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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, 1999
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 28, 2000,
was approximately $8,150,000.
At March 28, 2000, the issuer had outstanding approximately 6,995,000 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 2, 2000.
GREENBRIAR CORPORATION
Index to Annual Report on Form 10-K
Fiscal year ended December 31, 1999
Part I........................................................................3
ITEM 1: DESCRIPTION OF BUSINESS............................................3
ITEM 2: DESCRIPTION OF PROPERTIES.........................................13
ITEM 3: LEGAL PROCEEDINGS.................................................13
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...............14
Part II......................................................................15
ITEM 5: MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS..........15
ITEM 6: SELECTED FINANCIAL DATA...........................................15
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.........16
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.......20
ITEM 8: FINANCIAL STATEMENTS..............................................20
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE..............................20
Part III.....................................................................21
ITEMS 10-13:..............................................................21
Part IV......................................................................22
ITEM 14: EXHIBITS AND REPORTS ON FORM 8-K.................................22
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PART I
ITEM 1: DESCRIPTION OF BUSINESS
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 28, 2000, the Company operated 29 communities in 10 states,
with a capacity of 2,317 residents, consisting of 18 communities that are
owned and 11 that are leased from third parties. A third party manages
one property the Company leases.
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 properties and establish a
new focus on services and products for the elderly. In 1991 the Company
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, sold its existing nursing homes and
retirement centers, most of its commercial real estate and its mobility
equipment subsidiaries.
In 1995 the Company began developing and constructing assisted living
communities. However, the significant growth that subsequently occurred
was through acquisitions that were completed in 1996 and 1997.
The Assisted Living Industry
The Company believes that the assisted living industry has become the
preferred alternative to meet the growing demand for a cost-effective
setting in which to care for the elderly who do not require 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 levels than residents in skilled nursing
centers. Annual expenditures in the assisted living industry have been
estimated to be approximately $17 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.
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Demographic & Social Trends - The target market for the Company's
services is generally persons 75 years and older, one of the fastest
growing segments of the U.S. population (the average age of a
resident in Assisted Living is typically age 84 or older and that
resident is either widowed or single). According to the U.S. Census
Bureau, the portion of the U.S. population age 75 and older will have
increased by 28.7%, from approximately 13.0 million in 1990 to over
16.8 million by 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, 42 % of householders
over age 80 in 1999 had incomes of $15,000 and above and 38 % had
incomes of $25,000 and above. Accordingly, the Company believes that
the number of seniors who are able to afford high-quality residential
environments, such as those offered by the Company, has increased in
recent years. According to a 1998 study by the National Investment
Conference, reported incomes and net worth of residents in assisted
living communities are substantially lower than currently presumed by
feasibility standards and industry benchmarks ($25,000 and higher in
income annually). However, the same study states that residents are
more willing to spend down assets and family members are providing
more assistance than previously thought. If the study is correct,
this has dramatic implications for the future of the industry as it
indicates that the industry's potential market could be two to three
times larger than previously thought.
Lower Average Cost - The Company believes that the average annual
cost to residents receiving assisted living care in the Company's
communities is significantly less than the cost of receiving similar
care in a skilled nursing center.
Changing Supply of Long-term Care Beds - Most of the states in which
the Company currently operates have enacted certificate of need
("CON") or similar legislation that restricts the supply of licensed
nursing center beds. These laws generally limit the construction of
nursing centers and the addition of beds or services to existing
nursing centers. These laws 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 will also constrain the growth and supply of
traditional nursing home centers and beds. The Company expects that
this tightening supply of nursing beds coupled with the aging of the
population will create an increased demand for assisted living
communities. Finally, changes in Medicare reimbursement regulations
have had a very negative impact on the nursing home industry. A high
percentage of nursing homes are in bankruptcy and many have closed,
further reducing the number of available beds and discouraging
development of new beds.
Business Strategy
The Company believes that significant growth opportunities exist to
provide assisted living and full service independent living services to
the rapidly growing elderly population. The Company has expanded its
operations through the acquisition of assisted living and full service
independent living companies. The Company also seeks to improve the
profitability of its communities through continued enhancement of its
operations.
The majority of the Company's communities are operated and marketed on a
private-pay, single-occupancy basis. Double occupancy residents are
non-related people who are usually state-assisted. Most of the Company's
state-assisted residents are in Texas and North Carolina communities.
Texas is one of 33 states that have a Medicaid waiver program currently
operating (allowing a state to use set its own disbursement standards for
Medicaid funds - such as payment for assisted living services). North
Carolina was a pioneer in supporting the development of assisted living
as one way of containing the cost of caring for its aging population and
has one of the best assisted living reimbursement rates in the nation.
The Company believes that the assisted living industry will continue as a
private-pay industry for the foreseeable future, but may become more
price-sensitive as more people need assisted living for longer periods
due to increased life spans. Costs of caring for an aging America may
become more of a private-pay and state-assisted partnership
4
than currently exists. However, although Medicaid coverage is common and
becoming more so, participation is still low. Texas had only
approximately 1300 people participating in its Medicaid assisted living
program in 1998. This number increased to 1634 as of February 29, 2000.
The Company is no longer pursuing growth by new development but in the
past used the same development strategy for special care units in
combined Alzheimer's and assisted living communities and dedicated
special care communities. Using this strategy, the units and common space
were 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 an 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 and full service independent living industry.
The Company believes that building by acquisition is the best way to meet
its growth goals. The full service independent living 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 and full service independent living retirement
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
seeks to enhance 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. The Company offers services on both
a "point for services basis" and "level of service basis." Charges for
services are based on each community's price structure. The Company uses
active participation of the resident, the responsible party, the
resident's personal physician and other appropriate support team members
in determining the level of care needed on an individual basis, whether
using the point or level system. As a result, the Company believes that
it is able to maximize customer satisfaction while avoiding the high cost
of delivering all services to all residents without regard for need or
choice. The care plan for each resident is reviewed and updated at least
quarterly by the resident, the resident's family and the resident's
physician.
Maintain and Improve Occupancy Rates - The Company also seeks to maintain
and improve occupancy rates by continuing to (i) attract new residents
through marketing programs directed towards family decision makers,
namely adult children of potential residents, (ii) actively seek
referrals from hospitals, rehabilitation hospitals, physicians, clinics,
home healthcare agencies and other acute and sub-acute healthcare
providers in the markets served by the Company and (iii) develop new
market niches such as respite care, adult day care and other specialty
care programs sought by caregivers.
