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, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-8187
Greenbriar Corporation
(Exact name of Registrant as specified in its charter)
Nevada 75-2399477
(State or other jurisdiction of (IRS Employer
Incorporation or organization) Identification No.)
14185 Dallas Parkway, Suite 650, Dallas, Texas 75254
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 407-8400
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
------------------- ---------------------
Common Stock, $.01 par value American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the issuer (1) filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
past 12 months (or for such shorter period that the issuer was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. YES [X] NO [ ]
Indicate by check mark if there is no disclosure of delinquent filers in
response to Item 405 of Regulation S-K contained in this form, and no disclosure
will be contained, to the best of issuer's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
issuer, computed by reference to the closing sales price on March 28, 2002, was
approximately $3,464,000
At March 28, 2002, the issuer had outstanding approximately 359,000 shares of
par value $.01 Common Stock.
Documents Incorporated by Reference:
Registrant's definitive proxy statement pertaining to the 2002 Annual Meeting of
Stockholders (the "Proxy Statement") and filed or to be filed not later than 120
days after the end of the fiscal year pursuant to Regulation 14A is incorporated
herein by reference in Part III.
GREENBRIAR CORPORATION
Index to Annual Report on Form 10-K
Fiscal year ended December 31, 2001
Part I.........................................................................3
ITEM 1: DESCRIPTION OF BUSINESS.............................................3
ITEM 2: DESCRIPTION OF PROPERTIES..........................................13
ITEM 3: LEGAL PROCEEDINGS..................................................13
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................14
ITEM 5: MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS...........15
ITEM 6: SELECTED FINANCIAL DATA............................................15
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION..........16
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........21
ITEM 8: FINANCIAL STATEMENTS...............................................21
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.......................................................22
Part III......................................................................23
ITEMS 10-13: DIRECTORS AND EXECUTIVE OFFICERS, EXECUTIVE COMPENSATION,
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............................23
Part IV.......................................................................24
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K................................................................24
2
PART I
ITEM 1: DESCRIPTION OF BUSINESS
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Overview and Background of Assisted Living Operations
Greenbriar Corporation, its subsidiaries and affiliates (the "Company") operate
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. Finally, the
Company is involved in the identification and acquisition of real estate
properties, primarily in the retirement housing and assisted living industry,
enhancing the value of these properties by proper operations and marketing and
reselling these properties for their appreciated value while retaining a
management contract, if desirable, for their continuing operation.
As of March 28, 2002, the Company operated 16 communities in nine states, with a
capacity of 1,281 residents, consisting of seven communities that are owned four
that are leased and five that are managed under contract to one of the Company's
subsidiaries for third party owners.
The Assisted Living Industry
The Company believes that the assisted living industry has become the preferred
alternative to meet the growing demand for a cost-effective setting in which to
care for the elderly who do not require more intensive medical attention
provided by a skilled nursing center but who cannot live independently due to
physical or cognitive frailties. In general, assisted living represents a
combination of housing, general support services and full time personal care
services designed to aid elderly residents with the activities of daily living
("ADLs") on a scheduled and unscheduled basis. Many assisted living communities
also provide assistance to residents with low acuity medical needs or may offer
higher levels of personal assistance for incontinent residents or residents with
Alzheimer's disease or other forms of dementia. Another growing trend in the
industry is the provision of care for higher levels of acuity. Generally,
assisted living residents have higher levels of need than residents of
independent retirement communities but lower levels than residents in skilled
nursing centers. The Company believes that assisted living is one of the fastest
growing segments of elderly care and will continue to experience significant
growth due to the following:
Consumer Preference - The Company believes that assisted living is
increasingly becoming the setting preferred by prospective residents and
their families in which to care for the frail elderly. Assisted living
offers residents greater independence in a residential setting which the
Company believes results in a higher quality of life than that experienced
in more institutional or clinical settings such as skilled nursing centers.
According to the National Center for Assisted Living, there are more than
28,000 assisted living residences in the U.S. housing more than one million
people.
Demographic & Social Trends - The target market for the Company's services
is, generally, persons 75 years and older, one of the fastest growing
segments of the U.S. population (the average age of a resident in Assisted
Living is typically age 84 or older and that resident is either widowed or
single). According to the U.S. Census Bureau, the portion of the U.S.
population age 75 and older will have increased by 28.7%, from
3
approximately 13.0 million in 1990 to over 16.8 million by the year 2000,
and the number of person's age 85 and older is expected to have increased
37.3% during the 1990s. This age group is projected to increase by 33.2%
between the years 2000 and 2010. It is estimated by the United States
Bureau of census that approximately 50% of the population of seniors over
age 85 need assistance with ADLs and approximately 50% of such seniors
develop Alzheimer's disease or other forms of dementia. According to
Claritas, Inc., a nationally recognized demographics provider, 59% of
householders over age 80 in 2000 had incomes of $15,000 and above and 40 %
had incomes of $25,000 and above. Accordingly, the Company believes that
the number of seniors who are able to afford high-quality residential
environments, such as those offered by the Company, has increased in recent
years. According to a 1998 study by the National Investment Conference
(NIC), reported incomes and net worth of residents in assisted living
communities are substantially lower than currently presumed by feasibility
standards and industry benchmarks ($25,000 or more annual income). However,
the same study states that residents are more willing to spend down assets
and family members are providing more assistance than previously estimated.
If the study is correct, this has dramatic implications for the future of
the industry as it indicates that the industry's potential market could be
two to three times larger than previously thought. Because of severe
overbuilding in many markets, the NIC prediction has not been proved or
disproved at this time.
Lower Average Cost - The Company believes that the average annual cost to
residents receiving assisted living care in the Company's communities is
significantly less than the cost of receiving similar care in a skilled
nursing center.
Changing Supply of Long-term Care Beds - Most of the states in which the
Company currently operates have enacted certificate of need ("CON") or
similar legislation that restricts the supply of licensed nursing center
beds. These laws generally limit the construction of nursing centers and
the addition of beds or services to existing nursing centers, thus limiting
the available supply of traditional nursing home beds. In addition, some
long-term care centers have started to convert traditional nursing home
beds into sub-acute beds. The Company also believes that high construction
costs and limits on government reimbursement for the full cost of
construction and start-up expenses will also constrain the growth and
supply of traditional nursing home centers and beds. The Company expects
that this tightening supply of nursing beds coupled with the aging of the
population will create an increasing demand for assisted living
communities. Finally, changes in Medicare reimbursement regulations have
had a very negative impact on the nursing home industry. A high percentage
of nursing homes are in bankruptcy and many have closed, further reducing
the number of available beds and discouraging development of new beds.
However, upscale private nursing homes seem to be experiencing an upturn
and new construction of private pay nursing homes appears to be increasing
in some markets.
Business Strategy
The Company has historically had two sources of revenue and earnings. The first
is earnings from operations and the second is gain on sales of assets. The
Company has a business strategy of acquiring undervalued assisted and full
service retirement communities, enhancing their value and selling the property.
Whenever possible the Company will maintain a management contract to operate the
property for a fee. The Company conducts the management of the properties it
owns or leases as well as those it manages for others through its wholly owned
subsidiary. Senior Living Management, Inc.
The Company believes that significant growth opportunities exist to provide
assisted living and full service independent living services to the rapidly
growing elderly population. In addition, due to a series of setback that have
plagued the industry, including overbuilding, higher than anticipated operating
costs, quicker turnover of residents than anticipated and difficulties in
obtaining insurance there is a number of properties available to be purchased
at, what the Company believes to be attractive prices.
4
As discussed more fully in Management's Discussion and Analysis or Plan of
Operations (See Item: 7) the Company plans on participating in the acquisitions
of properties through limited partnership interests in partnerships formed in
conjunction with officers of the Company.
The Company's top management has extensive acquisition experience and contacts
in the assisted and full service independent living industry.
Acquisition Strategy - 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 a community's operating results. The Company also sells some of the
communities it acquires when they no longer fit with the Company's long-range
strategy.
Operating Strategy -The Company 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. The Company provides limited double occupancy in which
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.
Most of the states now have a currently operating Medicaid waiver program
(allowing a state to set its own disbursement standards for Medicaid funds -
such as payment for assisted living services).
The Company believes that the assisted living industry will continue as a
private-pay industry for the foreseeable future, but may become more
price-sensitive as more people need assisted living for longer periods due to
increased life spans. Costs of caring for an aging America may become more of a
private-pay and state-assisted partnership than currently exists. However,
although Medicaid coverage is common and becoming more so, participation is
still low.
In the past the Company 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 could be marketed as 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 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, (iii) improving operating efficiencies and (iv) improving
marketing positioning.
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 of service system. As a result, the Company believes that it is
able to maximize customer satisfaction while avoiding the high cost of
delivering all services to all residents without regard for need or choice. 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,
5
rehabilitation hospitals, physicians, clinics, home healthcare agencies and
other acute and sub-acute healthcare providers in the markets served by the
Company and (iii) develop new market niches such as respite care, adult day care
and other specialty care programs sought by caregivers.
Selectively Increase Service Pricing Levels - The Company regularly reviews
opportunities to increase resident service fees within its existing markets,
while maintaining competitive market positions. In keeping with this strategy,
the Company will continue to offer high quality assisted living services at
average to above average prices and generally target private-pay residents. The
Company's private-pay residents are typically seniors who can afford to pay for
services from both their own and their family's financial resources. Such
resources may include social security, investments, proceeds from the sale of a
residence, contributions from family members and insurance proceeds from
long-term care insurance policies.
Improve Operating Efficiencies - The Company seeks to improve the operating
results of its communities by actively monitoring and managing its operating
costs. In addition, the Company believes that concentrating communities within
selected geographic regions may enable the Company to achieve operating
efficiencies through economies of scale, reducing corporate and regional
overhead and providing for more effective management supervision and financial
controls. The Company has also become a member of HPSI, a nationwide purchasing
group, to further leverage its ability to reduce and control purchasing costs.
Offer Alzheimer's and Other Dementia Services - As of March 30, 2001, 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 these diseases,
will create an opportunity for residents to remain longer within the same
community and will allow special security and support for Alzheimer's and
dementia 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. An Alzheimer's care wing is secured from the rest of the
building.
6
Properties
Operating Communities - The following table sets forth certain information with
respect to communities that were operated or managed by the Company at March 28,
2002. The Company considers its communities to be in good operating condition
and suitable for the purpose for which they are being used.
Community
Care Resident Operations
Community Location Level Units Capacity(1) Commenced Ownership
- -----------------------------------------------------------------------------------------------------------------
Camelot Retirement Harlingen, TX S 57 57 Sep-94 Owned (2)
Countrytime Inn Kings Mountain, NC FE 25 42 Jun-95 Owned (2)
Crown Pointe Corona, CA S, FE, DC 163 168 Jan-93 Managed(5)
Corinthians Assisted Living Carrollton, TX FE, DC 55 65 Jan-02 Managed(5)
Corinthians Retirement Carrollton TX S 126 126 Oct-01 Managed(5)
Graybrier Southern Pines, NC FE, DC 55 95 Feb-94 Owned (2)
Greenbriar at Muskogee Muskogee, OK FE 48 48 Mar-97 Owned (2)
Greenbriar at Sherman Sherman, TX FE, DC 48 53 Mar-98 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 Managed(5)
Pacific Pointe King City, OR S 114 114 Jan-93 Leased (3)
Sweetwater Springs Lithia Springs, GA FE, DC 48 48 Oct-96 Leased (7)
Villa del Rey Roswell Roswell, NM S, FE 135 132 Oct-88 Leased (4,6)
Wedgwood Terrace Lewiston, ID FE, DC 38 47 Nov-95 Managed(5)
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)
Total
Key:
S basic support and supplemental services are offered.
