loss) on sale - - 520
------- ------- --------
Net cash effect of sale of subsidiary $ - $ - $ -
======= ======= ========
Businesses acquired
Fair value of assets acquired $ - $ 23,200 $ 59,890
Cash received - - 739
Common stock issued - (12,927) (16,202)
------- -------- --------
Liabilities assumed $ - $ 10,273 $ 44,427
======= ======== ========
F-13
Greenbriar Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE E - DEBT
Long-term debt is comprised of the following (in thousands):
December 31,
---------------------
1998 1997
-------- --------
Notes payable to financial institutions maturing through 2018; fixed and
variable interest rates ranging from 7.5% to 11.75% ; collateralized
by property, fixtures, equipment and the assignment of rents $32,176 $30,090
Notes payable to individuals and companies maturing through 2022;
variable and fixed interest rates ranging from 7% to 12%;
collateralized by real property, personal property, fixtures,
equipment and the assignment
of rents 4,741 9,544
Note payable to the Redevelopment Agency of the City of Corona,
California, payable into a sinking fund semi-annually in increasing
amounts from $65 to $420 through May 1, 2015; variable interest rate
of 5.4% at December 31, 1998; collateralized by personal
property, land, fixtures and rents 7,310 7,495
Notes payable to related parties - 897
Notes payable to financial institution - 8,023
Mortgage note payable to a financial institution maturing in 2007;
interest at 11.35%; collateralized by property and equipment 14,028 11,413
Other 2,177 792
------ ----
60,432 68,254
Less current maturities 2,278 13,403
------ ------
$58,154 $54,851
====== ======
F-14
Greenbriar Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE E - DEBT - Continued
Aggregate annual principal maturities of long-term debt at December 31, 1998
are as follows (in thousands):
1999 $ 2,278
2000 1,722
2001 3,604
2002 9,003
2003 14,812
Thereafter 29,013
------
$60,432
=======
Certain of the loan agreements contain various restrictive covenants, which
require, among others things, the maintenance of certain financial ratios,
as defined.
NOTE F - FINANCING OBLIGATIONS
The Company operates two communities that are financed through
sale-leaseback obligations. At the end of the tenth year of the fifteen-year
leases, the Company has options to repurchase the communities for the
greater of the sales prices or their current replacement costs less
depreciation plus land at current fair market values. Accordingly, these
transactions have been accounted for as financings, and the Company has
recorded the proceeds from the sales as financing obligations, classified
the lease payments as interest expense and continues to carry the
communities on its books and record depreciation. Payments under the lease
agreements are $1,167 for each of the years 1998 through 2001.
NOTE G - OPERATING LEASES
The Company leases certain communities under operating leases which expire
through the year 2011 and has various equipment operating leases. The leases
provide that the Company pay for property taxes, insurance, and maintenance.
Future minimum payments following December 31, 1998 are as follows (in
thousands):
1999 $ 4,894
2000 4,232
2001 4,330
2002 4,304
2003 3,749
Thereafter 22,018
------
$43,527
=======
Lease expense in 1998 and 1997 was $9,551,525 and $4,663,000, respectively.
Certain leases contain rent escalation clauses which are based upon future
events or changes in indices.
F-15
Greenbriar Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE H - INCOME TAXES
At December 31, 1998, the Company had net operating loss carryforwards of
approximately $30,800,000 which expire between 1999 and 2012. However,
approximately $6,700,000 of these net operating loss carryforwards have
limitations that restrict utilization to approximately $600,000 for any one
year. Also, carryforwards of $900,000, which expire between 2006 and 2008,
may only be used to offset future taxable income of the subsidiaries in
which the losses were generated.