Selectively Increase Service Pricing Levels - The Company regularly
reviews opportunities to increase resident service fees within its
existing markets, while maintaining competitive market positions. In
keeping with this strategy, the Company will continue to offer high
quality assisted living services at average to above average prices and
generally target private-pay residents. The Company's private-pay
residents are typically seniors who can afford to pay for services from
both their own and their family's financial resources. Such resources may
5
include social security, investments, proceeds from the sale of a
residence, contributions from family members and insurance proceeds from
long-term care insurance policies.
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 28, 2000, the
Company had 11 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 remain longer within the same community and
will allow special security and support for Alzheimer's residents. The
Company's experience indicates that Alzheimer's residents often respond
better by sharing a suite with another Alzheimer's resident rather than
being in a single occupancy suite. Consequently, the Company's
Alzheimer's programs are designed to allow double occupancy, although
rooms are available for single occupancy.
Assisted Living Services
The Company offers a wide range of full service retirement and assisted
living care and services to its residents. The residents are allowed to
select among the services offered beyond basic support services and are
charged only for the specific services or level of services they need.
The services offered by the Company can generally be categorized as
follows:
Basic Support Services - These services include providing up to three
meals per day in a common dining room, special dietary planning,
laundry, general housekeeping, organized social and other activities,
transportation, maintenance, utilities (except telephone), security
and 24-hour emergency call monitoring.
Supplemental Services - These services include performing,
coordinating or assisting with bill paying, banking, personal
shopping, transportation, appointments, pet care and reminder
services.
Personal Care Services - These services include providing assistance
with activities of daily living (the ADL's) such as ambulation,
bathing, eating, dressing, personal hygiene and grooming.
Wellness Services - These services include assistance with the
administration of medication and health monitoring by a nurse, which
are provided as permitted by government regulation.
Alzheimer's and Special Care Services - Alzheimer's care includes a
higher 24-hour staff ratio to provide oversight and around-the-clock
scheduled activities. 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 28, 2000. 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 153 162 Oct-93 Owned (2)
Camelot Harlingen, TX S 57 57 Sep-94 Owned (2)
Camelot Assisted Living Harlingen, TX FE, DC 83 99 Jan-98 Leased (3)
Countrytime Inn Kings Mountain, NC FE, DC 31 56 Jun-95 Owned (2)
Crown Pointe Corona, CA S, FE 163 168 Jan-93 Owned (2,5)
Graybrier Southern Pines, NC FE, DC 55 95 Feb-94 Owned (2)
Greenbriar at Denison Denison, TX FE, DC 44 52 May-96 Owned (2)
Greenbriar at Muskogee Muskogee, OK FE 48 48 Mar-97 Owned (2)
Greenbriar at Sherman Sherman, TX FE 48 53 Mar-98 Owned (2)
La Villa Roswell, NM FE, DC 82 91 Nov-96 Leased (3)
Meadowbrook Place Baker, OR FE 50 50 Dec-92 Owned (2)
Neawanna by the Sea Seaside, OR S, FE 58 58 Jan-90 Leased (4,6)
Oak Park, Ft Worth Fort Worth, TX FE 150 150 Jan-98 Leased (3)
Pacific Pointe King City, OR S 114 114 Jan-93 Leased (3)
Palm House Fort Worth, TX S 155 154 1985 Leased (3)
Rose Garden Estates Ritzville, WA FE 21 21 Nov-95 Owned (2)
Rose Tara Plantation King, NC FE 38 65 Sep-94 Owned (2)
Summer Hill Oak Harbor, WA FE 59 61 Feb-94 Owned (2)
Sweetwater Springs Lithia Springs, GA FE, DC 48 48 Oct-96 Leased (7)
Tandy Fort Worth, TX FE 84 94 1984 Leased (3)
The Terrace Portland, OR FE 65 65 May-91 Owned
Villa del Rey Merced Merced, CA S 92 92 Dec-79 Leased (3)
Villa del Rey Roswell Roswell, NM S 135 132 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 38 47 Nov-95 Owned (2)
Windsor House Florence Florence, SC FE, DC 26 37 Sep-98 Owned (2)
Windsor House Greenville Greenville, SC FE, DC 31 41 Nov-97 Owned (2)
Windsor House West Spartanburg, SC FE, DC 76 97 1991 Owned (2)
-----------------------------------------------------------------------------------------------------------------
Total 2114 2317
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 2000 and 2037 and bear interest at fixed
and variable interest rates ranging from 7.5% to 11.35% as of
December 31, 1999. 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 4.85% at December 31, 1999. 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 2000 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.
Repair and Maintenance - The Company conducts routine repairs and
maintenance, as needed, of its communities on a regular basis. Several of
the Company's communities have been in operation for ten years or more.
The Company has no other current plans for significant expenditures
relating to its existing communities and considers them to be in good
repair and working order.
Community Description
The Company's existing communities as of March 28, 2000 range in size
from 12 to 163 units, are from one to three stories and from 10,000 to
150,000 square feet. Most communities have a large family room, usually
equipped with a fireplace, a spacious open dining area, library, TV room,
commercial kitchen, beauty salon, laundry and indoor and outdoor
recreational areas. Units generally range in size from approximately 330
to 400 square feet for a studio unit, 470 to 650 square feet for a one
bedroom unit and 680 to 850 square feet for a two bedroom unit. Assisted
living units, among other amenities, typically include a private
bathroom, kitchenette, closets, living and sleeping areas, a lockable
door, emergency call system, individual room temperature controls and
fire alarm and sprinkler systems.
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 and data processing
services such as accounts payable, billing and payroll. Corporate
personnel, regional directors of operations and community executive
directors collaborate with respect to the establishment of community
goals and strategies, quality assurance oversight, development of Company
policies and procedures, development and implementation of new programs,
cash management, human resource management and community development.
The Company has attracted and continues to seek highly dedicated and
experienced personnel. 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,
8
community relations, healthcare management, life skills programming and
fiscal management. In addition to some classroom training, the Company's
communities provide new employees with on the job training, utilizing
experienced staff as trainers and mentors.