FE basic support, supplemental, personal care and wellness services are
offered ("Frail Elderly").
DC Alzheimer's and special care services are offered ("Dementia Care").
(1) Reflects licensed capacity for Assisted Living and Dementia Care and
actual number of units for Independent Living.
(2) Subject to first mortgage. Historically, each community has generally
been pledged as collateral on a single mortgage and deed of trust
securing a note payable to a bank, financial institution, individual
or other lender. The mortgages and deeds of trust mature between 2002
and 2037 and bear interest at fixed and variable interest rates
ranging from 7.5% to 14.5% as of December 31, 2001. 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 7,"Management's Discussion and Analysis or Plan of
Operation - Liquidity and Capital Resources."
(3) Leased from a partnership. Initial lease term is 10 years, expiring in
2012. The Company is responsible for all costs including repairs to
the community, property taxes and other direct operating costs of the
community. The lease includes clauses that allow for rent to increase
over time based on a specified schedule.
(4) 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) The Company's wholly owned subsidiary Senior Living Management, Inc.
or one of SLM's subsidiaries (SLM) managed the property under contract
to a third party owner.
(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.
7
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, 2002 range in size from 25 to
163 units, are from one to three stories and from 25,000 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 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. Part or full-time employees
perform most building maintenance services, while third party contractors
generally perform elevator, HVAC maintenance and landscaping services.
The Company's senior management and other personnel, located at the Dallas,
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, community relations,
healthcare management and fiscal management. In addition to some classroom
training, the Company's communities provide new employees with on the job
training, utilizing experienced staff as trainers and mentors.
8
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:
Philosophy of Management- The Company's philosophy of management is to
demonstrate by its actions and require from its employees high standards of
personal integrity, to develop a climate of openness and trust, to demonstrate
respect for human dignity in every circumstance, to be supportive in all
relationships, to promote teamwork by involving employees in the management of
their own work and to promote the free expression of ideas and opinions..
Family and Resident Feedback - The Company surveys residents on an annual basis
to monitor the quality of services provided to residents and the level of
satisfaction of residents and their families. The Company is presently
implementing surveys of family members of residents to monitor the quality of
services. The 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, the
vice president of operations 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 Company develops overall
strategies for promoting its 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 and
is guided and trained by corporate and operational personnel. For smaller
communities who do not have a community relation's coordinator, the Executive
Director performs the sales and marketing functions.
The Company engages in traditional types of marketing activities, such as
special events, direct mailings, print advertising, signs and yellow page
advertising. These marketing activities and media advertisements are directed to
potential residents and their adult children, who often comprise the primary
decision makers for placing a frail elderly relative in an assisted living
setting.
Government Regulation
Healthcare is an area of extensive and frequent regulatory change. The assisted
living industry is relatively new and, accordingly, the manner and extent to
which it is regulated at the Federal and state levels are evolving at a steady
pace. Currently, most states have a licensure category or statute that uses the
term "assisted living." Several states are proposing regulations using the term.
More than forty states have specific language in statute, licensure regulations
(including states with draft regulations) or Medicaid policy that addresses the
philosophy of assisted living. Several states have or are reviewing licensure
regulations and increasing the role of sta te personnel in monitoring and
controlling the assisted living industry.
9
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 reimbursement increase or overbuilding
continues in the industry other states may initiate CON requirements. This is
not happening at this time and there is significant overbuilding in many
markets. Consequently most major companies have either stopped or greatly
reduced their development programs. Conversely, small operators and individual
entrepreneurs continue to build, even in overbuilt markets.
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 Federally funded state
reimbursement programs. However, the Company expects the bulk of its revenues to
come from private payments.
The Americans with Disabilities Act ("ADA"), enacted July 26, 1990, has had and
will continue to have a major effect on the full service residential retirement
and assisted living industry. The communities acquired by the Company must be in
compliance with this act. The Fair Housing Amendments Act of 1988 also prohibits
discrimination against the handicapped in the sale or rental of a dwelling, or
in the provision of services in connection with such a dwelling. 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 that governs various types of financial arrangements
among health care providers and others who may be in a position to refer or
recommend patients to these providers. This law prohibits direct and indirect
payments that are intended to induce the referral of patients to, the arranging
of services by, or the recommending of a particular provider of health care
items or services. The Federal health care program anti-kickback law has been
interpreted to apply to some contractual relationships between health care
providers and sources of patient referral. Similar state laws vary from state to
state, are sometimes vague and have rarely been interpreted by courts or
regulatory agencies. Violation of these laws can result in loss of license,
civil or criminal penalties and exclusion of health care providers or suppliers
from furnishing covered items or services to beneficiaries of the Federal health
care program. The Company cannot be sure that these laws will be interpreted
consistently with its practices.
10
The Company is subject to the Fair Labor Standards Act, which governs such
matters as minimum wage, overtime and other working conditions. Many of the
Company's employees are paid at rates related to the Federal minimum wage and
accordingly, increases in the minimum wage will result in an increase in labor
costs.
In compliance with underlying state bond financing, rents at one community in
Oregon must be approved by an agency of the state.
Management is not aware of any non-compliance by the Company with applicable
regulatory requirements that would have a material adverse effect on the
Company's financial condition or results of operations.
Competition
The long-term care industry is highly competitive and the assisted living and
Alzheimer's care businesses in particular have and will continue to become
increasingly competitive in the future. The Company competes with other assisted
living companies and numerous other companies providing similar long-term care
alternatives such as home healthcare agencies, community-based service programs,
retirement communities and convalescent centers (nursing homes). In addition,
the Company competes with a number of tax-exempt nonprofit organizations which
can finance capital expenditures on a tax-exempt basis or receive charitable
contributions unavailable to the Company and which are generally exempt from
income tax. In most markets where the Company operates or plans to operate the
level of competition is rapidly increasing both from regional, national and
local providers. The Company expects this trend to continue and many markets are
already overbuilt and more will be overbuilt in the future. If reimbursement
programs, such as the Medicaid waiver program, increase, assisted living
competition will grow from existing and new companies focusing primarily on
assisted living. Nursing home centers that provide long-term care services are
also a source of competition for the Company, particularly with respect to
Alzheimer's care services. Many of the Company's present and potential
competitors have, or may have access to, greater financial, management and other
resources than those of the Company. There can be no assurance that competitive
pressures will not have 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 on price. The Company believes that it competes favorably in these areas and
in its recruitment and retention of qualified 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 has become a recruitment challenge. Unemployment rates are significantly
below the national average in a few markets.
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 that 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.
11
Environmental Matters
Under various Federal, state and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real estate may be
required to investigate and clean up hazardous or toxic substances or petroleum
product releases at the property, and may be held liable to a governmental
entity or to third parties for property damage and for investigation and clean
up costs incurred by such parties in connection with the contamination. Such
laws typically impose clean up responsibility and liability without regard to
whether the owner or operator knew of or caused the presence of the contaminants
and the liability under such laws has been interpreted to be joint and several
unless the harm is divisible and there is a reasonable basis for allocation of
responsibility. The costs of investigation, remediation or removal of such
substances may be substantial and the presence of such substances or the failure
to remediate properly such property may adversely affect the owner's ability to
sell or lease the property or to borrow using the property as collateral. In
addition, some environmental laws create a lien on the contaminated site in
favor of the government for damages and costs it incurs in connection with the
contamination. Persons who arrange for the disposal or treatment of hazardous or
toxic substances also may be liable for the costs of removal or redemption of
such substances at the disposal or treatment community, whether or not such
community is owned or operated by that person or corporation. Finally, the owner
or operator of a site may be subject to common law claims by third parties based
on damages and costs resulting from environmental contamination emanating from a
site.
The Company has conducted environmental assessments on most of its existing
communities that it operates plus one community it leases. These assessments
have not revealed any environmental liability that the Company believes would
have a material adverse effect on the Company's business, assets or results of
operations nor is the Company aware of any such environmental liability. The
Company owns seven 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, 2002, the Company's officers, directors and affiliated entities
owning more than 5% of the Company's outstanding stock owned approximately 56%
of the outstanding shares of Common Stock. 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 24.2% of the outstanding Common Stock of the Company. Mr. Victor
L. Lund, a director of the Company and the founder of Wedgwood retirement Inns
(a company acquired by the Company in 1996), beneficially owned approximately
16.6% of the outstanding shares of Common Stock. Mr. Floyd Rhoades, as a result
of the stock he received when the Company purchased American Care Communities,
Inc., beneficially owns 8.6% of the Company's outstanding stock. Mr. William
Shirley, due principally from the sale to the Company of assisted living
communities, beneficially owns approximately 6.5% of the outstanding Common
Stock of the Company. Accordingly, such individuals will have the ability, by
voting their shares in concert, to significantly influence (i) the election of
the Company's Board of Directors and, thus, the direction and future operations
of the Company, and (ii) the outcome of all other matters submitted to the
Company's stockholders, including mergers, consolidations and the sale of all or
substantially all of the Company's assets. In addition, the Company's officers
and directors, including James R. Gilley, currently hold options or conversion
rights to acquire 78,900 shares of Common Stock. The issuance of additional
shares of Common Stock pursuant to the exercise of these stock options granted
under the Company's stock option plan would increase the number of shares held
by the Company's executive officers and directors in the future.
12
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, 2002, the Company employed 450 employees, including 310 full-time
and 140 part-time employees. The Company believes it maintains good
relationships with its employees. None of the Company's employees are
represented by a collective bargaining group.
Corporate Offices
The Company's principal office is approximately 12,000 square feet of leased
space in Dallas, Texas. The lease extends through April 2006. The Company
believes the leased space will meet the Company's needs for the foreseeable
future.
ITEM 2: DESCRIPTION OF PROPERTIES
- ---------------------------------
See Item 1 for a discussion of properties owned or leased by the Company.
ITEM 3: LEGAL PROCEEDINGS
- -------------------------
LSOF Pooled Equity L.P. vs. Greenbriar Corporation
In LSOF Pooled Equity L.P. vs. Greenbriar Corporation, Cause # 00-08824, 162nd
Judicial District Court of Dallas County, Texas the plaintiff seeks to have the
court affirm that its action taken on October 30, 2001 to convert its preferred
stock into approximately 80% of Greenbriar outstanding common stock was proper.
In October 2001 the parties entered into a settlement agreement and On January
7, 2002 the court issued an order dismissing the lawsuit. For a discussion of
the terms of the settlement see Item 7 of this document.
13
Lifestyles, Senior Housing Managers, LLC v. Greenbriar et al
In 1995 Lifestyles Senior Housing Managers, LLC (Lifestyles) entered into a
contract to manage an assisted living community in Seaside, OR leased by
Neawanna by the Sea, LP (Neawanna). In March 2000 Lifestyles organized and held
a meeting with the executive director of Neawanna for the purpose of offering
her the position of manager of an assisted living community not affiliated with
Greenbriar. Greenbriar believes the action of Lifestyles represented a breach of
their fiduciary duty as the manager and terminated the management contract.
Lifestyles contended their termination was unjustified, sought damages of
approximately $800,000 and demanded the matter be submitted to binding
arbitration, which is called for in the management contract. The arbitration
hearing was held on February 19-21, 2001. On April 9, 2001, the Company was
notified that the arbitration panel had awarded Lifestyles $498,000 for damages
plus expenses.