The following is a summary of the components of income tax expense (benefit)
from continuing operations (in thousands):
Year ended December 31,
1998 1997 1996
------- ------- -------
Current $ 222 $ - $ 23
Deferred (2,118) (4,115) (2,423)
------ ------ ------
$(1,896) $(4,115) $(2,400)
====== ====== ======
Deferred tax assets and liabilities were comprised of the following (in
thousands):
December 31,
-------------------------
1998 1997
------- -------
Deferred tax assets:
Net operating loss carryforwards $10,473 $ 7,501
Note and accounts receivable 920 845
Investment in securities 651 651
Alternative minimum tax credit carryforwards 235 207
Accrued expenses 685 178
Financing obligations 1,802 1,802
Other 780 719
------ ------
Total deferred tax assets 15,546 11,903
Deferred tax liabilities - property and equipment (9,276) (9,271)
Valuation allowance (1,520) -
------ ------
Net deferred tax asset $ 4,750 $ 2,632
====== ======
F-16
Greenbriar Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE H - INCOME TAXES - Continued
Following is a reconciliation of income tax expense from continuing
operations with the amount of tax computed at the federal statutory rate of
34% (in thousands):
Year ended December 31,
-----------------------------------
1998 1997 1996
------- ------- -------
Tax benefit at the statutory rate $(3,605) $(3,501) $(2,718)
Change in deferred tax asset valuation allowance, exclusive
of additions for business purchased in 1996 1,520 (418) 418
Other 189 (196) (100)
------ ------ ------
Tax benefit $(1,896) $(4,115) $(2,400)
====== ====== ======
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. In the third quarter of 1998, management
determined that the Company's operating results were less than what was
initially expected in its profitability model. Accordingly, effective July
1, 1999, the Company began providing a valuation allowance for the deferred
tax benefits resulting from losses occurring after that date. The Company
believes that it is more likely than not that the net deferred tax asset at
December 31, 1998 of $4,750,000 will be recovered from future operations.
However, this evaluation is inherently subjective as it requires estimates
that are susceptible to significant revision as more information becomes
available.
NOTE I - STOCKHOLDERS' EQUITY
Preferred Stock
Preferred stock consists of the following (amounts in thousands, except per
share amounts):
Year ended
December 31,
-------------------
1998 1997
------ ------
Series B cumulative convertible preferred stock, $.10 par value; liquidation
value of $100; authorized, 100 shares; issued and outstanding, 1 share $ 1 $ 1
Series D cumulative convertible preferred stock, $.10 par value; liquidation
value of $3,375; authorized, issued ad outstanding, 675 shares 68 68
Series F voting cumulative convertible preferred stock, $.10 par value; liquidation
value of $14,000; authorized, issued and outstanding, 1,400 shares 140 140
Series G cumulative convertible preferred stock, $.10 par value; liquidation
value of $8,000; authorized, issued and outstanding, 800 shares 80 80
--- ---
$289 $289
=== ===
F-17
Greenbriar Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE I - STOCKHOLDERS' EQUITY - Continued
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 $25.00 per share in 1993 to $55.55 per share by 2001. Dividends at a
rate of 6% are payable in cash or preferred shares at the option of the
Company.
The Series D preferred stock has a liquidation value of $5 per share and is
convertible into common stock at $10.00 per share. Dividends are payable in
cash at a rate of 9.5%.
The Series F voting preferred stock has a liquidation value of $10.00 per
share and each share is convertible into .57 shares of common stock. The
Series F shareholders have the rights, as a class, to elect one member of
the Company's board of directors and to approve or reject certain
transactions, including any mergers or spin-offs involving the Company. The
holder has the option to convert beginning in January 2000 and must convert
by January 2001. Dividends are payable in cash at a rate of 6%.
The Series G preferred stock has a liquidation value of $10.00 per share and
each share is convertible into .57 shares of common stock. The holder has
the option to convert beginning in January 2000 and must convert by January
2001. Dividends are payable in cash at a rate of 6%.
The Series F and Series G preferred shares were sold to one investor in
December 1997 for $22,000,000, less selling and offering costs of $716,000.
