-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, J6tkJ7clq3iVbG3PvqTzmmSSPQbKs0Q6zz+576GQ/EYXZuv3pJqOuevO/YpaRjr4 luXRUC9gtQmA3WGPoPc6WQ== 0000930661-96-000842.txt : 19960726 0000930661-96-000842.hdr.sgml : 19960726 ACCESSION NUMBER: 0000930661-96-000842 CONFORMED SUBMISSION TYPE: 10KSB/A PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960725 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: GREENBRIAR CORP CENTRAL INDEX KEY: 0000105744 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-SKILLED NURSING CARE FACILITIES [8051] IRS NUMBER: 752399477 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-08187 FILM NUMBER: 96598622 BUSINESS ADDRESS: STREET 1: 4265 KELLWAY CIRCLE CITY: ADDISON STATE: TX ZIP: 75244 BUSINESS PHONE: 2144078400 MAIL ADDRESS: STREET 1: 4265 KELLWAY CIRCLE CITY: ADDISON STATE: TX ZIP: 75244 FORMER COMPANY: FORMER CONFORMED NAME: MEDICAL RESOURCE COMPANIES OF AMERICA DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: WESPAC INVESTORS TRUST DATE OF NAME CHANGE: 19900605 10KSB/A 1 FORM 10KSB AMENDMENT #2 UNITED STATES SECURITIES AND EXCHANGE COMMISSION FORM 10-KSB/A (Amendment No. Two) (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, 1995 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________________ to _______________ Commission file number 0-8187 GREENBRIAR CORPORATION (Formerly Medical Resource Companies of America) (Name of Small Business Issuer in its charter) Nevada 75-2399477 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 4265 Kellway Circle, Addison, Texas 75244 (Address of principal executive offices) (Zip Code) Issuer's telephone number, including area code: (214) 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 Check 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 ----- ----- Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of issuer's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [X] The issuer's revenues for its most recent fiscal year were: $ 9,710,000 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 26, 1996, was approximately $14,200,000. At March 26, 1996, the issuer had outstanding approximately 3,440,000 shares of par value $.01 common stock. Documents Incorporated by Reference Part III of this Annual Report on Form 10-KSB incorporates certain information by reference from the definitive Proxy Statement for the registrant's Annual Meeting of Stockholders held on May 24, 1996. Transitional Small Business Disclosure Format (check one): Yes No X ----- -----
TABLE OF CONTENTS ITEM 1: DESCRIPTION OF BUSINESS....................................... 1 Overview........................................................... 1 Real Estate Operations............................................. 1 Sale of Mobility Assistance Subsidiaries........................... 1 Wedgwood Acquisition............................................... 2 Overview of Assisted Living Operations............................. 4 The Assisted Living Industry....................................... 4 Business Strategy.................................................. 5 Assisted Living Services........................................... 8 Properties......................................................... 8 Facility Description............................................... 12 Operations......................................................... 12 Quality Assurance.................................................. 13 Marketing.......................................................... 14 Government Regulation.............................................. 14 Competition........................................................ 15 Insurance.......................................................... 16 Environmental Matters.............................................. 16 Employees.......................................................... 17 Corporate Offices.................................................. 17 ITEM 2: PROPERTIES................................................... 17 ITEM 3: LEGAL PROCEEDINGS............................................ 17 ITEM 6: MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.................................................... 18 ITEM 13: EXHIBITS LIST AND REPORTS ON FORM 8-K........................ 24
i ITEM 1: DESCRIPTION OF BUSINESS - ------- ----------------------- Overview On March 27, 1996, the Company changed its name from Medical Resource Companies of America to Greenbriar Corporation ("Greenbriar" or the "Company"). The Company existed from 1974 until 1989 as a real estate investment trust. In late 1989, control of the Company shifted to current management, who undertook to dispose of its REIT properties, establish a new focus on services and products to the elderly and reorganized the REIT as a Nevada corporation in May 1991. Until 1994, the Company's business was the acquisition, operation and sale of retirement, nursing and other healthcare facilities, as well as commercial real estate, and the manufacture and sale or lease of mobility assistance equipment. In 1994, the Company decided to change its business emphasis to the assisted living industry, and by early 1996 it had sold its existing nursing homes and retirement center properties, most of its commercial real estate, and its mobility equipment manufacturing subsidiaries. On March 15, 1996, the Company closed the acquisition (the "Wedgwood Acquisition") of Wedgwood Retirement Inns, Inc. ("Wedgwood"), as discussed below. Unless the context otherwise requires, references made hereafter to the "Company" or "Greenbriar" shall mean Greenbriar Corporation and its subsidiaries and predecessor entities, including Wedgwood and its predecessor entities. The Company's executive offices are located at 4265 Kellway Circle, Addison, Texas 75244, and its telephone number is (214) 407-8400. Real Estate Operations