One of the terms of the Neawanna lease is that any unsatisfied debt exceeding
$250,000 is an event of default. Rather than lose the lease on Neawanna, on July
12, 2001 Villa Del Rey - Seaside, Inc. and Neawanna By The Sea LP filed for
Chapter 11 bankruptcy protection in the United States Bankruptcy Court for The
District of Nevada. In addition Villa del Rey - Roswell LP filed for Chapter 11
in the same court. Although unrelated to the Lifestyles matter Villa Del Rey -
Roswell LP has a lease for an assisted living community, which is
cross-collateralized with the lease held by Neawanna by the Sea, LP.
Lifestyles and the Company have reached an agreement in principle to have a
subsidiary of the Company purchase Lifestyles judgment award and if the
agreement is finalized a request will be made to the court to release the three
entities from bankruptcy. If, however the parties are unsuccessful in concluding
a settlement agreement it is anticipated that a plan of reorganization will be
filed with the court in the second quarter of 2002. In 2000 the Company recorded
as an expense the arbitration award received by Lifestyle. The cost of
purchasing the arbitration award from Lifestyles will be less than the amount
recorded.
Other
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, results of operations or cash flows
of the Company.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -----------------------------------------------------------
The Company held its annual meeting on December 28, 2001. At that meeting the
shareholders re-elected two members to the Board of Directors.
14
PART II
ITEM 5: MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- ----------------------------------------------------------------
The Company's Common Stock is traded under the symbol "GBR" and is listed on the
American Stock Exchange. The high and low closing sales prices of the Company's
Common Stock on the American Stock Exchange during the last two fiscal years,
adjusted for the December 2001 reverse split and the January 2002 stock
dividend:
2001 2000
High Low High Low
----------------- -----------------
First Quarter $11.80 5.20 $79.60 13.80
Second Quarter 11.00 5.00 32.60 20
Third Quarter 7.00 5.20 26.20 12.60
Fourth Quarter 15.28 4.20 17.60 5.00
The Company has not paid cash dividends on its Common Stock during at least the
last ten fiscal years and it has been the Company's practice to retain all
earnings to pay down long-term debt and to finance the future expansion and
development of its business. Any determination to pay cash dividends in the
future will be at the discretion of the Board of Directors and will be dependent
on the Company's financial condition, results of operations, contractual
restrictions, capital requirements, business prospects and such other factors as
the Board of Directors deems relevant. The Company's ability to pay dividends in
the future may be limited by the terms of future debt financing and other
arrangements.
The closing price on the Company's common stock on March 26, 2002, was $21.50
per share. As of February 28, 2002, there were 513 holders of record of the
Company's common stock.
ITEM 6: SELECTED FINANCIAL DATA
- -------------------------------
2001 2000 1999 1998 1997
--------- --------- --------- --------- ---------
Operating revenue $ 30,861 $ 41,261 $ 41,260 $ 53,521 $ 38,979
Operating expenses 33,528 46,311 38,323 55,216 39,958
--------- --------- --------- --------- ---------
Operating profit (loss) (2,667) (5,050) 2,937 (1,695) (979)
Earnings (loss) from continuing operations
before income taxes $ 9,242 $ (10,623) $ 82 $ (10,602) $ (10,297)
Earnings (loss) per common share
Basic and diluted $ 15.53 $ (39.17) $ (12.33) $ (37.20) $ (18.42)
BALANCE SHEET DATA:
Total assets $ 44,022 $ 102,588 $ 119,908 $ 130,353 $ 151,243
Long-term debt 16,693 50,887 50,477 58,154 54,851
Total liabilities 34,753 68,944 69,425 78,516 88,726
Preferred stock redemption obligation -- 26,988 27,763 21,748 --
Total stockholders' equity 9,269 6,656 22,720 30,089 62,517
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 the manufacture and leasing of electric convenience vehicles and
wheelchairs. The nursing and retirement centers, convenience vehicle businesses
and real estate investments have been sold. 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. In order to increase the Company's presence in the
assisted living industry, create geographic diversity and obtain experienced
personnel, the Company acquired Wedgwood Retirement Inn Corp. in March 1996,
American Care in December 1996, the Windsor Group (Windsor) in October 1997 and
Villa Residential Care Homes (VRCH) in December 1997. As of December 31, 1998
the Company operated 31 communities that it either owned or managed.
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. The
preferred stockholders received a cash dividend of 6% payable quarterly. The
sale was to Lone Star Opportunity Fund, L.P. Subsequent to the initial
transaction the preferred stock was sold or transferred to LSOF Pooled Equity
L.P. ("LSOF"). The agreement provided for 6% dividend and a mandatory conversion
on January 13, 2001.
In connection with the sale of the preferred stock, 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. At January
13, 2001, a Cash Payment of approximately $27,167,000 would have been due
assuming conversion took place on that date.
In October 2000 a dispute arose between the parties as to the terms of the
conversion into common stock. That dispute lead to a lawsuit being filed by
LSOF.
On October 5, 2001 the parties entered into a settlement agreement to resolve
all differences between the parties. The settlement resulted in the Company
repurchasing all of LSOF's interest in the Company and LSOF releasing all claims
in exchange for $4,000,000 in cash and the conveyance of 11 of the Company's
assisted living properties. LSOF assumed the mortgage debt associated with the
properties. In addition, the Company released LSOF from any claims it might have
had. The amount owed to LSOF was $27,167,000 and the mortgages assumed by LSOF
were $36,981,000. After factoring in the book value of the property, the cash
paid and all expenses of the transaction the Company recorded a net gain on sale
of assets of approximately $16,129,000. Prior to the settlement and the
ultimately litigious dispute with LSOF it had been the Company's stated
intention to sell or refinance properties to pay LSOF the amount it was due. By
entering into this settlement the Company was able to settle its obligation
without the cost and effort of selling and or refinancing the properties to end
a lawsuit which was proving very costly in both professional fees and the
distraction of senior management from the operations and growth of the Company.
During 2001 the Company identified four properties that were not meeting
performance expectations. These properties are in a geographic region where,
after the transfer of communities to LSOF, the Company does not have a
significant presence. The Company has engaged a regional operator to assist in
the operations of three of the properties and has entered into a one-year lease
with this operator for the additional property. If the approvals from existing
lenders can be obtained it is anticipated that three of the properties will be
sold to this operator.
During 2001 the Company sold three properties to not-for-profit organizations
and subsidiaries of the Company entered into long-term management contracts for
16
the properties. The properties were sold for cash and approximately $6,400,000
in tax-free bonds paying 9.5% interest. The future payments on the bonds and
their interest are limited to cash generated from the properties either from
operations, refinancing or sale of the properties. The Company has deferred
gains in the amount of $6,090,000. The deferred gains and any interest on the
bonds will be recognized as cash is received.
In January 1997 the Company negotiated employment contracts with the Chief
Executive Officer (CEO) and Chief Financial Officer (CFO) of the Company. Both
individuals had been employed by the Company since 1989. The employment
contracts called for combined salaries of $640,000 per year and provided that if
the contracts were terminated or amended the individuals would be entitled to
cash payment of three years salary for the CEO and two years salary for the CFO.
In light of the reduced size of the Company the independent directors and the
officers in October 2001 agreed to modify the employment agreements with the two
officers. The two officers have each agreed to continue their roles in the
Company for $12,000 per year for three years. The revisions in the contracts
triggered the contract termination payments requiring the Company to immediately
pay the two officers $1,740,000. However, the two officers agreed to accept
non-interest-bearing notes due December 31, 2004. These notes have certain
acceleration provisions if the Company violates the terms of the revised
contracts.
In the future the two officers will participate with the Company in partnerships
or other entities formed to acquire and sell real estate properties during the
period of their contracts. The Company believes that this arrangement will allow
it to maintain experienced senior management at a fixed cost that will not
overburden its resources while at the same time allowing it to realize
significant profits through management fees, operating profits and the ultimate
sale of the properties.
It is anticipated that the Company will acquire additional properties through
investments in third party entities, which for the most part, will be
partnerships. The Company may or may not be the controlling party with respect
to these investments. It is anticipated that the two senior officers will bring
potential acquisitions and financing to Greenbriar whereby the Company can
choose to participate or not.
The Company conducts its property management operations through its subsidiary
Senior Living Management, Inc (SLM). SLM expects to manage properties, for a
fee, which are owned or leased by the Company or are owned by partnerships or
other entities where Greenbriar is an investor. To a far lesser degree SLM will
manage properties for independent third parties.
In October 2001 the Company became a limited partner in Corinthians Real Estate
Investors LP (CREI), a partnership formed to acquire two properties. The general
partner is a limited liability corporation whose controlling member is James
Gilley. Mr. Gilley is also CEO of the Company. Greenbriar is a 56% limited
partner. Mr. Gilley is a 26% limited partner and Mr. Bertcher (CFO) is a 10.5%
limited partner. The remaining 7.5% is held by other Company employees and a
third party attorney. In October 2001 the partnership acquired a retirement
community and in January 2002 it acquired an assisted living community. The
seller of the retirement community received $7,500,000 in cash from the
partnership and a $1,600,000 note from the Company. CREI is obligated to pay the
Company the $1,600,000 that the Company has agreed to pay the seller. The seller
of the assisted living community received $2,800,000 in cash. The cash component
for both acquisitions was financed through third party loans obtained by the
partnership. In total the partnership borrowed approximately $11,500,000 for
purchase costs, closing costs and working capital. The Company has guaranteed
both loans. As of December 31, 2001 the Company had advanced the partnership
approximately $311,000. The advance was repaid in January at 8% interest for all
days outstanding. SLM has entered into a management contract with CREI to manage
both properties.
Critical Accounting Policies and Estimates
The Company's discussion and analysis of its financial condition and results of
operations are based upon the Company's Consolidated Financial Statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. Certain of the Company's accounting policies require the
application of judgment in selecting the appropriate assumptions for calculating
17
financial estimates. By their nature, these judgments are subject to an inherent
degree of uncertainty. These judgments and estimates are based upon the
Company's historical experience, current trends, and information available from
other sources that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying value of
assets and liabilities that are not readily apparent from other sources. Actual
results may differ from these estimates under different assumptions or
conditions.
The Company believes the following critical accounting policies are more
significant to the judgments and estimates used in the preparation of its
consolidated financial statements. Revisions in such estimates are recorded in
the period in which the facts that give rise to the revisions become known.
Assets Held For Sale
The Company determines the fair value, net of cost of disposal, of an asset on
the date management determines that the asset is to be sold, and the asset is
recorded at the lower of its fair value, net of cost of disposal, or carrying
value on that date. The Company periodically reevaluates such assets to
determine if the assets are still recorded at the lower of fair value, net of
cost of disposal, or carrying value. The Company currently has three communities
held for sale. The actual sales price could differ significantly from the
Company's estimates.
Deferred Tax Assets
Significant management judgment is required in determining the provision for
income taxes, deferred tax assets and liabilities and any valuation allowance
recorded against net deferred tax assets. The future recoverability of the
Company's net deferred tax assets is dependent upon the generation of future
taxable income prior to the expiration of the loss carryforwards. The Company
believes that it will generate future taxable income to fully utilize the net
deferred tax assets.