Quality Assurance
The Company coordinates quality assurance programs at each of its
communities through its corporate headquarters staff and through its
regional operations staff. A commitment to quality assurance is designed
to achieve a high degree of resident and family member satisfaction with
the care and services the Company provides. In addition to ongoing
training and performance reviews of all employees, the Company's quality
control measures include:
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 residents' 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 visitors to its communities. The chairman,
president and chief executive officer is personally involved in resident
satisfaction surveys on a routine basis and the investigation and
resolution of resident and family complaints.
Regular Community Inspections - Community inspections are conducted by
corporate personnel (including the vice president of construction and
maintenance 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. These efforts are intended to create awareness
of a community and its services among prospective residents, their
families, other key decision-makers and professional referral sources.
The corporate marketing staff develops overall strategies for promoting
the Company's communities throughout its markets and continuously
assesses the success of these 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.
The Company engages in traditional types of marketing activities, such as
in special events, direct mailings, print advertising, signs and yellow
page advertising. These marketing activities and media advertisements are
directed to potential residents and their adult children, who often
comprise the primary decision makers for placing a frail elderly relative
in an assisted living setting.
9
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-seven states have a
licensure category or statute that uses the term "assisted living."
Several states are proposing regulations using the term. Thirty-five
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 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, social service
agencies and other regulatory authorities. Although regulatory
requirements vary from state to state, these requirements generally
address, among other things, staff education, training and records;
staffing levels; community services, including administration and
assistance with self-administration of medication; physical community
specifications; size and furnishing of community units and common areas;
food and housekeeping services and emergency evacuation plans and
resident rights and responsibilities. Most of the Company's communities
are required to possess state licenses in order to provide the levels and
types of services that they offer. A limited number of the Company's
communities are not required to possess such licenses because they do not
supply care and/or supervision to an extent requiring them to be licensed
under their respective state's laws. The Company's communities are also
subject to various state and local building codes and other ordinances,
including safety codes. Management anticipates that states establishing
regulatory frameworks for assisted living communities will require the
licensing of assisted living communities and will establish varying
requirements with respect to such licensing. The Company has obtained all
required licenses for each of its communities. Each of the Company's
licenses must be renewed annually.
Currently, only a few states have CON requirements for assisted living
communities. If Federal and state reimbursements increase or there is
overbuilding in the industry other states may initiate CON requirements.
This is not happening at this time and there is significant overbuilding
in many markets. Consequently most major companies have either stopped or
greatly reduced their development program. Conversely, small operators
and individual entrepreneurs continue to build, even in overbuilt
markets.
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, the Company participates in Federal and state
reimbursement programs. However, the Company expects the bulk of its
revenues to come from private payments.
The Americans with Disabilities Act ("ADA"), enacted July 26, 1990, has
had and will continue to have a major effect on the full service
residential retirement and assisted living industry. The communities
acquired by the Company must be in compliance with this act. The Fair
Housing Amendments Act of 1988 also prohibits discrimination against the
handicapped in the sale or rental of a dwelling, or in the provision of
services in connection with such a dwelling. 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
10
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.
The Company is subject to the Fair Labor Standards Act, which governs
such matters as minimum wage, overtime and other working conditions. Many
of the Company's employees are paid at rates related to the Federal
minimum wage and accordingly, increases in the minimum wage will result
in an increase in labor costs.
In compliance with underlying state bond financing, rents at one
community in Oregon must be approved by an agency of the state. Four
other communities financed with loans guaranteed by the Department of
Housing and Urban Development ("HUD") have rents requiring approval by
HUD.
Management is not aware of any non-compliance by the Company with
applicable regulatory requirements that would have a material adverse
effect on the Company's financial condition or results of operations.
Competition
The long-term care industry is highly competitive and the assisted living
and Alzheimer's care businesses in particular have and will continue to
become increasingly competitive in the future. 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 are already overbuilt and more will be overbuilt in the future.
If reimbursement programs, such as the Medicaid waiver program, increase,
assisted living competition will grow from existing and new companies
focusing primarily on assisted living. Nursing home centers that provide
long-term care services are also a source of competition for the Company,
particularly with respect to Alzheimer's care services. Many of the
Company's present and potential competitors have, or may have access to,
greater financial, management and other resources than those of the
Company. There can be no assurance that competitive pressures will not
have 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.
The Company also competes with other providers of long-term care in
attracting and retaining qualified and skilled personnel. In recent
years, the healthcare industry has experienced a shortage of qualified
healthcare professionals. The Company's operations require some
professionally certified (RN or LPN) staff, primarily for supervision of
care staff. While the Company has been able to retain the services of an
adequate number of professionals to staff its communities appropriately
and maintain its standards of quality care, there can be no assurance
that continued shortages will not affect the ability of the Company to
maintain the desired staffing levels. In some markets, non-licensed staff
have become a recruitment challenge. Unemployment rates are significantly
below the national average in a few markets.
11
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. The Company
owns nine communities that have been operated for periods ranging from 2
to 19 years for which environmental assessments have not been obtained.
The Company believes that all of its communities are in compliance in all
material respects with all Federal, state and local laws, ordinances and
regulations regarding hazardous or toxic substances or petroleum
products. The Company has not been notified by any governmental
authority, and is not otherwise aware, of any material non-compliance,
liability or claim relating to hazardous or toxic substances or petroleum
products in connection with any of its communities.
Control by Insiders
As of March 28, 2000, the Company's officers, directors and affiliated
entities owning more than 5% of the Company's outstanding stock owned
approximately 59% of the outstanding shares of Common Stock. Mr. James R.
Gilley, President, Chief Executive Officer and Chairman of the Board of
the Company, and one corporation wholly owned by him and his spouse,
beneficially owned an aggregate of approximately 30.8% of the outstanding
Common Stock of the Company. Mr. Victor L. Lund, a director of the
Company and the founder of Wedgwood (a company acquired by the Company in
1996), beneficially owned approximately 17.4% of the outstanding shares
of Common Stock. Floyd B. Rhoades, a director of the Company and founder
of American Care (a company acquired by the Company in 1996),
beneficially owned approximately 10.8% of the outstanding shares of
Common Stock. In addition, the Gilley family owns series D Voting
Preferred Stock, which is the equivalent of 675,000 Voting 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,
12
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
1,445,500 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 with
staggered term of service (ii) authorizing shares of preferred stock with
respect to which the Board of Directors has the power to fix the rights,
preferences, privileges and restrictions without any further vote or
action by the stockholders (iii) requiring holders of at least 80% of the
outstanding Common Stock to join together in requesting a special meeting
of stockholders and (iv) prohibiting removal of a director other than for
"cause" and then only if the holders of at least 80% of the outstanding
Common Stock vote for such removal. The Company is also subject to
Sections 78.411-78.444 of the Nevada Revised Statutes (the "Control Act")
which in general prohibits any business combination involving the Company
and a person that beneficially owns 10% or more of the outstanding Common
Stock or an affiliate or associate of the Company who within the past
three years was the beneficial owner, directly or indirectly, or 10% or
more of the outstanding Common Stock, except under certain circumstances.