At March 31, 1996, the Company owned three shopping centers in Georgia, and one shopping center in North Carolina. In June 1996 the Company entered into a contract to sell the three Georgia shopping centers for amounts that approximate the book value of the properties. The sale is expected to close in the third quarter. In July 1996, the Company determined to sell its remaining parcel of real estate consisting of the shopping center in Winston-Salem, North Carolina. Sale of Mobility Assistance Subsidiaries On February 9, 1996, the Company sold its wholly owned subsidiary American Mobility, Inc. ("AMI") along with AMI's subsidiaries Odyssey Mobility Systems, Inc., Aviation Mobility, Inc. and Alpha Mobility, Inc. to Innovative Health Services, Inc. ("IHS"), a private company. The sales price was $4,300,000, consisting of a $2 million note and $2,300,000 (230,000 shares) of IHS's Class A convertible preferred stock. The Company recorded a gain of approximately $930,000 on the sale of AMI. The price and terms of the sale were determined through arms length negotiations between the parties. The fair value of the preferred stock for accounting purposes was determined based on discounted projected future cash flows. The $2 million note bears interest at the prime rate plus 1% and is payable quarterly. The note calls for annual principal payments equal to a percentage of IHS's earnings with a final payment due on February 9, 2001. The preferred stock has a cumulative dividend rate of 8% per annum, payable quarterly. The preferred stock has no voting rights unless dividends are in arrears. After three years, under certain circumstances, the Company can convert the preferred stock into IHS common stock, at a price of 75% of the prevailing market price at the time of conversion. As a result of this sale, the Company is no longer involved in the business of manufacturing, selling and leasing mobility assistance equipment. Until the note is paid in full, the Company has the right to designate one member of the Board of Directors of IHS. Gene S. Bertcher, Executive Vice President and Chief Financial Officer of the Company, presently serves as the Company's designee. 1 Wedgwood Acquisition General. On March 15, 1996, the Company acquired Wedgwood, which along with its principals owned various interests in 15 predecessor entities, each of which owned, leased or managed at least one assisted or independent living facility. As a result of the Wedgwood Acquisition, the Company now owns these entities and owns, leases or manages their facilities. See "Properties-Operating Facilities." All entities and facilities are owned 100% by the Company except for one facility owned 40% by minority owners and two entities owned 51% by Victor L. Lund. The Wedgwood Acquisition also provided the Company with additional operational and developmental expertise. The consideration for the Wedgwood Acquisition was 1,949,950 shares of Series E Preferred Stock, having an issue price and liquidation value of $16,852,000, and $220,000 in cash and notes to the sellers (the "Sellers"), who consisted of 20 persons, all of whom were previously unrelated to the Company. Such purchase price was determined through arms' length negotiations. It is anticipated that the Series E Preferred Stock will be convertible into 1,624,958 shares of Common Stock, representing approximately one-third of the Company's outstanding shares after consummation of the Wedgwood Acquisition if the Company's stockholders approve such convertibility at a meeting to be held in 1996. The Sellers include the following persons who owned either 5% or more of Wedgwood or who were officers or directors of Wedgwood.
Shares of Common Number of Percentage Stock Into Shares of of Which Series E Current Series E Series E Preferred Stock Relationship to Seller Preferred Stock Preferred Stock is Convertible the Company - ------ --------------- --------------- -------------- ----------- Victor L. Lund 1,457,953 75.8% 1,214,961 Director Adult Children of Victor L. Lund 78,828 4.0% 65,690 None Paul W. Dendy 19,360 1.0% 16,133 Executive Vice President and Director Mark W. Hall 84,442 4.4% 70,368 Executive Vice President and Director Teresa L. Waldroff 24,920 1.3% 20,767 Vice President - Operations ---------- ----- ---------- of Wedgwood 1,665,503 86.5% 1,387,919
As an additional inducement for Victor L. Lund to enter into the acquisition with Greenbriar, Greenbriar assumed or agreed to indemnify him against indebtedness incurred in connection with the acquisition and development of the properties of Wedgwood, including approximately $43,200,000 for which he had issued his personal guarantees. In connection with the Wedgwood Acquisition, the Company entered into a Construction Management Agreement with Victor L. Lund pursuant to which Mr. Lund agreed to serve, for three years following closing of the Wedgwood Acquisition, as a construction manager to oversee construction for the Company of up to 20 assisted living facilities, including those that provide Alzheimer's care, during the term of the agreement. Mr. Lund will receive monthly fees based on the percentage of completion of each facility with a total fee of $150,000 for each facility successfully completed, less any profits or distributions paid to Mr. Lund from any partnership or limited liability company in which Mr. Lund and the Company both own equity interests. Mr. Lund is responsible for paying the costs of any construction supervisors or similar on site personnel employed by him to satisfy his oversight duties to the Company. Mr. Lund owns a 51% equity interest and the Company owns a 49% equity interest in two limited partnerships. The Company also has entered into employment agreements with Mr. Dendy for three years and Mr. Hall and Ms. Waldroff for one year. 2 Organization and Consolidation