Fiscal 2001 as Compared to Fiscal 2000
Revenues and Operating Expenses from Assisted Living Operations. Revenues
decreased to $30,861,000 in 2001 compared to $41,261,000 in 2000. Community
operating expenses, which consist of assisted living operations expense, lease
expense and depreciation and amortization, were $25,417,000 in 2001 as compared
to $33,402,000 in 2000. During 2001 the Company gave LSOF 11 communities as part
of the settlement in October 2001, sold three communities to a not-for-profit in
April, June and August of 2001, entered into a sub management agreement for
three communities in November, leased one community in November and sold one
community to a third party in April. The decrease in operating revenue and
expenses is due almost entirely to the reduction in the number of communities
operated by the Company.
Corporate General and Administrative Expenses. These expenses were $4,875,000 in
2001 as compared to $5,448,000 in 2000. The decrease in the corporate general
and administrative expenses between 2001 and 2000 is primarily a result of the
decrease in salaries and related personal expenses .Due to the significant
reduction in the number of communities operated by the Company the number of
employees on the corporate staff was reduced. Also reduced were the overhead
costs associated with personnel. In addition in October the salaries for the two
senior officers was reduced.
Write-off of Impaired Assets and Related Expenses. As noted above the Company is
attempting to sell three communities and based upon the terms of the pending
transaction Company has reduced the carrying value of the communities by
$1,887,000.
Interest and Dividend Income. Interest and dividend income was $265,000 in 2001
as compared to $406,000 in 2000. The reduction in interest and dividend is due
to a net reduction in the notes that generated the interest income.
18
Interest Expenses. These expenses decreased to $4,958,000 in 2001 as compared to
$5,759,000 in 2000. Approximately $1,000,000 of the decrease is a result of the
disposition of owned communities throughout 2001. There was an increase in
interest expense in 2001 for additional notes due to the conversion of the
Series D preferred stock to a note. The Series D preferred stock was held by
Sylvia Gilley, the wife of the Company's CEO. The preferred stock was issued to
Mrs. Gilley in 1996 to assist the Company in completing an acquisition. As the
holder of preferred stock Mrs. Gilley received dividends, which are not
deductible for tax purposes. As a note the interest paid will provide the
Company with a tax deduction. The note matures on July 1, 2003. Because the note
was a conversion of preferred stock the same corporate limitations regarding the
redemption of preferred stock will apply to the note
Other income (expense), net. Other income (expense) was $16,602,000 in 2001 The
Company recorded a gain of $16,129,000 due to the settlement with LSOF. The
balance of the other income represents the net gain on the properties sold
during 2001.
Fiscal 2000 as Compared to Fiscal 1999
Revenues and Operating Expenses from Assisted Living Operations. Revenues
increased to $41,261,000 in 2000 compared to $41,260,000 in 1999. Community
operating expenses, which consist of assisted living community expense, lease
expense and depreciation and amortization, were $33,402,000 in 2000 as compared
to $34,010,000 in 1999. There were two communities disposed of in 1999 and
another two communities disposed of in 2000. The revenue and community operating
expenses for these four communities in 1999 and 2000 respectively were
$2,948,000 and $2,776,000 compared to $995,000 and $1,210,000. In addition to
the decrease in revenue and community operating expenses from the disposition of
these four communities, there has been an increase in the same store revenue in
2000 that is attributable to an increase in both census and average rental
rates. This increase in census has also resulted in a corresponding increase in
community operating expenses. The community operating expense margin increased
from 18% in 1999 to 19% in 2000.
Corporate General and Administrative Expenses. These expenses were $5,448,000 in
2000 as compared to $4,313,000 in 1999. The increase in the corporate general
and administrative expenses between 2000 and 1999 is primarily a result of the
increase in corporate legal expenses associated with the ongoing litigation with
LSOF and the arbitration award in the Lifestyles, Senior Housing Managers
matter. See further discussion of legal proceedings at Item 3: Legal
Proceedings.
Write-off of Impaired Assets and Related Expenses. In 2000, the Company recorded
a write-off of impaired assets and related expenses of $7,461,000.
In 1992 the Company sold four nursing homes to Southern Care Corporation and a
subsidiary of the Company entered into a management agreement to manage the
nursing homes. In 1994 Southern Care terminated the management agreement and
informed the Company that they believed the notes due to the Company from the
sale of the nursing homes in 1992 were invalid. The matter has been in the
courts since 1995 and legal issues were resolved in June 2000 when Greenbriar
was awarded a judgment of $18,688,000 for the notes, interest, amounts due for
the management contract and reimbursement of legal fees. The assets had a
recorded value of $4,525,000.
The Company was informed that the financial condition of the four nursing homes
had deteriorated, that they failed to make the mortgage payment, and that the
first mortgage holder foreclosed on the property in June 2000. The Company is
actively pursuing collection of its judgment from Southern Care as well as from
its officers, directors and a third party trustee. However, under the
circumstances the Company is writing off the entire $4,525,000 (see Item 3:
Legal Proceedings for more information regarding Southern Care).
19
The Company decided in 2000 to dispose of two assisted living communities, which
did not meet operating performance expectations. These communities were written
down to net realizable value at June 30, 2000. One of these communities was
disposed of in the quarter ending September 30, 2000. Also, a third community
whose operations have deteriorated was written down based on management's
estimate of future cash flows pursuant to the provisions of Statement of
Financial Accounting Standards No. 121. In addition certain receivables
associated with these properties were written off. These write offs
substantially account for the remainder of the write-off of impaired assets and
related expenses
Interest and Dividend Income. Interest and dividend income was $406,000 in 2000
as compared to $599,000 in 1999. 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 increased to $5,759,000 in 2000 as compared to
$5,632,000 in 1999. Interest expense decreased $275,000 as a result of the
disposition of two owned communities in 1999. The increase in 2000 interest
expense for communities owned in both 1999 and 2000 is a result of the increase
in variable interest rates throughout 2000.
Other income (expense), net. Other income (expense) was ($220,000) in 2000 and
$2,178,000 in 1999. The 2000 expense of ($220,000) is the result of a gain on
the divestiture of assets in the amount of $49,000 and the minority interest in
one community of ($359,000) as well as the amortization of deferred income of
$72,000. The divestiture of assets included three parcels of raw land and two
communities that did not meet the Company's long-term strategies.
The 1999 income is primarily the result of the divestiture of assets. The
preferred stock investment in New Life Corporation 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).
Liquidity and Capital Resources
At December 31, 2001, the Company had current assets of $3,874,000 and current
liabilities of $6,941,000.
Included in current liabilities is a $3,360,000 mortgage for an assisted living
community, which matures in October 2002. The Company intends to refinance that
mortgage on a long-term basis prior to its maturity date.
During 2001 the Company reduced it long-term debt from $50,887,000 to
$16,693,000. The reduction was due to the sale of properties and the repayment
of the mortgages related to the properties. The reduction was also due to the
settlement with LSOF, which assumed the mortgage debt on eleven properties it
received as settlement of a preferred stock obligation. In addition to the
mortgage obligation the agreement with LSOF removed the obligation the Company
had to repay LSOF a Preferred Stock Redemption Obligation, which at December 31,
2000 was $26,988,000. The LSOF settlement required a cash payment of $4,000,000.
The Company used net proceeds from the sale of properties to make this payment.
In January 2001, the Company sold their corporate office building in Addison,
Texas and received net cash proceeds of $1,477,772. The corporate office was
relocated to leased space in April 2001
In January 2001 the Company sold certain garden homes and related property that
was adjacent to a community in Harlingen, TX and received net cash of $866,280.
On July 1, 2001 the Company converted the Series D Preferred Stock to a
$3,375,000 note, which matures on July 1, 2003. In addition the Company settled
employment contracts with two officers by issuing notes totaling $1,740,000,
discounted at 8.52% to $1,349,000 which mature on December 31, 2004.
20
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 filing that
are not historical or current facts deal with potential future circumstances,
operations, and prospects. The discussion of such matters and subject areas is
qualified by the inherent risks and uncertainties surrounding future
expectations generally, and also may materially differ from Greenbriar
Corporation's actual future experience involving any one or more of such matters
and subject areas relating to interest rate fluctuations, ability to obtain
adequate debt and equity financing, demand, pricing, competition, construction,
licensing, permitting, construction delays on new developments contractual and
licensure, and other delays on the disposition, transition, or restructuring of
currently or previously owned, leased or managed communities in the Company's
portfolio, and the ability of the Company to continue managing its costs and
cash flow while maintaining high occupancy rates and market rate assisted living
charges in its assisted living communities. Greenbriar Corporation has attempted
to identify, in context, certain of the factors that they currently believe may
cause actual future experience and results to differ from Greenbriar
Corporation's current expectations regarding the relevant matter or subject
area. These and other risks and uncertainties are detailed in the Company's
reports filed with the Securities and Exchange Commission (SEC), including
Greenbriar Corporation's Annual Reports on Form 10-K and Quarterly Reports on
Form 10-Q.
ITEM 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 2002 than they did in 2001, the Company's interest expense would
increase and income before income taxes would decrease by approximately $50,000
based on the amount of debt outstanding at December 31, 2001. The Company does
not expect changes in interest rates to have a material effect on income or cash
flows for existing properties in fiscal 2002, 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.
21
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- --------------------------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
None.
22
PART III
ITEMS 10-13: DIRECTORS AND EXECUTIVE OFFICERS, EXECUTIVE COMPENSATION, SECURITY
- --------------------------------------------------------------------------------
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND CERTAIN
-------------------------------------------------------------------
RELATIONSHIPS AND RELATED TRANSACTIONS
--------------------------------------
The information required by Items 10, 11, 12and 13 is incorporated by reference
into this Form 10-K from the Company's definitive Proxy Statement for its Annual
Meeting of Stockholders, which definitive Proxy Statement the Company intends to
file within 120 days after its fiscal year-end.
23
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
- ------------------------------------------------------------------------
(a) The following documents are filed as a part of the report:
(1) FINANCIAL STATEMENTS: The following financial statements of the
Registrant and the Report of Independent Public Accountants
therein are filled as part of this Report on Form 10-K:
Report of Independent Certified Public Accountants............F-1
Consolidated Balance Sheets...................................F-2
Consolidated Statement of Operations..........................F-4
Consolidated Statement of Changes in Stockholders' Equity.....F-5
Consolidated Statements of Cash Flows.........................F-6
Notes to Consolidated Financial Statements....................F-7
(2) FINANCIAL STATEMENT SCHEDULES: Other financial statement
schedules have been omitted because the information required to
be set forth therein is not applicable, is immaterial or is shown
in the consolidated financial statements or notes thereto.
(b) REPORTS ON FORM 8-K: Form 8-K filed on January 26, 2001, regarding
additional events in the LSOF litigation. Form 8-K filed on August 10,
2001 regarding issuance of Series H Preferred Stock, the Master
Settlement Agreement between the Company and LSOF Pooled Equity, LP
and the conversion of Series D Preferred Stock to a promissory note.
(c) Exhibits: The following exhibits are filed as part of, or incorporated
by reference into, this Report on Form 10-K:
Exhibit
Number Description of Exhibit
----------------------------------------------------------------------
2.1.1 Stock Purchase Agreement between Villa Residential Care
Homes, Inc., William A. Shirley, Jr. and Greenbriar
Corporation ("Registrant") (filed as Exhibit 2.1.1 to
Registrant's Form 8-K Current Report on January 13, 1998 and
incorporated herein by this reference).