Payment was received in January 1998. In connection with the sale, the
Company entered into an agreement which provides that, on the date of
conversion, if the value of the Company's common stock has not increased at
an annual rate of at least 14% during the period the preferred shares are
outstanding, the Company is required to make a Cash Payment (the Cash
Payment) to the preferred stockholders equal to the market price deficiency
on the shares received upon conversion.
The 14% guaranteed return is accreted by a charge to accumulated deficit.
The amount of the Cash Payment that would be required assuming conversion at
each balance sheet date is transferred from stockholders' equity to
Preferred Stock Redemption Obligation. At December 31, 1998, a Cash Payment
of $21,748,000 would have been due assuming conversion took place.
At December 31, 1998 and since the date of issuance of the Series F and G
preferred stock, the Company was not in compliance with one of the financial
ratio convenants of the stock purchase agreement. The Company believes this
situation stems from a computational mistake that was made at the time this
particular ratio test was originally determined.
The Company has brought this mistake to the attention of representatives of
the preferred shareholder and anticipates that the ratio will be modified to
reflect the original intentions of the parties. The representatives have not
indicated to the Company that they consider that a default has occurred,
However, an event of default (1) permits the holder to elect a number of
persons to the board of directors that will constitute 70% of the board, (2)
gives the holder, upon giving the Company written notice of an event of
default, the right (Put Right) to require the Company to repurchase, "out of
funds legally available therefor," any or all of the preferred stock for an
amount equal to the liquidation value ($22,000,000 in the aggregate) plus
accumulated but unpaid dividends, plus a premium of 20%, and (3) entitles
the holder to additional dividends of $1.20 per share (an aggregate of
$660,000 per quarter). Any additional dividends paid pursuant to this
provision would reduce the amount of the Cash Payment resulting from the
aforementioned 14% guaranteed return.
F-18
Greenbriar Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE I - STOCKHOLDERS' EQUITY - Continued
Stock Options
-------------
In 1993, the Company established a long-term incentive plan (the 1993 Plan)
for the benefit of certain key employees. Under the 1993 Plan, up to 217,500
shares of the Company's common stock are reserved for issuance. Options
granted to employees under the 1993 Plan become exercisable over a period as
determined by the Company and may be exercised up to a maximum of 10 years
from date of grant. In 1997, the Company adopted the 1997 Stock Option Plan,
under which up to 500,000 shares of the Company's common stock are reserve
for issuance.
The Company has also granted options to officers during 1996, 1997, and 1998
aggregating 1,000,000 shares not covered by either plan. These options were
granted at market, were exercisable immediately, and expire 10 years from
date of grant.
SFAS 123 requires disclosure of pro forma net earnings (loss) and pro forma
net earnings (loss) per share as if the fair value based method had been
applied in measuring compensation cost for stock-based awards granted after
January 1, 1995. The pro forma amounts are not necessarily representative of
the effects of stock-based awards on future pro forma net income (loss) and
pro forma net income (loss) per share because those pro forma amounts
exclude the pro forma compensation expense related to unvested stock options
granted before 1995.
Reported and pro forma net loss and net loss per share amounts are set forth
below (in thousands, except per share data):
1998 1997 1997
------ ------ ------
Net loss allocable to common stockholders (amounts in thousands)
As reported $(13,509) $(6,041) $(4,837)
Pro forma $(13,937) $(8,696) $(8,153)
Net loss per share
As reported $(1.86) $ (.92) $ (.99)
Pro forma $(1.92) $(1.32) $(1.55)
The fair value of these options was estimated at the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions: expected volatility of 100 percent for 1998, 37 percent for
1997 and 35 percent for 1996; risk-free interest rates of 5.5 percent for
1998, 5.9 percent for 1997 and 7.0 percent for 1996; no dividend yield; and
weighted average expected lives of 7.3 years.