of Wedgwood. Wedgwood Retirement Inns, Inc. ("WRII") was incorporated in May 1977 in the State of Washington. During early 1996, WRII consolidated itself (the "Consolidation") with 15 affiliated partnerships, corporations, limited liability companies and proprietorships (the "Predecessor Entities") owned by the Sellers, who agreed to exchange their interests in the Predecessor Entities for common stock in WRII which was then exchanged for Series E Preferred Stock of the Company pursuant to the Wedgwood Acquisition. The Predecessor Entities owned or leased a total of 15 assisted or independent living facilities, with two more under construction, at the time of the Consolidation and the Wedgwood Acquisition, and WRII managed all but one of the these facilities, plus an additional facility owned by a third party. All references to "Wedgwood" shall mean WRII and the Predecessor Entities on a consolidated basis. Acquisition of Shopping Center and the Series D Preferred Stock. It was important to the Sellers that the Wedgwood Acquisition not result in taxable gain to them. Because Wedgwood was formed from the consolidation of 16 separate legal entities, the only structure that was deemed suitable to achieve a tax free transaction was a contribution to a controlled corporation under Section 351 of the Internal Revenue Code of 1986. The Sellers would not have been in control of the Company following the Wedgwood Acquisition, and it was necessary to have additional assets contributed to the Company by others in exchange for equity securities so that the Sellers together with the other contributing assets would in the aggregate control more than 80% of the voting power of the Company following the transaction. In order to satisfy these objectives, a material part of the Wedgwood Acquisition included the contribution of a shopping center property in Winston- Salem, North Carolina to the Company in exchange for additional shares of voting stock. Such shopping center was owned by James R. Gilley and certain of his affiliates and family members. The following table reflects the number and percentage of shares of Series D Preferred Stock issued to each of them in exchange for their respective interests in the contributed shopping center as well as the number of shares of Common Stock into which such shares of Series D Preferred Stock are convertible:
Number of Shares of Common Shares of Percentage of Stock Into Which Series D Series D Series D Preferred Seller Preferred Stock Preferred Stock Stock is Convertible - ------ --------------- --------------- -------------------- JRG Investment Co., Inc.(1) 355,927 52.7% 177,963 Sylvia M. Gilley(2) 157,613 23.3% 78,806 The April Trust(3) 117,653 17.5% 58,827 W. Michael Gilley(4) 37,057 5.5% 18,529 James R. Gilley 6,750 1.0% 3,375 ------- ------- ------- 675,000 100.0% 337,500 - ---------------------------
(1) Nevada corporation wholly owned by James R. Gilley. (2) Spouse of James R. Gilley. (3) Grantor trust for benefit of James R. and Sylvia M. Gilley. (4) Adult son of James R. and Sylvia M. Gilley. The shopping center was valued at $3,375,000 based on an independent appraisal prepared by the firm of Pinnacle Consulting Group, Inc., Dallas, Texas. Shares of Series D Preferred Stock were issued at an issue price and liquidation value of $5.00 per share, and will become convertible at a rate of two shares of Series D Preferred Stock for one share of Common Stock or an equivalent Common Stock conversion rate of $10.00 per share. The $10.00 equivalent per share conversion rate is the same equivalent per share conversion rate attributed to the Series E Preferred Stock, which was determined through arms' length negotiations. James R. Gilley was faced with certain conflicts of interest in determining to accept the Series D Preferred Stock in exchange for the shopping center. The exchange, including the equivalent per share 3 conversion rate, issue and liquidation price, and voting rights attributed to the Series D Preferred Stock as a part of the tax planning for the Wedgwood Acquisition, was approved by the Conflicts of Interest Committee of the Board of Directors and by the full Board of Directors, with Mr. Gilley and W. Michael Gilley abstaining. Acquisition of the shopping center has been recorded on the financial statements of the Company at approximately $2.3 million, which is the cost of such property to the holders of Series D Preferred Stock. The net profit from the operation of the shopping center will be sufficient to cover the dividends payable on the Series D Preferred Stock. In July 1996, the Company determined to market the property for sale. Overview of Assisted Living Operations Greenbriar Corporation is an established assisted living company that operates assisted and independent living facilities 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 ("ADLs"), but who do not generally require more expensive skilled nursing care. Independent living residents typically require only occasional assistance with ADLs but receive other support services. In addition, the Company also develops and operates facilities for residents suffering from Alzheimer's or other related dementia, a growing niche within the assisted living industry. The Company's objective is to capitalize on its extensive experience in the senior care industry to meet the growing demand for assisted living services. The Company's business strategy is to: (i) provide a wide range of assisted living services to its aging residents; (ii) target primarily private pay residents; (iii) design and construct or acquire facilities with units sufficiently large to provide the Company with the flexibility to allow double occupancy; (iv) emphasize providing assisted living services to residents with Alzheimer's or other forms of dementia through the operation of distinct