2.1.2 Exchange Agreement between Villa Residential Care
Homes-Corpus Christi South, L.P. and Greenbriar Corporation
("Registrant") (filed as Exhibit 2.1.2 to Registrant's Form
8-K Current Report on January 13, 1998 and incorporated
herein by this reference).
2.1.3 Exchange Agreement between Villa Residential Care
Homes-Granbury, L.P. and Greenbriar Corporation
("Registrant") (filed as Exhibit 2.1.3 to Registrant's Form
8-K Current Report on January 13, 1998 and incorporated
herein by this reference).
2.1.4 Exchange Agreement between Villa Residential Care Homes-Oak
Park, L.P. and Greenbriar Corporation ("Registrant") (filed
as Exhibit 2.1.4 to Registrant's Form 8-K Current Report on
January 13, 1998 and incorporated herein by this reference).
2.1.5 Exchange Agreement between Villa Residential Care Homes-Fort
Worth East, L.P. and Greenbriar Corporation ("Registrant")
(filed as Exhibit 2.1.5 to Registrant's Form 8-K Current
Report on January 13, 1998 and incorporated herein by this
reference).
2.1.6 Exchange Agreement between William A. Shirley, Jr., Lucy M.
Brody and C. Kent Harrington and Greenbriar Corporation
("Registrant") (filed as Exhibit 2.1.6 to Registrant's Form
8-K Current Report on January 13, 1998 and incorporated
herein by this reference).
2.1.7* Certificate of Decrease in Authorized and Issued Shares
dated November 27, 2001, and filed with the State of Nevada
on November 30, 2001.
24
2.2.1 Stock Purchase Agreement between Lone Star Opportunity Fund,
L.P. and Greenbriar Corporation ("Registrant") filed as
Exhibit 2.2.1 of Registrant's Form 10-KSB for the year ended
December 31, 1997.
2.2.4 Form of Registration Rights Agreement between Registrant and
Lone Star Opportunity Fund, L.P. as regards 1,400,000 shares
of Registrant's Series F Senior Convertible Preferred Stock
and 800,000 shares of Registrant's Series G Senior
Non-Voting Preferred Stock filed as Exhibit 2.2.4 of
Registrant's Form 10-KSB for the year ended December 31,
1997.
2.2.5 Agreement between Lone Star Opportunity Fund, L.P. and
Registrant regarding certain minimum values of Registrant's
stock filed as Exhibit 2.2.5 of Registrant's Form 10-KSB for
the year ended December 31, 1997.
3.1 Articles of Incorporation of Medical Resource Companies of
America ("Registrant") (filed as Exhibit 3.1 to Registrant's
Form S-4 Registration Statement, Registration No. 33-55968,
and incorporated herein by this reference).
3.1.1 Restated Articles of Incorporation of Greenbriar
Corporation.
3.2 Bylaws of Registrant (filed as Exhibit 3.2 to Registrant's
Form S-4 Registration Statement, Registration No. 33-55968,
and incorporated herein by this reference).
3.2.1 Amendment to Section 3.1 of the Bylaws of Registrant adopted
upon approval of the Merger (filed as Exhibit 3.2.1 to
Registrant's Form S-4 Registration Statement, Registration
No. 33-55968, and incorporated herein by this reference).
3.3 Certificate of Decrease in Authorized and Issued Shares.
4.1.2 Certificate of Designations, Preferences and Rights of
Preferred Stock dated May 7, 1993, relating to Registrant's
Series B Preferred Stock (filed as Exhibit 4.1.2 to
Registrant's Form S-3 Registration Statement, Registration
No. 33-64840, and incorporated herein by this reference.
4.1.4 Certificate of Designations, Preferences and Rights of
Preferred Stock dated March 15, 1996, relating to
Registrants' Series D Preferred Stock.
4.1.6 Certificate of Voting Powers, Designations, Preferences and
Rights of Registrant's Series F Senior Convertible Preferred
Stock dated December 31, 1997, filed as Exhibit 2.2.2 of
Registrant's Form 10-KSB for the year ended December 31,
1997.
4.1.7 Certificate of Voting Powers, Designations, Preferences and
Rights of Registrant's Series G Senior Non-Voting
Convertible Preferred Stock dated December 31, 1997, filed
as Exhibit 2.2.3 of Registrant's Form 10-KSB for the year
ended December 31, 1997.
10.3.2 Form of $62,500 Promissory Note dated December 27, 1991
payable to Registrant by Gene S. Bertcher representing the
purchase price for 250,000 shares (50,000 post December 1995
shares) of Registrant's Common Stock (filed as Exhibit
10.3.2 to Registrant's Form S-4 Registration Statement,
Registration No. 33-55968, and incorporated herein by this
reference).
10.3.3 Form of Renewal of Promissory Note dated October 14, 1992
extending the maturity date of the Promissory Note
referenced in Exhibit 10.3.2 (filed as Exhibit 10.3.3 to
Registrant's Form S-4 Registration Statement, Registration
No. 33-55968, and incorporated herein by this reference).
10.3.4 Form of Security Agreement - Pledge (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).
25
10.4.3 Form of Security Agreement - Pledge (Nonrecourse) between
Registrant and Robert L. Griffis securing the Promissory
Note referenced in Exhibit 10.4.2 (filed as Exhibit 10.4.3
to Registrant's Form S-4 Registration Statement,
Registration No. 33-55968, and incorporated herein by this
reference).
10.6.1 Form of Stock Option to purchase 100,000 shares (20,000 post
December 1995 shares) of Registrant's Common Stock issued to
Oscar Smith on October 1, 1992 (filed as Exhibit 10.6.1 to
Registrant's Form S-4 Registration Statement, Registration
No. 33-55968, and incorporated herein by this reference).
10.6.2 Form of $50,000 Promissory Note dated October 1, 1992
payable to Registrant by Oscar Smith representing the
purchase price for 100,000 shares (20,000 post December 1995
shares) of Registrant's Common Stock (filed as Exhibit
10.6.2 to Registrant's Form S-4 Registration Statement,
Registration No. 33-55968, and incorporated herein by this
reference).
10.6.3 Form of Security Agreement - Pledge (Nonrecourse) between
Registrant and Oscar Smith securing the Promissory Note
referenced in Exhibit 10.6.2 (filed as Exhibit 10.6.3 to
Registrant's Form S-4 Registration Statement, Registration
No. 33-55968, and incorporated herein by this reference).
10.7.1 Form of Stock Option to purchase 80,000 shares (16,000 post
December 1995 shares) of Registrant's Common Stock issued to
Lonnie Yarbrough on October 12, 1992 (filed as Exhibit
10.7.1 to Registrant's Form S-4 Registration Statement,
Registration No. 33-55968, and incorporated herein by this
reference).
10.7.2 Form of $40,000 Promissory Note dated October 12, 1992
payable to Registrant by Lonnie Yarbrough representing the
purchase price for 80,000 shares (16,000 post December 1995
shares) of Registrant's Common Stock (filed as Exhibit
10.7.2 to Registrant's Form S-4 Registration Statement,
Registration No. 33-55968, and incorporated herein by this
reference).
10.7.3 Form of Security Agreement - Pledge (non-recourse) between
Registrant and Lonnie Yarbrough securing the Promissory Note
referenced in Exhibit 10.7.2 (filed as Exhibit 10.7.3 to
Registrant's Form S-4 Registration Statement, Registration
No. 33-55968, and incorporated herein by this reference).
10.9.6 Form of $62,500 promissory note dated December 29, 1994,
payable to Registrant by L.A. Tuttle representing the
purchase price of 50,000 shares (10,000 post December 1995
shares) of Registrant's Common Stock (filed as Exhibit
10.9.6 to Registrant's Form 10-KSB for the year ended
December 31, 1994).
10.9.7 Form of Security Agreement-Pledge between Registrant and
L.A. Tuttle securing the promissory note reference in
Exhibit 10.9.6 (filed as Exhibit 10.9.7 to Registrant's Form
10-KSB for the year ended December 31, 1994).
10.13.1 Registrant's 1992 Stock Option Plan (filed as Exhibit 10.13
to Registrant's Form S-4 Registration Statement,
Registration No. 33-55968, and incorporated herein by this
reference).
10.13.2 Registrant's 1997 Stock Option Plan (filed as Exhibit 4.1 to
Registrant's Form S-8 Registration Statement, Registration
No. 333-33985 and incorporated herein by this reference).
10.13.3 Registrant's 2000 Stock Option Plan (filed as Exhibit 4.1 to
Registrant's Form S-8 Registration Statement, Registration
No. 333-50868 and incorporated herein by this reference).
10.21.1 Extended and Consolidated Promissory Note in the principal
amount of $5,700,000 dated effective May 23, 1992 payable by
JRG Investment Co., Inc. to M.S. Holding Co. Corp. (filed as
Exhibit 10.22.1 to Registrant's Form S-4 Registration
Statement, Registration No. 33-55968, and incorporated
herein by this reference).
10.22.2 Extended and Consolidated Pledge Agreement dated effective
May 23, 1992 between JRG Investment Co., Inc. and M.S.
Holding Co. Corp. securing the Note referenced in Exhibit
10.22.1 (filed as Exhibit 10.22.2 to Registrant's Form S-4
Registration Statement, Registration No. 33-55968, and
incorporated herein by this reference).
26
10.22.3 Pledge Agreement dated as of May 23, 1992 between James R.
Gilley and M.S. Holding Co. Corp. (filed as Exhibit 10.22.3
to Registrant's Form S-4 Registration Statement,
Registration No. 33-55968, and incorporated herein by this
reference).
10.22.4 Irrevocable Proxy from James R. Gilley to M.S. Holding Co.
Corp. relating to shares of capital stock of JRG Investment
Co., Inc. (filed as Exhibit 10.22.4 to Registrant's Form S-4
Registration Statement, Registration No. 33-55968, and
incorporated herein by this reference).
10.22.5 Blank Assignment and Power of Attorney signed by JRG
Investment Co., Inc. relating to 482,000 (96,400 post
December 1995 shares) shares of Registrant's Common Stock
(filed as Exhibit 10.22.5 to Registrant's Form S-4
Registration Statement, Registration No. 33-55968, and
incorporated herein by this reference).
10.22.6 Blank Assignment and Power of Attorney signed by JRG
Investment Co., Inc. relating to 1,268,000 shares (236,600
post December 1995 shares) of Registrant's Common Stock
(filed as Exhibit 10.22.6 to Registrant's Form S-4
Registration Statement, Registration No. 33-55968, and
incorporated herein by this reference).
10.22.7 Three Blank Assignments and Powers of Attorney signed by JRG
Investment Co., Inc., each relating to 600,000 shares
(120,000 post December 1995 shares) of Registrant's Common
Stock (filed as Exhibit 10.22.7 to Registrant's Form S-4
Registration Statement, Registration No. 33-55968, and
incorporated herein by this reference).
10.22.8 Blank Assignment and Power of Attorney signed by JRG
Investment Co., Inc. relating to 2,281,818 shares of
Registrant's Common Stock (filed as Exhibit 10.22.8 to
Registrant's Form S-4 Registration Statement, Registration
No. 33-55968, and incorporated herein by this reference).
10.22.9 Blank Assignment and Power of Attorney signed by JRG
Investment Co., Inc. relating to 905,557 shares of
Registrant's Series A Preferred Stock (filed as Exhibit
10.22.9 to Registrant's Form S-4 Registration Statement,
Registration No. 33-55968, and incorporated herein by this
reference).
10.37 Employment Agreements dated December 31, 1996
10.37.1* Modified Employment Contract between the Company and James
R. Gilley
10.37.2* Modified Employment Contract between the Company and Gene S.