F-19
Greenbriar Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE I - STOCKHOLDERS' EQUITY - Continued
Additional information with respect to options outstanding at December 31,
1998, and changes for the three years then ended was as follows:
1998
----------------------------
Weighted
average
exercise
Shares price
--------- ---------
Outstanding at beginning of year 1,000,000 $14.23
Granted 216,000 2.96
Exercised - -
--------- ---------
Outstanding at end of year 1,216,000 $12.36
========= =====
Options exercisable at
December 31, 1998 1,199,333 $12.29
========= =====
Weighted average fair value per share of options granted during 1998 was
$2.14.
1997
----------------------------
Weighted
average
exercise
Shares price
--------- ---------
Outstanding at beginning of year 587,500 $12.20
Granted 440,000 17.52
Exercised (27,500) 11.59
-------- -----
Outstanding at end of year 1,000,000 $14.20
========= =====
Options exercisable at
December 31, 1997 992,000 $14.23
======== =====
Weighted average fair value per share of options granted during 1997 was $9.14.
F-20
Greenbriar Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE I - STOCKHOLDERS' EQUITY - Continued
1996
--------------------------
Weighted
average
exercise
Shares price
------- --------
Outstanding at beginning of year 155,500 $12.83
Granted 432,000 11.98
------- ------
Outstanding at end of year 587,500 $12.20
======= =====
Weighted average fair value per share of options granted during 1996 was
$7.72.
Information about stock options outstanding at December 31, 1998 is
summarized as follows:
Options outstanding
-----------------------------------------------------------------
Weighted average
Number remaining Weighted average
Range of exercise prices outstanding contractual life exercise price
------------------------ ------------ ---------------- ------------------
$2.00 to $10.00 200,000 1.0 2.50
$10.00 to $15.00 558,000 5.6 11.58
$15.00 to $17.75 458,000 8.4 17.61
--------
1,216,000
=========
Options exercisable
------------------------------------
Number Weighted average
Range of exercise prices exercisable exercise price
----------- ----------------
$2.00 to $10.00 200,000 2.50
$10.00 to $15.00 552,000 11.58
$15.00 to $17.75 447,333 17.55
--------
1,199,333
=========
F-21
Greenbriar Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE J - OTHER INCOME (EXPENSE)
Other income (expenses) consists of the following: (amounts in thousands)
Year ended December 31,
-----------------------------
1998 1997 1996
------- ------- -------
Loss on sale of property (see Note B) $(2,924) $ - $ -
Write-off of note receivable - (2,000) -
Write-off of investment securities - (2,100) (200)
Gain on settlement of litigation - 2,409 -
Prepayment penalty on mortgage note payable - (1,300) -
Write down of property (560) - -
Other (85) (5) 825
---- --- ---
$(3,569) $(2,996) $625
====== ====== ===
In December 1997, management determined that it was in the best interests of
the Company to exchange its note receivable of $2,000,000 for certain of the
borrower's trade receivables. Due to the uncertainty as to the value of the
trade receivables the Company has fully written off the note and has placed
no value on the trade receivables. Further, the Company has preferred stock
of the borrower which was carried at $2,300. Due to deteriorating financial
condition of the borrower the Company has fully written off its investment.
When the Company acquired Wedgwood certain representations were made by the
seller. Subsequent to the acquisition two lawsuits were filed against the
Company and the seller. In October 1997, the Company and the seller entered
into an agreement whereby the Company would indemnify the seller for any
damages resulting from the lawsuits and agreed to assume responsibility for
all legal fees associated with the lawsuits. In return, the seller agreed to
give the Company 125,000 shares of its common stock. Subsequent to the
agreement, both the defendants were awarded a summary judgment and a
directed verdict, including legal fees, by the respective courts. The
Company has recorded a gain on the transaction of the fair market value of
the stock, net of legal fees.
In October 1997, the Company agreed to an early payoff on a loan on three of
its communities. The loan, which was refinanced at a lower rate of interest,
had a prepayment penalty of $1,300,000.