Alzheimer's wings or dedicated Alzheimer's facilities; and (v) concentrate its facilities primarily in non-metropolitan communities located in the western and southern regions of the United States. As of July 1, 1996, the Company operated 16 facilities in six states, with a capacity of 1,276 residents, consisting of 15 facilities in which the Company has ownership or leasehold interests and one facility managed for a third party. In addition, the Company leases one facility that is managed by a third party. The Company plans to pursue an aggressive growth strategy through development and construction and, when opportunities arise, to acquire other facilities and assisted living companies through strategic acquisitions. As of July 1, 1996, the Company had seven assisted living facilities with capacity for 559 residents under construction (i.e., construction activities have commenced and are ongoing) and is developing 12 additional assisted living facilities with capacity for 719 residents (i.e. the site is under control and development activities such as site permitting, preparation of surveys, architectural plans and negotiation of construction contracts have commenced). Of the 16 facilities operated by the Company as of July 1, 1996, 15 were operated by Wedgwood at the time of the Wedgwood Acquisition. The Assisted Living Industry The Company believes that the assisted living industry is emerging as a preferred alternative to meet the growing demand for a cost-effective setting in which to care for the elderly who do not require the more intensive medical attention provided by a skilled nursing facility but who cannot live independently due to physical or cognitive frailties. In general, assisted living represents a combination of housing, general support services and 24-hour a day personal care services designed to aid elderly residents with the activities of daily living ("ADLs"). Certain assisted living facilities may also provide assistance to residents with low acuity medical needs, or may offer higher levels of personal assistance for incontinent residents or residents with Alzheimer's disease or other forms of dementia. Generally, assisted living residents have higher levels of 4 need than those of residents of independent retirement living centers but lower than those of residents in skilled nursing facilities. Annual expenditures in the assisted living industry have been estimated to be approximately $12 billion, including facilities ranging from "board and care" to full-service assisted living facilities such as those operated by the Company. The Company believes that assisted living is one of the fastest growing segments of elderly care and will continue to experience significant growth due to the following: Consumer Preference. The Company believes that assisted living is increasingly becoming the setting preferred by prospective residents and their families in which to care for the frail elderly. Assisted living offers residents greater independence in a residential setting, which the Company believes results in a higher quality of life than that experienced in more institutional or clinical settings, such as skilled nursing facilities. Demographic and Social Trends. The target market for the Company's services is persons generally 75 years and older, one of the fastest growing segments of the U.S. population. According to the U.S. Census Bureau, the portion of the U.S. population age 75 and older is expected to increase by 33.5%, from approximately 13.0 million in 1990 to over 17.4 million by the year 2000, and the number of persons age 85 and older, as a segment of the U.S. population, is expected to increase approximately 42% during the 1990s from 3.1 million to approximately 4.3 million. It is estimated that the total U.S. population will increase by approximately 11% during the same period. It is further estimated that approximately 57% of the population of seniors over age 85 need assistance with ADLs and more than one-half of such seniors develop Alzheimer's disease or other forms of dementia. According to the United States Bureau of the Census, the median net worth of householders age 75 and older has increased from $61,491 in 1988 to $76,541 in 1992. Accordingly, the Company believes that the number of seniors who are able to afford high-quality residential environments, such as those offered by the Company, has increased in recent years. Lower Average Cost. The Company believes that the average annual cost to residents of receiving assisted living care in the Company's assisted living facilities is significantly less than the cost of receiving similar care in a skilled nursing facility. According to the Marion Merrell Dow Inc. Managed Care Digest Series, Institutional Digest 1995, the average annual cost per person in 1994 in the United States for private, nursing home care was approximately $36,000. During the three months ended March 31, 1996, the average annualized revenue per assisted living resident in the Company's facilities was approximately $20,000. Changing Supply of Long-Term Care Beds. Most of the states in which the Company currently operates have enacted certificate of need ("CON") or similar legislation that restricts the supply of licensed nursing facility beds. These laws generally limit the construction of nursing facilities and the addition of beds or services to existing nursing facilities, and hence tend to limit the available supply of traditional nursing home beds. In addition, some long-term care facilities have started to convert traditional nursing home beds into sub- acute beds. The Company also believes that high construction costs and limits on government reimbursement for the full cost of construction and start-up expenses also will constrain the growth and supply of traditional nursing home facilities and beds. The Company expects that this tightening supply of nursing beds coupled with the aging population will create an increased demand for assisted living care facilities. Business Strategy The Company believes that significant growth opportunities exist to provide assisted living services to the rapidly growing elderly population. The Company intends aggressively to expand its operations through the development and construction, and the selective acquisition of additional quality facilities and assisted living companies. The Company also intends to seek to improve the operating performance of its facilities through the continued enhancement of its operations. 