Bertcher
10.38 Stock Purchase Warrant dated December 31, 1996 between
registrant and The April Trust
10.39 Portfolio Divestiture Agreement between certain subsidiaries
of the Company, the Company, Health Care REIT and HCRI Texas
Properties, Ltd.
21.1* Subsidiaries of Registrant.
23.1* Consent of Grant Thornton.
* Filed herewith.
27
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 29, 2002 by: /s/ Gene S. Bertcher
----------------------------
Gene S. Bertcher
Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
28
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 29, 2002 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 29, 2002 /s/ James R. Gilley
----------------------------------------------
James R. Gilley, President, Chief Executive
Officer and Chairman of the Board of Directors
March 29, 2002 /s/ Don C. Benton
----------------------------------------------
Don C. Benton, Director
March 29, 2002 /s/ Gene S. Bertcher
----------------------------------------------
Gene S. Bertcher, Executive Vice President,
Chief Financial Officer and Director
March 29, 2002 /s/ Victor L. Lund
----------------------------------------------
Victor L. Lund, Director
29
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, 2001 and 2000, 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, 2001. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Greenbriar
Corporation and subsidiaries as of December 31, 2001 and 2000, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended December 31, 2001, in conformity
with accounting principles generally accepted in the United States of America.
GRANT THORNTON, LLP
Dallas, Texas
March 28, 2002
Greenbriar Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
December 31,
ASSETS 2001 2000
--------- ---------
CURRENT ASSETS
Cash and cash equivalents $ 1,246 $ 2,287
Short-term investments 1,098 --
Accounts receivable - trade 106 470
Receivables from affiliated partnership 311 --
Prepaid expenses 572 845
Other current assets 541 260
--------- ---------
Total current assets 3,874 3,862
NOTES RECEIVABLE, from sale of properties 6,400 --
Less deferred gains (6,090) --
--------- ---------
310 --
NOTE RECEIVABLE FROM AFFILIATE PARTNERSHIP 1,600 --
PROPERTY AND EQUIPMENT, AT COST
Land and improvements 4,430 9,716
Buildings and improvements 32,675 75,723
Equipment and furnishings 3,134 6,615
--------- ---------
40,239 92,054
Less accumulated depreciation and amortization 6,498 12,410
--------- ---------
33,741 79,644
DEFERRED INCOME TAX BENEFIT 2,350 4,750
DEPOSITS 1,730 3,834
LEASE RIGHTS AND OTHER INTANGIBLES -- 9,347
OTHER ASSETS 417 1,151
--------- ---------
$ 44,022 $ 102,588
========= =========
F-2
Greenbriar Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS - CONTINUED
(Amounts in thousands, except share amounts)
December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 2001 2000
--------- ---------
CURRENT LIABILITIES
Current maturities of long-term debt $ 4,316 $ 2,538
Accounts payable - trade 1,042 1,445
Accrued expenses 1,116 1,934
Other current liabilities 467 668
--------- ---------
Total current liabilities 6,941 6,585
LONG-TERM DEBT, including amounts to related
parties of $4,724,000 16,693 50,887
FINANCING OBLIGATIONS 10,815 10,815
OTHER LONG-TERM LIABILITIES 304 657
--------- ---------
Total liabilities 34,753 68,944
PREFERRED STOCK REDEMPTION OBLIGATION -- 26,988
STOCKHOLDERS' EQUITY
Preferred stock; liquidation value of $100 1 254
Common stock, $.20 par value; authorized, 4,000,000
shares; issued and outstanding, 359 and 365 shares in 2001
and 2000, respectively 75 76
Additional paid-in capital 56,828 60,219
Accumulated deficit (45,268) (51,526)
--------- ---------
11,636 9,023
Less employee stock purchase notes receivable (2,367) (2,367)
--------- ---------
9,269 6,656
--------- ---------
$ 44,022 $ 102,588
========= =========
The accompanying notes are an integral part of these statements.
F-3
Greenbriar Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share data)
Year ended December 31,
2001 2000 1999
-------- -------- --------
Revenue
Assisted living operations $ 30,861 $ 41,261 $ 41,260
Operating expenses
Assisted living operations 19,484 24,750 24,836
Lease expense 3,139 4,912 5,197
Facility depreciation and amortization 2,794 3,740 3,977
Termination of employment contracts 1,349 -- --
General and administrative 4,875 5,448 4,313
Write-down of assets 1,887 7,461 --
-------- -------- --------
33,528 46,311 38,323
-------- -------- --------
Operating profit (loss) (2,667) (5,050) 2,937
Other income (expense)
Interest and dividend income 265 406 599
Interest expense (4,958) (5,759) (5,632)
Other income (expense), net 16,602 (220) 2,178
-------- -------- --------
11,909 (5,573) (2,855)
-------- -------- --------
Earnings (loss) before income taxes 9,242 (10,623) 82
Income tax expense 2,824 -- --
-------- -------- --------
NET EARNINGS (LOSS) 6,418 (10,623) 82
Preferred stock dividend requirement (160) (4,105) (4,720)
-------- -------- --------
Net earnings (loss) allocable to common stockholders $ 6,258 $(14,728) $ (4,638)
======== ======== ========
Earnings (loss) per share
Basic and diluted $ 15.53 $ (39.17) $ (12.33)
Weighted average number of common shares outstanding:
Basic and diluted 403 376 376
The accompanying notes are an integral part of these statements.
F-4
Greenbriar Corporation and Subsidiaries
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Amounts in thousands)
Stock
Preferred stock Common stock Additional purchase
------------------- ------------------- paid in Accumulated notes
Shares Amount Shares Amount capital deficit receivable Total
-------- -------- -------- -------- -------- -------- -------- --------
Balances at January 1, 1999 2,876 $ 289 365 $ 76 $ 64,261 $(32,170) $ (2,367) $ 30,089
Dividends on preferred stock, including
accretion of $3,080 -- -- -- -- 3,080 (4,710) -- (1,630)
Accretion of redemption obligation -
preferred stock -- -- -- -- (6,015) -- -- (6,015)
Escrow stock released -- -- -- -- 194 -- -- 194
Net earnings -- -- -- -- -- 82 -- 82
-------- -------- -------- -------- -------- -------- -------- --------
Balance at December 31, 1999 2,876 289 365 76 61,520 (36,798) (2,367) 22,720
Dividends on preferred stock, including
accretion of $2,649 -- -- -- -- 2,649 (4,105) -- (1,456)
Redemption of preferred stock (355) (35) -- -- (4,725) -- -- (4,760)
Reduction of redemption obligation -
preferred stock -- -- -- -- 775 -- -- 775
Net loss -- -- -- -- -- (10,623) -- (10,623)
-------- -------- -------- -------- -------- -------- -------- --------
Balance at December 31, 2000 2,521 254 365 76 60,219 (51,526) (2,367) 6,656
Accretion of redemption obligation -
preferred stock -- -- -- -- (179) -- -- (179)
Conversion of preferred stock to
common stock (1,845) (185) 53 11 174 -- -- --
Conversion of preferred stock
to debt (675) (68) -- -- (3,307) -- -- (3,375)
Dividends on preferred stock -- -- -- -- -- (160) -- (160)
Common stock acquired -- -- (59) (12) (79) -- -- (91)
Net earnings -- -- -- -- -- 6,418 -- 6,418
-------- -------- -------- -------- -------- -------- -------- --------
Balance at December 31, 2001 1 $ 1 359 $ 75 $ 56,828 $(45,268) $ (2,367) $ 9,269
======== ======== ======== ======== ======== ======== ======== ========
The accompanying notes are an integral part of this statement.
F-5
Greenbriar Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
Year ended December 31,
--------------------------------
2001 2000 1999
-------- -------- --------
Cash flows from operating activities
Net earnings (loss) $ 6,418 $(10,623) $ 82
Adjustments to reconcile net earnings (loss) to net
cash provided by (used in) operating activities
Depreciation and amortization 2,329 3,740 3,977
Gain on sale of properties (16,635) (49) --
Employment contract termination 1,349 -- 0
Gain on sale of investment -- -- (2,166)
Write down of impaired assets 1,887 7,461 186
Deferred income taxes 2,400 -- --
Changes in operating assets and liabilities
Accounts receivable - trade 252 (288) 266
Other current and noncurrent assets 809 (750) (367)
Accounts payable and other liabilities (1,391) 750 (1,570
-------- -------- --------
Net cash provided by (used in)
operating activities (2,582) 241 408
Cash flows from investing activities
Purchase of property and equipment (24,294) (1,796) (1,764)
Proceeds from sale of investments -- -- 4,331
Purchase of investments (1,098) -- --
Proceeds from sales of properties 33,550 1,014 1,861
-------- -------- --------
Net cash provided by (used in)
investing activities 8,158 (782) 4,428
Cash flows from financing activities
Proceeds from borrowings 15,788 3,956 2,290
Payments on debt (18,045) (3,725) (2,706)
Dividends on preferred stock (160) (1,457) (1,630)
Extinguishment of preferred stock redemption obligation (4,200) (4,760) --
-------- -------- --------
Net cash provided by (used in) financing activities (6,617) (5,986) (2,046)
-------- -------- --------
Net increase (decrease) in cash
and cash equivalents (1,041) (6,527) 2,790
Cash and cash equivalents at beginning of year 2,287 8,814 6,024
-------- -------- --------
Cash and cash equivalents at end of year $ 1,246 $ 2,287 $ 8,814
======== ======== ========
The accompanying notes are an integral part of these statements.
F-6
Greenbriar Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
--------------------
Greenbriar Corporation's business consists of development and operation of
assisted living communities located throughout the United States of
America, that provide housing, healthcare, hospitality and personal
services to elderly individuals. At December 31, 2001, the Company had 11
communities in operation in seven states. Five other communities are
managed.
A summary of the significant accounting policies applied in the preparation
of the accompanying consolidated financial statements follows:
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of Greenbriar
Corporation and its majority-owned subsidiaries (collectively, the Company)
and are prepared on the basis of accounting principles generally accepted
in the United States of America. All significant intercompany transactions
and accounts have been eliminated.
Assisted Living Community Revenue
---------------------------------
Assisted living community revenue is reported at the estimated net
realizable value based upon expected amounts to be recovered from
residents, third party payors, and others for services rendered. Services
provided by certain of the Company's communities are reimbursed under
various state assistance plans.
Depreciation
------------
Depreciation is provided for in amounts sufficient to relate the cost of
property and equipment to operations over their estimated service lives,
ranging from 3 to 40 years. Depreciation is computed by the straight-line
method.
Use of Estimates
----------------
In preparing financial statements in conformity with accounting principles
generally accepted in the United States of America, management is required
to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements and revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
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.
F-7
Greenbriar Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE A - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- Continued
Impairment of Notes Receivable
------------------------------
Notes receivable are identified as impaired when it is probable that
interest and principal will not be collected according to the contractual
terms of the note agreements. The accrual of interest is discontinued on
such notes, and no income is recognized until all past due amounts of
principal and interest are recovered in full.
Impairment of Long-Lived Assets
-------------------------------
The Company reviews its long-lived assets and certain identifiable
intangibles for impairment when events or changes in circumstances indicate
that the carrying amount of the assets may not be recoverable. In reviewing
recoverability, the Company estimates the future cash flows expected to
result from use of the assets and eventually disposing of them. If the sum
of the expected future cash flows (undiscounted and without interest
charges) is less than the carrying amount of the asset, an impairment loss
is recognized based on the asset's fair value.