NOTE K - CONTINGENCIES
The Company is defendant in various lawsuits generally arising in the
ordinary course of business. Management of the Company is of the opinion
that these lawsuits will not have a material effect on the consolidated
results of operations, cash flows or financial position of the Company.
F-22
Greenbriar Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE L - 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, 1998, and 1997:
Cash and cash equivalents - The carrying amount approximates fair value
because of the short maturity of these instruments.
Investment in securities - The investment in securities consists of
convertible preferred stock of a private company. Fair value, based on
estimated future discounted cash flows, approximates carrying value.
Mortgage note receivable - The mortgage note receivable consists of a
$6,700,000 note with a stated interest rate of 14% due in 2021 from Southern
Care Corp. Although the note is in default due to non-payment of interest,
management believes the value of the underlying collateral is adequate to
recover the carrying value.
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.
Accounts receivable and payable - trade and note payable - affiliate - The
carrying amount approximates fair value because of their short maturity.
NOTE M - NOTES RECEIVABLE
Stock Purchase Notes
--------------------
December 31,
-----------------------
1998 1997
----- -----
In thousands)
Related party
Note from James R. Gilley, chief executive officer, principal
and interest at 5-1/2%, due November 2003 $2,250 $2,250
Other 117 265
---- ----
$2,367 $2,515
===== =====
All stock purchase notes are collateralized by common stock of the Company
and are presented in the balance sheet as a deduction from stockholders'
equity.
F-23
Greenbriar Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE M - NOTES RECEIVABLE - Continued
Mortgage Notes
--------------
December 31,
-----------------------
1998 1997
------ ------
(In thousands)
Mortgage notes receivable consist of amounts due from a corporation
and bear interest at 14% per annum, payable annually. The notes
are due in 2021 and are collateralized by a third lien on real property $6,700 $6,700
===== =====
In connection with certain litigation in which the Company is defendant, the
maker of the aforementioned note stopped making the interest payments
required under the note. As a result, the Company has ceased recording the
accrual of interest income. Had the Company been accruing interest on this
note, the amount recognized would have been approximately $900,000 per
annum.
Based on the value of the underlying collateral at December 31, 1998, no
impairment reserve is required for this note.
NOTE N - LEASE RIGHTS AND OTHER INTANGIBLES
Lease rights and other intangibles consist of the following:
December 31,
------------------------
1998 1997
------- --------
Lease rights, net of accumulated amortization of $798 in 1998 $ 5,419 $11,276
Lease buyout options 5,157 -
Other 1,935 853
------ ----
$12,511 $12,129
====== ======
In December 31, 1998, the Company exchanged its operating lease rights on
eight assisted living communities for options to purchase five assisted
living communities (the Option Communities) currently being leased and
operated by the Company. The purchase price under the options is the
lessor's acquisition cost, and the options are exercisable from December
1998 through December 2001.
The lease agreements on the Option Communities have implicit interest rates
of approximately 12%. The Company believes that financing of assisted living
communities can be obtained at this time at interest rates substantially
less than 12%.
For financial statement purposes, the capitalized costs related to the eight
leases exchanged of $5,157,000 were allocated to the Option Communities as
Lease Buyout Options. No gain or loss was recorded. Upon exercise of the
purchase options, these costs will be amortized over the term of the related
debt.
F-24
Greenbriar Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE O - FOURTH QUARTER ADJUSTMENTS
During the fourth quarter of 1998, the Company wrote down property by
approximately $560,000.
During the fourth quarter of 1997, the Company wrote off a note receivable
and an investment in securities in the aggregate amount of $4,100,000. See
Note J.
During the fourth quarter of 1996, the Company wrote off certain offering
costs of approximately $670,000 and notes receivable of approximately
$400,000. Additionally, the Company made other adjustments reducing earnings
by approximately $200,000.
F-25