5 Growth Strategy. The Company's growth strategy emphasizes growth through the development and construction of assisted living facilities and, when opportunities arise, through strategic acquisitions of assisted living operations. Development Strategy. The Company intends to expand its operations through the development and construction of assisted living facilities primarily in selected non-metropolitan markets identified as under-served markets by the Company's market research. Currently, the Company is focusing most of its development activities in the southern and western regions of the United States. The Company has an integrated internal development approach pursuant to which the Company's management and other personnel (including designers and architects, market analysts and construction managers), locate sites for, develop and open its facilities. Personnel experienced in site selection conduct extensive market and site- specific feasibility studies before the Company commits significant financial resources to new projects. As of July 1, 1996, the Company was in the process of constructing seven facilities and has 12 additional facilities under development. The Company expects to open two of these facilities during the remainder of 1996. Construction time for new development generally ranges from six to twelve months. Once opened, new facilities generally achieve a stabilized level of occupancy of 95% or higher over periods ranging from six to twelve additional months. As of July 1, 1996, the Company had loans in place or has received commitments for approximately $64.3 million in lease credit lines and $22.1 million in mortgage credit lines, subject to final documentation, available for funding construction and development, subject to satisfaction of standard terms, conditions and approvals at the time construction of each new facility is commenced. See Item 6. "Management's Discussion and Analysis or Plan of Operation - Liquidity and Capital Resources." The Company presently markets its facilities, other than its Alzheimer's units, on a private pay, single occupancy basis, although a limited number of non-Alzheimer's units in each Company facility have double occupancy, usually by married couples. However, the assisted living industry is evolving, and the Company believes there may be changes in government pay regulations or the ability for private pay residents to continue on such basis. Consequently, the units within the new facilities to be constructed by the Company will be sufficiently large to provide the Company with the flexibility to allow double occupancy and common areas will be larger to accommodate more residents. The Company's larger units and common areas will allow it to rapidly and inexpensively convert units from single to double occupancy, which the Company believes will provide a competitive advantage over its competitors who do not have units large enough to readily accommodate double occupancy. The Company's Alzheimer's units are large enough to accommodate double occupancy and are currently marketed primarily as semi-private units, but the Company has assumed for future planning purposes that approximately half of its Alzheimer's units will be occupied by a single person. To facilitate its construction and development strategy, the Company has entered into a Construction Management Agreement with Victor L. Lund, the founder of Wedgwood and a director of the Company, pursuant to which Mr. Lund agreed to serve, for three years following closing of the Wedgwood Acquisition, as a construction manager to oversee the Company's construction of up to 20 assisted living facilities, including those that provide Alzheimer's care. Acquisition Strategy. The Company has acquired, and intends to continue selectively to acquire as opportunities arise, assisted living operations. The Company may acquire one or more facilities or assisted living companies as a means to enter new markets and may also make acquisitions within its existing regions to gain further market share and leverage its existing operating infrastructure. In reviewing acquisition opportunities, the Company considers, among other things, the competitive climate, the current reputation of the facility or the operator, the quality of the management, the need to reposition the facility in the marketplace and costs associated therewith, the 6 construction quality and any need for renovations of the facility and the opportunity to improve or enhance operating results. Operating Strategy. The Company's operating strategy is to achieve and sustain a strong competitive position within its chosen markets as well as to continue to enhance the performance of its operations. The Company also will seek to enhance its current operations by (i) maintaining and improving occupancy rates at its facilities; (ii) opportunistically increasing resident service fees; and (iii) improving operating efficiencies. Offer Residents Customized Care and Service Packages. The Company continually seeks to expand its range of services to meet the evolving needs of its residents. The Company offers each of its residents a personalized assisted living