The Company determines the fair value of assets to be disposed of and
records the asset at the lower of fair value less disposal costs or
carrying value. Assets are not depreciated while held for disposal.
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 2001, 2000 and 1999,
stock options for approximately 70,000, 70,000 and 113,000 shares,
respectively, were excluded from diluted shares outstanding because their
effect was anti-dilutive.
F-8
Greenbriar Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE A - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- Continued
Investment in Partnership
-------------------------
The Company accounts for its investment in partnership, in which it is a
limited partner, by the equity method of accounting.
Stock Split and Stock Dividend
------------------------------
The Company declared a one-for-twenty-five reverse stock split effective
December 1, 2001. Due to the reduced stock float available in the public
market, the Company declared a twenty-five percent stock dividend to
stockholders of record on January 25, 2002. All share data has been
restated to give effect to the stock split and stock dividend.
New Accounting Pronouncements
-----------------------------
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141, Business Combinations
("SFAS 141"), and Statement of Financial Accounting Standards No. 142,
Goodwill and Intangible Assets ("SFAS 142"). SFAS 141 requires all business
combinations initiated after June 30, 2001 be accounted for under the
purchase method. SFAS 141 supercedes APB Opinion No. 16, Business
Combinations, and Statement of Financial Accounting Standards No. 38,
Accounting for Preacquisition Contingencies of Purchased Enterprises, and
is effective for all business combinations initiated after June 30, 2001.
SFAS 142 addresses the financial accounting and reporting for acquired
goodwill and other intangible assets. Under the new rules, a company is no
longer required to amortize goodwill and other intangible assets with
indefinite lives, but will be subject to periodic testing for impairment.
SFAS 142 supercedes APB Opinion No. 17, Intangible Assets and is effective
January 1, 2002.
In September 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets ("SFAS 144"). SFAS 144 established a single accounting model for the
impairment or disposal of long-lived assets, including discontinued
operations.
The Company will adopt these statements as of January 1, 2002 and does not
expect that the adoption will have a material impact on its consolidated
results of operations or financial position.
F-9
Greenbriar Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE B - CASH FLOW INFORMATION
Supplemental information on cash flows is as follows (in thousands):
Year ended December 31,
------------------------
2001 2000 1999
------ ------ ------
Interest paid $4,958 $5,752 $5,613
Income taxes paid 82 13 170
Noncash investing and financing activities (in thousands):
Assets transferred in settlement of preferred stock
redemption obligations, net of mortgage loans
of $36,981 6,837 -- --
Notes received from sale of assets 6,400 -- --
Note given in connection with purchase of
property by affiliated partnership 1,600 -- --
Common stock received in payment of note receivable 80 -- --
Common stock received in settlement of preferred stock
obligation 11 -- --
NOTE C - EMPLOYEE STOCK PURCHASE NOTES RECEIVABLE
December 31,
---------------
2001 2000
------ ------
(In thousands)
Note from James R. Gilley, chief executive officer, principal
and interest at 5.50%, due November 2008 $2,250 $2,250
Others 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.
F-10
Greenbriar Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE D - NOTES RECEIVABLE FROM SALE OF PROPERTY
During 2001, the Company sold three properties for cash of $30,804,000 and
$6,400,000 of tax-free notes bearing interest at 9.5%. The notes mature on
April 1, 2032, March 20, 2037, and August 1, 2031, respectively.
The repayment of the notes is limited to the cash flow of the respective
communities either from operations refinancing or sale. The Company has
deferred gains in the amount of $6,090,000. The deferred gains and interest
income will be recognized as cash is received.
NOTE E - LEASE RIGHTS AND OTHER INTANGIBLES
Lease rights and other intangibles consist of the following (in thousands):
December 31,
---------------
2001 2000
------ ------
Lease rights, net of accumulated amortization of
$1,458 in 2000 $ -- $3,447
Lease buyout options -- 5,607
Goodwill -- 293
------ ------
$ -- $9,347
====== ======
In 2001, the Company exercised its lease buyout options and the properties
were sold or transferred to LSOF (Note M). The related lease rights and
goodwill were charged against the gain on disposition.
F-11
Greenbriar Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE F - EMPLOYMENT CONTRACT TERMINATIONS
In January 1997, the Company negotiated employment contracts with the Chief
Executive Officer (CEO) and Chief Financial Officer (CFO) of the Company.
Both individuals had been employed by the Company since 1989. The
employment contracts called for combined annual salaries of $640,000 per
year and provided that, if the contracts were terminated or amended, the
individuals would be entitled to cash payment of three years salary for the
CEO and two years salary for the CFO. In light of the reduced size of the
Company, the independent directors and the officers in October 2001 agreed
to modify the employment agreements with the two officers. The two officers
have each agreed to continue their roles in the Company for $12,000 per
year for three years. The revisions in the contracts triggered contract
termination payments requiring the Company to immediately pay the two
officers $1,740,000. However, the two officers agreed to accept
non-interest bearing notes due December 31, 2004. These notes have certain
acceleration provisions if the Company violates the terms of the revised
employment contracts. For accounting purposes, interest has been imputed on
the notes at 8.5%, resulting in a discount of $391,000. The net amount of
the notes of $1,349,000 was expensed in 2001.
F-12
Greenbriar Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE G - AFFILIATED PARTNERSHIPS
In October 2001, the Company became a limited partner in Corinthians Real
Estate Investors LP (CREI), a partnership formed to acquire two properties.
The general partner is a limited liability corporation whose controlling
member is James Gilley. Mr. Gilley is also CEO of the Company. The Company
is a 56% limited partner. Mr. Gilley has a 25.9% interest, the general
partner has a .1% interest, the Company's chief financial officer has a
10.5% interest, and other employees of the Company have interests
aggregating 7.5%. In October 2001, the Partnership acquired a retirement
community for approximately $9,100,000 and in January 2002, it acquired an
assisted living community for approximately $2,800,000.
The Company issued a $1,600,000 note to the seller as partial payment for
the purchase of the retirement community. The balance of the purchase price
was funded by borrowings by CREI from a third party in the amount of
$7,840,000, which was guaranteed by the Company. CREI gave the Company a
$1,600,000 note in consideration for payment of that amount of the purchase
price. The note bears interest at 8.75% and is due December 30, 2003. CREI
also has debt in the amount of 3,975,000 collateralized by the assisted
living community that has been guaranteed by the Company.
The Company accounts for its investment in CREI by the equity method.
However, because of its guaranty of the debt of CREI, the Company records
100% of the losses of CREI, which were $95,947 for 2001. The Company had a
receivable of 311,000 at December 31, 2001, resulting from advances to
CREI.
Following are unaudited condensed financial statements of CREI at December
31, 2001 and the period from October 1, 2001 through December 31, 2001 (in
thousands):
Balance Sheet
Current assets $ 93
Property and equipment 9,358
Other assets 361
-------
$ 9,812
Current liabilities $ 67
Other liabilities 401
Note payable to Greenbriar Corporation 1,600
Mortgage payable 7,840
-------
9,908
Partners' deficit (96)
-------
$ 9,812
F-13
Greenbriar Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE G - AFFILIATED PARTNERSHIPS - Continued
Statement of Operations
Revenue $ 347
Expenses
Operating 171
Depreciation 46
General and administrative 22
Interest 204
-----
443
Net loss $ (96)
=====
NOTE H - 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, 2001 and 2000:
Cash and cash equivalents - The carrying amount approximates fair value
because of the short maturity of these instruments.
Long-term debt - The fair value of the Company's long-term debt is
estimated based on market rates for the same or similar issues. The
carrying value of long-term debt approximates its fair value.
Notes receivable - The fair value of the note receivable from an affiliate
partnership is estimated to approximate fair value based on its short
maturity. It is not practical to estimate the fair value of notes
receivable from sale of properties because no quoted market exists and
there are no comparable debt instruments to provide a basis for valuation.
F-14
Greenbriar Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE I - LONG-TERM DEBT
Long-term debt is comprised of the following (in thousands):
December 31,
-----------------
2001 2000
------- -------
Notes payable to financial institutions maturing through 2015; fixed and
variable interest rates ranging from 5.25% to 10.5% ; collateralized
by real property, fixtures, equipment and the assignment of rents $ 8,947 $27,991
Notes payable to individuals and companies maturing through 2023;
variable and fixed interest rates ranging from 7% to 8.75%;
collateralized by real property, personal property, fixtures,
equipment and the assignment
of rents 1,655 4,477
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 5.5% at December 31, 2000; collateralized by personal
property, land, fixtures and rents -- 6,895
Mortgage notes payable to a financial institutions maturing through 2010;
interest rates ranging from 7.5% through 14.5%; collateralized by real
property and equipment 5,253 13,972
Notes payable to wife of Chief Executive Officer, bearing interest at 10% and
maturing on July 1, 2003 3,375 --
Notes payable to executive officers, noninterest-bearing at 8.5% and maturing
December 31, 2004, net of discount of $391 representing interest
imputed at 8.5% 1,349 --
Line of credit with bank, bearing interest at 7.94% and maturing
April 1, 2002; collateralized by certificates of deposit 430 90
------- -------
21,009 53,425
Less current maturities 4,316 2,538
------- -------
$16,693 $50,887
======= =======
F-15
Greenbriar Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE I - LONG-TERM DEBT - Continued
Aggregate annual principal maturities of long-term debt at December 31,
2001 are as follows (in thousands):
2002 $ 4,316
2003 5,474
2004 1,867
2005 529
2006 314
Thereafter 8,509
-------
$21,009
NOTE J - 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 $1,167,000 for each year through 2009.
NOTE K - OPERATING LEASES
The Company leases certain communities under operating leases which expire
through 2011 and has operating leases for equipment and office space. The
leases generally provide that the Company pay property taxes, insurance,
and maintenance.
Future minimum payments following December 31, 2001 are as follows (in
thousands):
2002 $ 1,581
2003 1,661
2004 1,661
2005 1,661
2006 1,467
Thereafter 8,169
-------
$16,200
Lease expense in 2001, 2000 and 1999 was $2,315, $4,911 and $5,196,
respectively.
F-16
Greenbriar Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE L - INCOME TAXES
At December 31, 2001, the Company had net operating loss carryforwards of
approximately $19,300,000, which expire between 2002 and 2020. However,
approximately $7,900,000 of these net operating loss carryforwards have
limitations that restrict utilization to approximately $1,530,000 for any
one year.