The application of the Control Act and/or the provisions of the Company's
Articles of Incorporation and Bylaws could delay, deter or prevent a
merger, consolidation, tender offer or other business combination or
change of control involving the Company that some or a majority of the
Company's stockholders might consider to be in their personal best
interests, including offers or attempted takeovers that might otherwise
result in such stockholders receiving a premium over the market price of
the Common Stock and may adversely affect the market price of and the
voting and other rights of, the holders of Common Stock.
Employees
At March 28, 2000, the Company employed 1080 employees, including 757
full-time and 323 part-time employees. The Company believes it maintains
good relationships with its employees. None of the Company's employees
are represented by a collective bargaining group.
Corporate Offices
The Company's principal office is 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 28, 2000.
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.
13
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 $12 million. The Company's basis for financial statement
purposes in the indebtedness, net of related deferred gains, is
approximately $ 3.6 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, 1999.
14
PART II
ITEM 5: MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded under the symbol "GBR" and is listed
on the American Stock Exchange. The high and low closing sales prices of
the Company's Common Stock on the American Stock Exchange during the last
two fiscal years:
1999 1998
High Low High Low
---------------- ----------------
First Quarter $3.25 $2.06 $17.38 $13.75
Second Quarter 2.50 2.00 12.88 8.94
Third Quarter 2.13 1.63 8.75 1.63
Fourth Quarter 1.63 .50 3.94 1.37
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 28, 2000, was
$2.25 per share. As of March 28, 2000, there were 2,438 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,
1999 1998 1997 1996 1995
-------------- ------------- ------------- ------------- --------------
Operating revenue $ 41,260 $ 53,521 $ 38,979 $ 29,785 $ 7,964
Operating expenses 38,323 55,216 39,958 34,719 9,568
-------------- ------------- ------------- ------------- --------------
Operating income (loss) 2,937 (1,695) (979) (4,934) (1,604)
Income (loss) from continuing
operations before income taxes $ 82 $ (10,602) $ (10,297) $ (7,995) $ 5,286
Basic and diluted income (loss) per
common share $ (.62) $ (1.86) $ (.92) $ (.99) $ 1.04
BALANCE SHEET DATA:
Total assets $ 119,908 $ 130,353 $ 151,243 $ 116,701 $ 47,756
Long-term debt $ 50,477 $ 58,154 $ 54,851 $ 54,717 $ 16,485
Total liabilities $ 69,425 $ 78,516 $ 88,726 $ 80,549 $ 23,131
Preferred stock redemption obligation $ 27,763 $ 21,748 - - -
Total stockholders equity $ 22,720 $ 30,089 $ 62,517 $ 36,152 $ 24,625
15
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 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. In 1999 the Company disposed of one
community that was subleased to a local operator. The Company owned or
had current options to purchase all but five of its communities. The
percentage of residents who were private pay was approximately 90%.
Fiscal 1999 as Compared to Fiscal 1998
Revenues and Operating Expenses from Assisted Living Operations. Revenues
decreased to $41,260,000 in 1999 compared to $53,521,000 in 1998.
Community operating expenses, which consist of assisted living community
expense, lease expense and depreciation and amortization, were
$34,010,000 in 1999 as compared to $49,924,000 in 1998. The primary
reason for the decrease was the disposition of twenty-two communities
during 1998 that did not meet the Company's strategic objectives. The
revenues and related expenses for these communities for 1998 were
$14,879,000 and $16,490,000 respectively. After consideration of these
dispositions, the increases in both revenue and expenses are a result of
increased census at the existing communities.
Corporate General and Administrative Expenses. These expenses were
$4,313,000 in 1999 as compared to $5,292,000 in 1998. The decrease in the
expense is a result of the reorganization of the regional and corporate
16
offices that resulted in the elimination of one of the regional offices
and a reduction in the corporate staff in the third quarter of 1998.
Interest and Dividend Income. Interest and dividend income was $599,000
in 1999 as compared to $1,094,000 in 1998. In the first quarter of 1998,
the Company received proceeds from the sale of preferred stock of
$22,000,000. These funds were used during 1998 to fund operations and pay
down debt. The decrease in interest income in 1999 is due to less cash
available for investment purposes. In addition, in the fourth quarter of
1999, the Company entered into an agreement to sell its preferred stock
in New Life Corporation. Prior to this agreement, the Company had been
receiving quarterly cash dividends on this preferred stock.
Interest Expenses. These expenses decreased to $5,632,000 in 1999 as
compared to $6,432,000 in 1998. The decrease is reflective of the sale of
an owned community in the third quarter of 1998 as well as the payoff of
approximately $2,500,000 of debt in the first quarter of 1998.
Other income (expense), net. Other income for 1999 was $2,178,000. This
income is primarily the result of the divestiture of assets. A preferred
stock investment in another company was disposed of resulting in a gain
of $2,166,000. In addition, the disposition of two assisted living
communities that did not meet the Company's long-term strategies resulted
in a loss of ($186,000).
The other income (loss) 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. 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.
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.
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.
17
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. 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.
Liquidity and Capital Resources
At December 31, 1999, the Company had current assets of $10,108,000 and
current liabilities of $7,676,000.
In December 1997 the Company sold Series F and Series G convertible
preferred shares for $22,000,000 less selling and offering costs of
$453,000. 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 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, 1999, a Cash
Payment of $27,763,000 would have been due assuming conversion took
place.
In January and February 2000 the Company made payments totaling
$3,500,000 to redeem a portion of the preferred stock.