service plan which may include any combination of basic support care, personal care, supplemental services, wellness services, and if needed, Alzheimer's and special care services, subject to the level of services allowed to be offered by the licensing in place at each facility. By offering services in an "unbundled" manner, charging only for the services needed and involving the active participation of the resident, the Company is able to customize its service plans to meet the specific needs of such resident. As a result, the Company believes that it is able to maximize customer satisfaction while avoiding the high cost of delivering all services to all residents without regard to need or choice. The care plan for each resident is periodically reviewed and updated by the Company, the resident and the resident's family. Maintain and Improve Occupancy Rates. The Company also seeks to maintain and improve occupancy rates by continuing to (i) attract new residents through marketing programs directed towards family decision makers, namely adult children and potential residents and (ii) actively seek referrals from hospitals, rehabilitation hospitals, physicians' clinics, home healthcare agencies and other acute and sub-acute healthcare providers in the markets served by the Company. 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 their own and their families' financial resources. Such resources may include social security, investments, proceeds from the sale of their residence, contributions from family members and insurance proceeds from long-term care insurance policies. Improve Operating Efficiencies. The Company seeks to improve operating results of its residences by actively monitoring and managing its operating costs. In addition, the Company believes that concentrating facilities within selected geographic regions may enable the Company to achieve operating efficiencies through economies of scale, reduce corporate overhead and provide for more effective management supervision and financial controls. The Company also believes that it will be able to obtain volume discounts through enhanced purchasing power for a variety of items including food, insurance, equipment and other items. Offer Alzheimer's Dedicated Facilities. As of July 1, 1996, the Company had three facilities with distinct special care wings specifically designed to serve the needs of individuals with Alzheimer's disease and other forms of dementia through the provision of a variety of specialty care services. The Company generally plans to build its new developments with a distinct Alzheimer's wing (as of July 1, 1996, five were under construction and 11 were under development) which will allow the Company to offer this service to the elderly with this disease and other forms of dementia, will create an opportunity for residents who develop the disease to age in place within the same facility, and will allow segregation of Alzheimer's residents for safety. The Company believes this will allow it to maintain residents for a longer period, and provide a desirable alternative for its 7 residents and their families. However, most of the new facilities will be designed to be flexible enough to allow the Alzheimer's wing to be used only for assisted living residents if demand for Alzheimer's care is not adequate to justify maintaining a distinct Alzheimer's wing in a particular facility. Also, the Company expects to dedicate certain facilities entirely to Alzheimer's and other dementia care in markets where it determines that assisted living facilities are over built and such facilities would provide a source for residents for the Company. The Company's experience and research indicate that Alzheimer's patients often respond better to sharing a room with another Alzheimer's patient rather than being isolated in a single occupancy room. Consequently, the Company's Alzheimer's units are designed to allow double occupancy, although rooms are available on a single occupancy basis. Assisted Living Services The Company offers a wide range of assisted living care and services to its residents. The residents are allowed to select among the services offered beyond the basic support services and are charged only for the services they need. Management believes this provides the Company with a competitive advantage over other service providers in the industry who typically offer discrete levels of services and base their charges on the level of services offered regardless of whether a resident requires or uses all of the services available at a particular level. The services offered by the Company can generally be categorized as follows: * Basic Support Services. These services include providing up to three meals per day in a common dining room, special dietary planning, laundry, general housekeeping, organized social and other activities, transportation, maintenance, utilities (except telephone) and 24 hour security. * Supplemental Services. These services include performing, coordinating or assisting with bill paying, banking, personal shopping, transportation, appointments, pet care and reminder services. * Personal Care Services. These services include providing assistance with activities of daily living (the ADL's) such as ambulation, bathing, eating, dressing, personal hygiene and grooming. * Wellness Services. These services include assistance with the administration of medication and health monitoring by a nurse, which are provided as permitted by government regulation. * Alzheimer's and Special Care Services. The Company has a distinct Alzheimer's special care wing in three of its existing facilities and generally plans to include a distinct Alzheimer's wing in the facilities constructed and developed by the Company, including five facilities under construction and 11 facilities under development as of July 1, 1996. Alzheimer's care includes a higher 24 hour staff ratio to provide oversight and activity programs scheduled around-the-clock in the Alzheimer's wing which is secured from the rest of the building and includes secured outdoor walking paths. Properties Operating Facilities. The following table sets forth certain information with respect to facilities which are operated by the Company. The Company owns, leases, holds equity interest in or manages, on behalf of third parties, these facilities. The Company considers its facilities to be in good operating condition and suitable for the purpose for which they are being used. All of the facilities were acquired by the Company in the Wedgwood Acquisition, except The Greenbriar at Dennison, which was built and developed by Greenbriar. 8