The following is a summary of the components of income tax expense (in
thousands):
Year ended
December 31,
------------------------
2001 2000 1999
------ ------ ------
Current - state $ 424 $ -- $ --
Deferred - federal 2,400 -- --
------ ------ ------
$2,824 $ -- $ --
====== ====== ======
Deferred tax assets and liabilities were comprised of the following (in
thousands):
December 31,
--------------------
2001 2000
-------- --------
Deferred tax assets:
Net operating loss carryforwards $ 6,554 $ 12,784
Note receivable 680 680
Alternative minimum tax credit carryforwards 235 235
Accounts receivable 20 32
Accrued expenses 604 798
Financing obligations 1,802 1,802
Other 493 550
-------- --------
Total deferred tax assets 10,388 16,881
Deferred tax liabilities - property and equipment (5,021) (8,791)
Valuation allowance (3,017) (3,340)
-------- --------
Net deferred tax asset $ 2,350 $ 4,750
======== ========
F-17
Greenbriar Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE L - INCOME TAXES - Continued
Following is a reconciliation of income tax expense with the amount of tax
computed at the federal statutory rate of 34% (in thousands):
Year ended December 31,
----------------------------
2001 2000 1999
------ ------- -------
Tax expense (benefit) at the statutory rate $ 3,142 $(3,612) $ 27
State taxes net of federal benefit 380 -- --
Expiration of carryforwards -- 433 --
Change in deferred tax asset valuation allowance (323) 2,244 (49)
Nondeductible loss on write-down of properties -- 400 --
Nondeductible amortization -- 150 15
Other (375) 385 7
------- ------- -------
Tax expense $ 2,824 $ -- $ --
======= ======= =======
Changes in the deferred tax valuation allowance result from assessments
made by the Company each year of its expected future taxable income
available to absorb its carryforwards. The Company believes that it is more
likely than not that the net deferred tax asset at December 31, 2001 of
$2,350,000 will be realized. However, this evaluation is inherently
subjective as it requires estimates that are susceptible to significant
revision as more information becomes available. Accordingly, the ultimate
realization of the net deferred tax asset could be less than the carrying
amount.
F-18
Greenbriar Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE M- STOCKHOLDERS' EQUITY
Preferred Stock
Preferred stock consists of the following (amounts in thousands, except per
share amounts):
Year ended
December 31,
-----------------
2001 2000
------- -------
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 in 2000 -- 68
Series F voting cumulative convertible preferred stock, $.10 par value; liquidation
value of $14,000; authorized, issued and outstanding, 1,400 shares at
December 31, 2000 -- 140
Series G cumulative convertible preferred stock, $.10 par value;
liquidation value of $4,450; authorized, 800 shares; issued and
outstanding,
445 and 800 shares at December 31, 2001 and 2000, respectively -- 45
------- -------
$ 1 $ 254
======= =======
F-19
Greenbriar Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE M- 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 $500 per share in 1993 to $1,111 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 had a liquidation value of $5 per share and
was convertible into common stock at $200 per share. Dividends were payable
in cash at a rate of 9.5%. The stock was exchanged for a $3,375,000 note in
2001. See Note I.
The Series F and Series G preferred shares were sold to LSOF Pooled Equity,
L.P. (LSOF) in December 1997 for $22,000,000, less selling and offering
costs of $716,000. In connection with the sale, the Company entered into an
agreement which provided that, on the date of conversion, if the value of
the Company's common stock has not increased at an annual rate of at least
14% during the period the preferred shares are outstanding, the Company is
required to make a cash payment (the Cash Payment) to LSOF equal to the
market price deficiency on the shares received upon conversion. Conversion
was required by January 2001.
The 14% guaranteed return was accreted by a charge to accumulated deficit.
The amount of the Cash Payment that would be required assuming conversion
at each balance sheet date is transferred from stockholders' equity to
Preferred Stock Redemption Obligation.
During 2000, the Company made payments totaling $4,760,000 to redeem
355,150 shares of the Series G preferred stock, pursuant to an agreement
that it would redeem additional shares from the proceeds generated from the
sale of assets or from refinancings.
The Company received a notice dated October 30, 2000 from LSOF, advising
that it was electing to convert the outstanding shares of preferred stock
into common stock. Such notice set forth LSOF's position that, as a result
of certain employee stock options issued by the Company, the conversion
price of the preferred stock had been reduced from $350 per share to $13.80
per share, and that the Company was required to issue 1,373,768 shares of
common stock upon conversion.
The Company did not agree that the conversion price should be adjusted, and
LSOF brought a lawsuit against the Company. In October 2001, LSOF and the
Company entered into a settlement agreement. Pursuant to the agreement, (1)
the Company transferred 11 assisted living communities to LSOF subject to
the assumption by LSOF of debt in the amount of $36,981,000, (2) the
Company paid LSOF $4,000,000 in cash, (3) LSOF transferred to the Company
the 53,000 common shares received upon conversion of the Series F and G
preferred shares, (4) the Preferred Stock Redemption Obligation of
$27,167,000 was cancelled, and (5) each agreed to release all claims
against the other. The Company recognized a gain of $16,129,000 on the
transfer of assets to LSOF.
F-20
Greenbriar Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE M - STOCKHOLDERS' EQUITY - Continued
Stock Options
-------------
In 1992, the Company established a long-term incentive plan (the 1993 Plan)
for the benefit of certain key employees. Under the 1993 Plan, up to 10,875
shares of the Company's common stock are reserved for issuance. Options
granted to employees under the 1993 Plan become exercisable over a period
as determined by the Company and may be exercised up to a maximum of 10
years from date of grant. In 1997, the Company adopted the 1997 Stock
Option Plan, under which up to 25,000 shares of the Company's common stock
are reserve for issuance. In 2000, the Company adopted the 2000 Stock
Option Plan, under which up to 25,000 shares of the Company's common stock
are reserve for issuance.
The Company has also granted options to an officer during 1996 through
2001, aggregating 50,000 shares not covered by either plan. These options
were granted at market, were exercisable immediately, and expire 10 years
from date of grant.
SFAS 123 requires disclosure of pro forma net earnings (loss) and pro forma
net earnings (loss) per share as if the fair value method had been applied
in measuring compensation cost for stock-based awards.
Reported and pro forma net earnings (loss) and net earnings (loss) per
share amounts are set forth below (in thousands, except per share data):
2001 2000 1999
--------- --------- ---------
Net earnings (loss) allocable to common stockholders
As reported $ 6,258 $(14,728) $( 4,638)
Pro forma 5,889 $(15,080) $ (5,287)
Net earnings (loss) per share
As reported 15.53 $ (39.17) $ (12.33)
Pro forma 14.61 $ (40.11) $ (14.06)
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: no dividends; expected volatility of 317 percent in 2001, 87
percent for 2000, and 83 percent for 1999; risk-free interest rates of 5.0
percent for 2001, 5.6 percent for 2000, and 6.1 percent for 1999; and
weighted average expected lives of 6.8 years.
F-21
Greenbriar Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE M - STOCKHOLDERS' EQUITY - Continued
Information with respect to stock option activity is as follows:
Weighted
average
exercise
Shares price
---------- ----------
Outstanding at January 1, 1999 60,800 $ 245.80
Granted 53,090 27.40
Forfeitures (275) 403.80
---------- ----------
Outstanding at December 31, 1999 113,615 $ 144.20
Granted 10,000 7.60
Cancelled, rescinded, or annulled (53,090) 65.40
Forfeitures (100) 315.00
---------- ----------
Outstanding at December 31, 2000 70,425 $ 183.80
Granted 10,000 12.80
---------- ----------
Outstanding at December 31, 2001 80,425 $ 162.56
========== ==========
Options exercisable at December 31, 1999 91,747 $ 169.20
========== ==========
Options exercisable at December 31, 2000 70,250 $ 183.20
========== ==========
Options exercisable at December 31, 2001 80,425 $ 162.56
========== ==========
Weighted average fair value per share of options granted during 2001, 2000
and 1999 was $7.60, $6.00 and $22.29, respectively.
Additional information about stock options outstanding at December 31, 2001
is summarized as follows:
Options outstanding and exercisable
------------------------------------------------------
Weighted average
Number remaining Weighted average
Range of exercise prices outstanding contractual life exercise price
------------------------ ---------------- ---------------- ----------------
$7.50 to $13.80 30,000 9.0 $ 11.37
$13.81 to $50.00 10,000 7.0 50.00
$200.00 to $265.60 17,900 4.6 240.84
$350.00 to $403.80 22.525 5.4 351.70
---------------- ---------------- ----------------
80,425 6.8 $ 162.56
================ ================ ================
F-22
Greenbriar Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE N - OTHER INCOME (EXPENSE)
Other income (expenses) consists of the following: (amounts in thousands)
Year ended December 31,
--------------------------------
2001 2000 1999
-------- -------- --------
Gain (loss) on sale of properties $ 16,635 $ -- $ (186)
Gain on sale of investments -- -- 2,166
Other (33) (220) 198
-------- -------- --------
$ 16,602 $ (220) $ 2,178
======== ======== ========
NOTE O - WRITE-OFF OF IMPAIRED ASSETS
In 1992, the Company sold four nursing homes to Southern Care Corporation
(Southern Care), and a subsidiary of the Company entered into a management
agreement to manage the nursing homes. In 1994, Southern Care terminated
the management agreement and informed the Company that they believed the
notes due to the Company from the sale of the nursing homes in 1992 were
invalid. The matter has been in the courts since 1995 and legal issues were
resolved in June 2000 when Greenbriar was awarded a judgment of $18,688,000
for the notes, interest, amounts due for the management contract and
reimbursement of legal fees. The assets had a recorded value of $4,525,000.
The Company was informed during 2000 that the financial condition of
Southern Care had deteriorated, that it was delinquent on mortgage payments
on the homes, and that the first mortgage holder foreclosed on the homes in
June 2000. The Company is actively pursuing collection of its judgment from
Southern Care as well as from its officers, directors and a third party
trustee. However, under the circumstances, the Company is writing off the
entire $4,525,000.
The Company decided to dispose of two assisted living communities in 2000
that were not meeting operating performance expectations. These communities
were written down to net realizable value at June 30, 2000. One of these
communities was disposed of in the quarter ending September 30, 2000 with
no additional write-off required. Also, a third community whose operations
have deteriorated was written down based on management's estimate of future
cash flows pursuant to the provisions of Statement of Financial Accounting
Standards No. 121. In addition, certain receivables associated with these
properties were written off. These write-offs substantially account for the
remainder of the write-off of impaired assets and related expenses.
During 2001, the Company identified four properties that were not meeting
performance expectations. These properties are in a geographic region
where, after the transfer to LSOF, the Company does not have a significant
presence. The Company has engaged a regional operator to assist in the
operations of three of the properties and has entered into a one-year lease
with this operator for an additional property. If the approvals from
existing lenders can be obtained, it is anticipated that three of these
properties will be sold to this operator. In the fourth quarter, the
Company wrote these properties down to their net realizable value of
$5,066,000 with a charge to earnings of $1,887,000.
F-23
Greenbriar Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE P - CONTINGENCIES
The Company is defendant in various lawsuits generally arising in the
ordinary course of business. Management of the Company is of the opinion
that these lawsuits will not have a material effect on the consolidated
results of operations, cash flows or financial position of the Company.
As discussed in Note G, the Company is guarantor of debt of an affiliated
partnership in the amount of $11,815,000 at March 28, 2002.
NOTE Q - QUARTERLY DATA (UNAUDITED)
Year ended December 31, 2001
--------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
Revenue $ 9,976 $ 9,247 $ 8,186 $ 3,452
Operating expenses 9,207 9,387 7,770 7,164
Net earnings (loss) (276) (1,611) (480) 8,785
Preferred stock dividend requirement (80) (80) -- --
Net earnings (loss) allocable to common shareholders (356) (1,691) (480) 8,785
Net earnings (loss) per common share - basic and diluted (.85) (4.05) (1.15) 24.51
Year ended December 31, 2000
--------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
Revenue $ 10,522 $ 10,319 $ 10,263 $ 10,157
Operating expenses 9,635 16,885 9,409 10,382
Net loss (619) (7,990) (571) (1,443)
Preferred stock dividend requirement (1,047) (1,028) (1,028) (1,002)
Loss allocable to common shareholders (1,396) (9,018) (1,599) (2,715)
Loss per common share - basic and diluted (3.80) (23.98) (4.19) (7.20)
F-24