In conjunction with the $3,500,000 payment noted above Greenbriar and the
preferred stockholders have an agreement whereby Greenbriar would redeem
the Series F & G preferred stock from proceeds generated from the sale or
refinancing of certain assets. The original agreement provides the Series
F & G preferred stockholders the option to convert beginning January
2000. Management of Greenbriar believes that the preferred stockholders
have no plans to exercise their early conversion rights however there can
be no assurance that such an event will not occur
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
18
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, 1999 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 (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.
Effect of Inflation
The Company's principal sources of revenues are from resident fees from
Company-owned or leased assisted living communities and management fees
from communities operated by the Company for third parties. The operation
of the communities is affected by rental rates that are highly dependent
upon market conditions and the competitive environment in the areas where
the communities are located. Compensation to employees is the principal
cost element relative to the operations of the communities. Although the
Company has not historically experienced any adverse effects of inflation
on salaries or other operating expenses, there can be no assurance that
such trends will continue or that should inflationary pressures arise
that the Company will be able to offset such costs by increasing rental
rates or management fees.
Forward Looking Statements
"Safe Harbor" Statement under the Private Securities Litigation Reform
Act of 1995: A number of the matters and subject areas discussed in this
press release that are not historical or current facts deal with
potential future circumstances, operations, and prospects. The discussion
of such matters and subject areas is qualified by the inherent risks and
uncertainties surrounding future expectations generally, and also may
materially differ from Greenbriar Corporation's actual future experience
involving any one or more of such matters and subject areas relating to
interest rate fluctuations, ability to obtain adequate debt and equity
financing, demand, pricing, competition, construction, licensing,
permitting, construction delays on new developments contractual and
licensure, and other delays on the disposition, transition, or
restructuring of currently or previously owned, leased or managed
communities in the Company's portfolio, and the ability of the Company to
continue managing its costs and cash flow while maintaining high
occupancy rates and market rate assisted living charges in its assisted
living communities. Greenbriar Corporation has attempted to identify, in
context, certain of the factors that they currently believe may cause
actual future experience and results to differ from Greenbriar
Corporation's current expectations regarding the relevant matter or
subject area. These and other risks and uncertainties are detailed in the
Company's reports filed with the Securities and Exchange Commission
(SEC), including Greenbriar Corporation's Annual Reports on Form 10-K and
Quarterly Reports on Form 10-Q.
19
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 2000 than
they did in 1999, the Company's interest expense would increase and
income before income taxes would decrease by approximately $300,000. The
Company does not expect changes in interest rates to have a material
effect on income or cash flows in fiscal 2000, although there can be no
assurances that interest rates will not significantly change.
ITEM 8: FINANCIAL STATEMENTS
The financial statements required by this Item begin at page F-1 hereof.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
20
PART III
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 2, 2000,
which definitive Proxy Statement will be filed with the Securities and
Exchange Commission on or before April 28, 2000.
21
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).
22
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.
4.1.4 Certificate of Designations, Preferences and Rights of
Preferred Stock dated March 15, 1996, relating to
Registrants' Series D Preferred Stock.
4.1.6 Certificate of Voting Powers, Designations, Preferences
and Rights of Registrant's Series F Senior Convertible
Preferred Stock dated December 31, 1997, filed as Exhibit
2.2.2 of Registrant's Form 10-KSB for the year ended
December 31, 1997.
4.1.7 Certificate of Voting Powers, Designations, Preferences
and Rights of Registrant's Series G Senior Non-Voting
Convertible Preferred Stock dated December 31, 1997, filed
as Exhibit 2.2.3 of Registrant's Form 10-KSB for the year
ended December 31, 1997.
10.3.2 Form of $62,500 Promissory Note dated December 27, 1991
payable to Registrant by Gene S. Bertcher representing the
purchase price for 250,000 shares (50,000 post December
1995 shares) of Registrant's Common Stock (filed as
Exhibit 10.3.2 to Registrant's Form S-4 Registration
Statement, Registration No. 33-55968, and incorporated
herein by this reference).
10.3.3 Form of Renewal of Promissory Note dated October 14, 1992
extending the maturity date of the Promissory Note
referenced in Exhibit 10.3.2 (filed as Exhibit 10.3.3 to
Registrant's Form S-4 Registration Statement, Registration
No. 33-55968, and incorporated herein by this reference).
10.3.4 Form of Security Agreement - Pledge (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).
23
Exhibit
Number Description of Exhibit
----------------------------------------------------------------------
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).
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 Exhibit 10.22.2 to Registrant's Form S-4
Registration Statement, Registration No. 33-55968, and
incorporated herein by this reference).
10.22.3 Pledge Agreement dated as of May 23, 1992 between James R.
Gilley and M.S. Holding Co. Corp. (filed as Exhibit
10.22.3 to Registrant's Form S-4 Registration Statement,
Registration No. 33-55968, and incorporated herein by this
reference).
24
Exhibit
Number Description of Exhibit
----------------------------------------------------------------------
10.22.4 Irrevocable Proxy from James R. Gilley to M.S. Holding Co.
Corp. relating to shares of capital stock of JRG
Investment Co., Inc. (filed as Exhibit 10.22.4 to
Registrant's Form S-4 Registration Statement, Registration
No. 33-55968, and incorporated herein by this reference).
10.22.5 Blank Assignment and Power of Attorney signed by JRG
Investment Co., Inc. relating to 482,000 (96,400 post
December 1995 shares) shares of Registrant's Common Stock
(filed as Exhibit 10.22.5 to Registrant's Form S-4
Registration Statement, Registration No. 33-55968, and
incorporated herein by this reference).
10.22.6 Blank Assignment and Power of Attorney signed by JRG
Investment Co., Inc. relating to 1,268,000 shares (236,600
post December 1995 shares) of Registrant's Common Stock
(filed as Exhibit 10.22.6 to Registrant's Form S-4
Registration Statement, Registration No. 33-55968, and
incorporated herein by this reference).
10.22.7 Three Blank Assignments and Powers of Attorney signed by
JRG Investment Co., Inc., each relating to 600,000 shares
(120,000 post December 1995 shares) of Registrant's Common
Stock (filed as Exhibit 10.22.7 to Registrant's Form S-4
Registration Statement, Registration No. 33-55968, and
incorporated herein by this reference).
10.22.8 Blank Assignment and Power of Attorney signed by JRG
Investment Co., Inc. relating to 2,281,818 shares of
Registrant's Common Stock (filed as Exhibit 10.22.8 to
Registrant's Form S-4 Registration Statement, Registration
No. 33-55968, and incorporated herein by this reference).