EXISTING FACILITIES Occupancy Company At Care Resident Operations March 31, Facility Name: Location Level Units Capacity(1) Commenced Ownership 1996 -------- ----- ----- ----------- --------- --------- ---- Owned or Leased and Managed by Company: Camelot (6)(10) Harlingen, TX S 168 168 9/94 Owned(2)) 91% Crown Pointe Corona, CA S, FE 147 147 1/93 Owned(2)(5) 93 The Greenbriar at Dennison Dennison, TX FE, DC 46 60 5/96 Owned(2) - Lincolnshire Lincoln City, OR S, FE 64 64 11/95 Owned(2) 58 Meadowbrook Place Baker City, OR FE 50 50 12/92 Owned(2) 98 Pacific Pointe(6) King City, OR S 113 113 1/93 Leased(3) 100 Rose Garden Estates Ritzville, WA FE 21 21 11/95 Owned(2) 43 Summer Hill(6) Oak Harbor, WA FE 59 59 2/94 Owned(2) 75 The Terrace(6) Portland, OR FE, DC 59 69 5/91 Owned(2) 96 Villa del Rey(6) Merced, CA S 92 92 12/79 Leased(3) 99 Villa del Rey (6) Napa, CA S(8) 80 80 11/94(9) Leased(3) 81 Villa del Rey Roswell, NM S, FE 133 133 10/88 Leased(4)(7) 88 Villa del Rey(6) Visalia, CA S 98 98 12/79 Leased(3) 100 Villa del Sol Roswell, NM S 12 12 12/95 Owned(2) 83 Wedgwood Terrace(6) Lewiston, ID FE, DC 40 50 11/95 Leased(3) 34 -- -- --- Subtotal/Average 1,182 1,216 87 Managed, but Owned by Third Party: Timberhill Place(6) Corvallis, OR FE 60 60 5/95 Managed 73 Leased, Managed by Third Party: Neawanna by the Sea Seaside, OR S, FE 58 58 1/90 Leased(4)(7) 97 ----- ----- --- Total/Average 1,300 1,334 ===== ===== - -------------------------
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) Anticipated number of residents, although capacity exists for additional residents with double occupancy of more units. (2) Subject to first mortgage. Historically, each facility has generally been pledged as collateral on a single mortgage or deed of trust securing a note payable to a bank, financial institution, individual or other lender. The mortgages and deeds of trust mature between 1997 and 2015 and bear interest at fixed and variable interest rates ranging from 7.5% to 11.75% as of December 31, 1995. The Crown Pointe facility is subject to a mortgage and note payable to the Redevelopment Agency of the City of Corona, California, is payable into a sinking fund semi- annually in increasing amounts from $65,000 to $420,000 through May 2015, and bears interest at a variable interest rate equal to 4.75% at December 31, 1995. Future facilities owned and mortgaged by the Company will likely be pledged as collateral for mortgage credit lines which relate to more than one facility. See Item 6. "Management's Discussion and Analysis or Plan of Operation - Liquidity and Capital Resources." (3) Leased from third party individuals or partnership. Initial lease terms generally range from 15 to 20 years, and mature between 1999 and 2005. The Company is responsible for all costs including repairs to the facility, property taxes and other direct operating costs of the facility. Leases generally include clauses that allow for rent to increase over time based on a specified schedule or on an increase in the consumer price index. Generally, the Company has an option to purchase the facility after a specified period, or at expiration of the lease, at a price generally equal to market value. As of July 1, 1996, the Company had available, subject to final documentation, commitments for approximately $60 million of lease credit lines for future facilities. See Item 6. "Management's Discussion and Analysis or Plan of Operation - Liquidity and Capital Resources." (4) Facility 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 facility in 2004 and in 2009 for an amount equal to the greater of the sales price or the current replacement cost less actual depreciation. (5) Company owns 60% of real estate and the lessee. (6) Facility was not constructed by Wedgwood or Greenbriar. (7) Company owns 49% of lessee. Victor 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. (8) In process of conversion of 41 units to Frail Elderly. (9) Leased since 1979 from a third party and managed by the Company since November 1994. (10) Of these units, 111 have been sold to residents who then pay a reduced monthly fee. The Company agrees to repurchase the units that are sold at a price ranging from 65% to 80% of the fair market value at the date of repurchase, based upon the number of years the resident owned the unit. 9 Facilities Under Construction and Development. As of July 1, 1996, the Company was in various stages of construction of seven assisted living facilities (i.e. construction activities have commenced and are ongoing) and was developing 12 additional assisted living facilities (i.e. the site is under control and development activities such as site permitting, preparation of surveys, architectural plans and negotiation of construction contracts have commenced). Set forth below is certain information with respect to facilities in construction and under development as of July 1, 1996. Of these facilities, two were under construction and four were under development by Wedgwood at the time of the Wedgwood Acquisition.