10.22.9 Blank Assignment and Power of Attorney signed by JRG
Investment Co., Inc. relating to 905,557 shares of
Registrant's Series A Preferred Stock (filed as Exhibit
10.22.9 to Registrant's Form S-4 Registration Statement,
Registration No. 33-55968, and incorporated herein by this
reference).
10.37 Employment Agreements dated December 31, 1996
10.38 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
25
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 28, 2000 By: /s/ Gene S. Bertcher
-------------------------------------
Gene S. Bertcher
Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
26
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 28, 2000 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 28, 2000 /s/ James R. Gilley
--------------------
James R. Gilley, President, Chief Executive Officer
and Chairman of the Board of Directors
March 28, 2000 /s/ Don C. Benton
------------------
Don C. Benton, Director
March 28, 2000 /s/ Gene S. Bertcher
---------------------
Gene S. Bertcher, Executive Vice President, Chief
Financial Officer and Director
March 28, 2000 /s/ Paul G. Chrysson
---------------------
Paul G. Chrysson, Director
March 28, 2000 /s/ Matthew G. Gallins
-----------------------
Matthew G. Gallins, Director
March 28, 2000 /s/ Victor L. Lund
-------------------
Victor L. Lund, Director
March 28, 2000 /s/ Michael E. McMurray
------------------------
Michael E. McMurray, Director
March 28, 2000 /s/ William A. Shirley, Jr.
----------------------------
William A. Shirley, Jr., Director
27
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, 1999 and 1998, 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, 1999.
These financial statements are the responsibility of the Company's management.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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, 1999 and 1998, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended December 31, 1999, in conformity
with accounting principles generally accepted in the United States.
GRANT THORNTON LLP
Dallas, Texas
March 16, 2000
F-1
Greenbriar Corporation
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
December 31,
ASSETS 1999 1998
------ ------
CURRENT ASSETS
Cash and cash equivalents $ 8,814 $ 6,024
Accounts receivable - trade 182 448
Other current assets 848 1,851
---- ------
Total current assets 9,844 8,323
REAL ESTATE OPERATIONS HELD FOR SALE,
at lower of cost or market - 1,000
DEFERRED INCOME TAX BENEFIT 4,750 4,750
INVESTMENT IN SECURITIES, AT COST - 2,046
MORTGAGE NOTE RECEIVABLE, net of deferred
gain of $3,083 3,617 3,617
PROPERTY AND EQUIPMENT, AT COST
Land and improvements 11,179 11,651
Buildings and improvements 76,848 84,097
Equipment and furnishings 6,586 5,996
------ ------
94,613 101,744
Less accumulated depreciation 9,888 7,921
------ ------
84,725 93,823
DEPOSITS 3,907 3,422
LEASE RIGHTS AND OTHER INTANGIBLES 10,439 11,096
OTHER ASSETS 2,626 2,276
------ ------
$119,908 $130,353
======= =======
F-2
Greenbriar Corporation
CONSOLIDATED BALANCE SHEETS - CONTINUED
(Amounts in thousands, except per share amounts)
December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1998
------ ------
CURRENT LIABILITIES
Current maturities of long-term debt $ 3,317 $ 2,278
Accounts payable - trade 2,072 1,787
Accrued expenses 1,345 2,471
Other current liabilities 678 1,266
---- ------
Total current liabilities 7,412 7,802
MORTGAGE NOTE COLLATERALIZED BY
REAL ESTATE HELD FOR SALE - 883
LONG-TERM DEBT 50,477 58,154
FINANCING OBLIGATIONS 10,815 10,815
OTHER LONG-TERM LIABILITIES 721 862
---- ----
Total liabilities 69,425 78,516
PREFERRED STOCK REDEMPTION OBLIGATION 27,763 21,748
STOCKHOLDERS' EQUITY
Preferred stock 289 289
Common stock, $.01 par value; authorized,
20,000 shares; issued and outstanding, 76 76
7,514 shares
Additional paid-in capital 61,520 64,261
Accumulated deficit (36,798) (32,170)
------- -------
25,087 32,446
Less stock purchase notes receivable
(including $2,250 from related parties) (2,367) (2,367)
------- -------
22,720 30,089
------- -------
$119,908 $130,353
======= =======
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,
1999 1998 1997
------ ------ ------
Revenue
Assisted living operations 41,260 $ 53,428 $ 38,824
Other - 93 155
--- --- ----
41,260 53,521 38,979
Operating expenses
Assisted living operations 24,836 35,965 26,310
Lease expense 5,197 9,552 4,663
Facility depreciation and amortization 3,977 4,407 3,333
General and administrative 4,313 5,292 5,652
------ ------ ------
38,323 55,216 39,958
------ ------- -------
Operating profit (loss) 2,937 (1,695) (979)
Other income (expense)
Interest and dividend income 599 1,094 479
Interest expense (5,632) (6,432) (6,801)
Other income (expense), net 2,178 (3,569) (2,996)
------ ------- -------
(2,855) (9,110) (9,318)
------ ------- -------
Earnings (loss) from continuing operations
before income taxes 82 (10,602) (10,297)
Income tax benefit - (1,896) (4,115)
----- ------- -------
Earnings (loss) from continuing operations 82 (8,706) (6,182)
Discontinued operations
Earnings (loss) from operations, net of income taxes - (34) 153
Gain (loss) on disposal, net of income taxes - (169) 322
----- ----- ----
NET EARNINGS (LOSS) 82 (8,909) (5,707)
Preferred stock dividend requirement (4,720) (4,600) (334)
------- ------- -----
Loss allocable to common stockholders $ (4,638) $(13,509) $(6,041)
======= ======= ======
Earnings (loss) per share - basic and diluted
Continuing operations $(.62) $(1.83) $(.99)
Discontinued operations - (.03) .07
----- ----- ----
Net loss $(.62) $(1.86) $(.92)
====== ===== ====
Weighted average number of common shares outstanding 7,514 7,275 6,582
The accompanying notes are an integral part of these statements.
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, 1997 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
acretion 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
Dividends on preferred stock, including
accertion of $3,080 - - - - 3,080 (4,710) - (1,630)
Redemption obligation - preferred stock - - - - (6,015) - - (6,015)
Escrow stock released - - - - 194 - - 194
Net earnings - - - - - 82 - 82
--- --- --- --- --- --- --- ---
Balance at December 31, 1999 2,876 $ 289 7,514 $76 $61,520 $(36,798) $(2,367) $ 22,720
===== ==== ===== == ====== ======= ====== =======
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,
-----------------------------------------
1999 1998 1997
------ ------ ------
Cash flows from operating activities
Net earnings (loss) $ 82 $(8,909) $ (5,707)
Adjustments to reconcile net earnings (loss) to net
cash used in operating activities
Discontinued operations - 203 (475)
Depreciation and amortization 3,977 4,407 3,333
Gain on settlement of litigation - - (2,409)
Gain on sale of investment (2,166) - -
Loss on sale of assets 186 2,924 -
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)
Deferred income taxes - (2,118) (4,115)
Changes in operating assets and liabilities,
net of effect of acquisitions
Accounts receivable 266 714 (572)
Other current and noncurrent assets (367) (3,206) 1,338
Accounts payable and other liabilities (1,570) (312) (2,007)
------ ----- ------
Net cash used in operating activities of
continuing operations 408 (5,737) (6,553)
Net cash provided by (used in) operating activities
of discontinued operations - 93 66
--- --- ---
Net cash provided by (used in)
operating activities 408 (5,644) (6,487)
F-6
Greenbriar Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(Amounts in thousands)
Year ended December 31,
-----------------------------------------
1999 1998 1997
------ ------ ------
Cash flows from investing activities
Collections of notes receivable $ - $ - $ 126
Purchase of property and equipment (1,764) (4,843) (3,970)
Investing activities of discontinued operations - 1,500 2,941
Proceeds from sale of investments 4,331 - -
Proceeds from sale of property 1,861 - -
------ --- ---
Net cash used in investing activities 4,428 (3,343) (903)
Cash flows from financing activities
Proceeds from borrowings 2,290 18,539 4,705
Payments on debt (2,706) (23,195) (17)
Dividends on preferred stock (1,630) (1,622) (320)
Purchase and retirement of common stock - (471) -
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 (2,046) 14,988 4,629
------ ------- ------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 2,790 6,001 (2,761)
Cash and cash equivalents at beginning of year 6,024 23 2,784
------ --- ------
Cash and cash equivalents at end of year $ 8,814 $ 6,024 $ 23
====== ====== ======
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, 1999, the Company had 30 communities
in operation in 10 states with a total capacity for 2,390 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, if 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.
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 1999,
1998 and 1997, stock options for 1,612,000, 1,000,000 and 587,500,
respectively, were excluded from diluted shares outstanding because their
effect was anti-dilutive.
F-9
Greenbriar Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE B - ACQUISITIONS AND DISPOSITIONS
Acquisitions
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 158,500 shares of the Company's common stock
valued at approximately $2,533,000. 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.
NOTE C - DISCONTINUED OPERATIONS
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. 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, less applicable income tax benefits of
$86,000.
F-10
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
---- ----
Revenues $170 $702
=== ===
Earnings (loss) before income taxes $(34) $235
Income tax expense - 82
--- ---
Net earnings (loss) $(34) $153
=== ===
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,
---------------------------------
1999 1998 1997
------ ------ ------
Supplemental cash flow information
Interest paid $5,613 $ 6,333 $ 6,981
Income taxes paid 170 25 23
Supplemental data on noncash investing and financing activities
Preferred stock subscribed - - 22,000
Purchase of common stock in exchange for
assumption of liabilities - - 2,409
Businesses acquired
Fair value of assets acquired $ - $ - $23,200
Common stock issued - - (12,927)
------ --- -------
Liabilities assumed $ - $ - $10,273
====== === =======
F-11
Greenbriar Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE E - NOTES RECEIVABLE
Stock Purchase Notes
December 31,
1999 19978
------ ------
(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 117 117
---- ----
$2,367 $2,367
===== =====
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.
Mortgage Notes
December 31,
1999 1998
------ ------
(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
Less deferred gain 3,083 3,083
----- -----
$3,617 $3,617
===== =====
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, 1999, no
impairment reserve is required for this note.
The maker of the aforementioned note has previously issued Series B Bonds
which are collateralized by a second lien on the real property. In March
2000 the Company acquired the outstanding Series B Bonds from a related
party for $329,668.
F-12
Greenbriar Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE F - LEASE RIGHTS AND OTHER INTANGIBLES
Lease rights and other intangibles consist of the following:
December 31,
------------------------
1999 1998
------ ------
Lease rights, net of accumulated amortization of $1,259 and
$798 in 1999 and 1998 $ 4,958 $ 5,419
Lease buyout options 5,157 5,157
Goodwill 324 520
---- -----
$10,439 $11,096
====== ======
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
1999 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 in 1998 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.
NOTE G - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is practicable
to estimate values at December 31, 1999 and 1998:
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.
F-13
Greenbriar Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE H - DEBT
Long-term debt is comprised of the following (in thousands):
December 31,
--------------------
1999 1998
------ ------
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 $25,681 $32,176
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
4,572 4,741
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 7,110 7,310
Notes payable to financial institution -
Mortgage note payable to a financial institution maturing in 2003;
interest at 8.86%; collateralized by property and equipment 13,972 14,028
Other 2,459 2,177
------ ------
53,794 60,432
Less current maturities 3,317 2,278
------ ------
$50,477 $58,154
====== ======
Aggregate annual principal maturities of long-term debt at December 31,
1999 are as follows (in thousands):
2000 $ 3,317
2001 3,663
2002 8,676
2003 14,631
2004 763
Thereafter 22,744
------
$53,794
Certain of the loan agreements contain various restrictive covenants,
which require, among others things, the maintenance of certain financial
ratios, as defined.
F-14
Greenbriar Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE I - 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 year through 2001.
NOTE J - 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 property taxes, insurance, and
maintenance.
Future minimum payments following December 31, 1999 are as follows (in
thousands):
2000 $ 5,032
2001 4,345
2002 4,320
2003 3,766
2004 3,278
Thereafter 18,863
------
$39,604
Lease expense in 1999 and 1998 was $5,196,893 and $9,551,525,
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 K - INCOME TAXES
At December 31, 1999, the Company had net operating loss carryforwards of
approximately $31,000,000 which expire between 2002 and 2019. However,
approximately $8,300,000 of these net operating loss carryforwards have
limitations that restrict utilization to approximately $1,600,000 for any
one year.
The following is a summary of the components of income tax expense
(benefit) from continuing operations (in thousands):
Year ended December 31,
--------------------------------
1999 1998 1997
------ ------ ------
Current $ - $ 222 $ -
Deferred - (2,118) (4,115)
--- ------ ------
$ - $(1,896) $(4,115)
=== ====== ======
Deferred tax assets and liabilities were comprised of the following (in
thousands):
December 31,
--------------------
1999 1998
------ ------
Deferred tax assets:
Net operating loss carryforwards $10,450 $10,473
Note receivable 1,462 1,462
Alternative minimum tax credit carryforwards 235 235
Charitable contribution carryforwards 438 438
Accounts receivable 85 240
Accrued expenses 426 685
Financing obligations 1,802 1,802
Other 754 211
---- ----
Total deferred tax assets 15,652 15,546
Deferred tax liabilities - property and equipment (9,806) (9,276)
Valuation allowance (1,096) (1,520)
------- ------
Net deferred tax asset $ 4,750 $ 4,750
====== ======
In 1999, the Company determined that its net operating loss carryforwards
should be approximately $1,200,000 less than the amount reported at
December 31, 1998, primarily as a result of an Internal Revenue Service
examination. The amount of the related deferred tax asset has been
accordingly reduced by $424,000 at December 31, 1999. A corresponding
reduction was made in the valuation allowance.
F-16
Greenbriar Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE K - 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,
-----------------------------
1999 1998 1997
------ ------ ------
Tax expense (benefit) at the statutory rate $ 27 $(3,605) $(3,501)
Change in deferred tax asset valuation allowance - 1,520 (418)
Other (27) 189 (196)
--- ---- -----
Tax benefit $ - $(1,896) $(4,115)
=== ====== ======
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, 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, 1999 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 L - STOCKHOLDERS' EQUITY
Preferred Stock
Preferred stock consists of the following (amounts in thousands, except
per share amounts):
Year ended
December 31,
------------------
1999 1998
---- ----
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 and 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 L - 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, 1999, a Cash
Payment of $27,763,000 would have been due assuming conversion took
place.
At December 31, 1999 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 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 L - STOCKHOLDERS' EQUITY - Continued
In January and February 2000, the Company made payments totaling
$3,500,000 to redeem a portion of the Series G preferred stock. In
conjunction with the payments, the Company entered into an agreement
whereby (1) it will redeem additional shares from the proceeds generated
from the sale of assets or from refinancings and (2) it would limit
capital expenditures until all the shares have been redeemed.
Stock Options
In 1992, the Company established a long-term incentive plan (the 1993
Plan) for the benefit of certain key employees. Under the 1993 Plan, up
to 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):
1999 1998 1997
------ ------ ------
Net loss allocable to common stockholders (amounts in thousands)
As reported $(4,638) $(13,509) $(6,041)
Pro forma $(5,287) $(13,937) $(8,696)
Net loss per share
As reported $(.62) $(1.86) $ (.92)
Pro forma $(.78) $(1.92) $(1.32)
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 83 percent for 1999,
100 percent for 1998 and 37 percent for 1997, risk-free interest rates of
6.1 percent for 1999, 5.5 percent for 1998 and 5.9 percent for 1997; no
dividend yield; and weighted average expected lives of 7.3 years.
F-19
Greenbriar Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE L - STOCKHOLDERS' EQUITY - Continued
Information with respect to options outstanding at December 31, 1999, and
changes for 1997 - 1999 is as follows:
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.
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.
F-20
Greenbriar Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE L - STOCKHOLDERS' EQUITY - Continued
1999
---------------------------
Weighted
average
exercise
Shares price
-------- -------
Outstanding at beginning of year 1,216,000 $12.29
Granted 1,061,800 1.37
Cancelled (5,500) 20.19
------- -----
Outstanding at end of year 2,272,300 $ 7.21
========= =====
Options exercisable at
December 31, 1999 1,834,933 $ 8.46
========= =====
Weighted average fair value per share of options granted during 1999 was
$1.37.
Additional information about stock options outstanding at December 31,
1999 is summarized as follows:
Options outstanding
--------------------------------------------------------
Weighted average
Number remaining Weighted average
Range of exercise prices outstanding contractual life exercise price
------------------------ ----------- ------------------ ----------------
$.50 to $.75 660,000 8.4 .69
$2.00 to $3.00 601,800 6.3 2.50
$10.00 to $14.00 558,000 4.5 11.58
$15.00 to $21.00 452,500 7.5 17.58
--------
2,272,300
=========
Options exercisable
---------- ----------------
Number Weighted average
Range of exercise prices exercisable exercise price
------------------------ ----------- ----------------
$50 to $.75 460,000 .69
$2.00 to $3.00 373,933 2.50
$10.00 to $14.00 552,000 11.58
$15.00 to $21.00 449,000 17.56
--------
1,834,933
---------
Greenbriar Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE M - OTHER INCOME (EXPENSE)
Other income (expenses) consists of the following: (amounts in thousands)
Year ended December 31,
---------------------------------
1999 1998 1997
------ ------ ------
Gain on sale of securities $2,166 $ - $ -
Loss on sale of property (186) (2,924) -
Write-off of note receivable - - (2,000)
Write-off of investment securities - - (2,100)
Gain on settlement of litigation - - 2,409
Prepayment penalty on mortgage note payable - - (1,300)
Write down of property - (560) -
Other 198 (85) (5)
---- ---- ---
$2,178 $(3,569) $(2,996)
===== ====== ======
In December 1997, management determined that it was in the best interests
of the Company to exchange a 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 $2,100,000. Due to
deteriorating financial condition of the borrower the Company has fully
written off its investment.
When the Company acquired Wedgwood Retirement Inns, Inc. in March of
1996, 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.
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 (1) sold
two communities located in North Carolina and Florida to third parties
for consideration of $6,175,000, (2) assigned the leases on eleven
communities located in North Carolina and Texas to third parties for no
consideration, (3) terminated the leases on two properties located in
North Carolina, and (4) subleased one property located in Oregon to a
third party. The aforementioned sales and disposals resulted in an
aggregate loss of $2,924,000.
In November of 1999 the Company sold investments in preferred stock which
resulted in a gain of $2,166,000.
F-22
Greenbriar Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE N - 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.
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 M.