FACILITIES UNDER CONSTRUCTION/DEVELOPMENT Care Resident Anticipated Anticipated Facility Name Location Level Units Capacity/1/ Opening/2/ Ownership/3/ - ------------- -------- ----- ----- ----------- ---------- ------------ Under Construction: Sweetwater Springs Lithia Springs, GA FE 49 49 Q3-96 Lease/4/ Villa de la Rosa Roswell, NM FE, DC 81 87 Q4-96 Own/5/ Greenbriar at Muskogee Muskogee, OK FE 48 58 Q1-97 Own Greenbriar at Sherman Sherman, TX FE, DC 46 60 Q1-97 Own Greenbriar at Texarkana Texarkana, TX FE, DC 46 60 Q1-97 Own Camelot Harlingen, TX S, FE, DC 140 149 Q2-97 Own/5//6/ Woodmark at Steel Lake Federal Way, WA FE, DC 89 96 Q2-97 Own/5//7/ --- --- Subtotal 499 559 --- --- Held for Development: Greenbriar at Palestine Palestine, TX FE, DC 46 60 Q2-97 Own Oak Park Clermont, FL FE 60 60 Q2-97 Lease Oak Knoll Paradise, CA FE, DC 93 102 Q2-97 Lease Greenbriar at Brownwood Brownwood, TX FE, DC 46 60 Q2-97 Lease Greenbriar at Winston-Salem Winston-Salem, NC DC 25 38 Q2-97 Own Sweetwater Springs (Phase II) Lithia Springs, GA DC 16 24 Q2-97 Lease/4/ Greenbriar at Friendswood Friendswood, TX FE, DC 46 60 Q2-97 Greenbriar at Abilene/8/ Abilene, TX FE, DC 46 60 Q2-97 Greenbriar at Denton/8/ Denton, TX DC 25 38 Q2-97 Greenbriar at Wichita Falls/8/ Wichita Falls, TX DC 25 38 Q2-97 Greenbriar at Georgetown/8/ Georgetown, TX FE, DC 46 60 Q2-97 La Conner Retirement Inn La Conner, WA FE 59 59 Q3-97 Own/7/ Greenbriar at Forest Glen Beaverton, OR FE, DC 54 60 Q4-97 ----- ----- Subtotal 587 719 --- --- Total 1,086 1,278 ===== =====
- --------------------------- 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/ Anticipated number of residents, although capacity exists for additional residents with double occupancy of more units. /2/ The quarter in which the facility expects to receive its certificate of occupancy. The Company anticipates that the facility will receive its licensure within one to two months of receiving its certificate of occupancy. The anticipated opening represents the Company's current estimate of the opening date. Problems could be encountered during development or construction which could cause the Company not to proceed with a facility or delay its opening. See "- Development and Construction Risks" and "- Need for Additional Financing; Risk of Rising Interest Rates, Development Delays and Cost Overruns," below. /3/ As of July 1, 1996, the Company had available, subject to final documentation, commitments for various lease credit lines and mortgage credit lines. See Item 6. "Management's Discussion and Analysis or Plan of Operations - Liquidity and Capital Resources." It generally expects to lease finance approximately 50% and own and mortgage approximately 50% of its facilities. This column reflects the Company's currently anticipated form of ownership of each facility, but such form of ownership may change depending on availability of lease or mortgage lines and acceptance or nonacceptance of a particular facility by the lessor or lender. If no designation appears in this column, the Company has not determined whether it will pursue a lease or mortgage. /4/ Facility is leased from a Real Estate Investment Trust. The lease expires in 2011. The Company has an option to purchase the facility at fair market value during the last year of the lease term. /5/ Subject to first mortgage. Each facility has been pledged as collateral on a single mortgage or deed of trust securing a note payable to a REIT or a bank. The mortgages mature between 2002 and 2008 and bear interest at fixed and variable interest rates ranging from 9.75% to 11.75% as of July 1, 1996. 10 (6) Certain units are sold to residents who then pay a reduced monthly service fee. The Company agrees to repurchase the units that are sold at a price ranging from 65% to 80% of the fair market value at the date of repurchase, based upon the number of years the resident owned the unit. Of the units under construction, 57 will be built and sold to residents over an estimated 3 to 5 years. (7) Company will own less than a 10% interest, but will manage the facility. (8) The Company has entered into options or letters of intent to acquire the land for these facilities. Plans for Construction. The Company generally retains independent general contractors to construct its facilities. The Company approves all aspects of development including, among other things, site selection, plans and specifications, the proposed construction budget and selection of the architect and general contractor. The Company estimates the average capitalized cost to develop, construct and open a facility (including land acquisition, architectural and engineering, construction period interest and loan fees) to be approximately $71,000 per unit, and average construction time for a typical facility to be approximately six to twelve months, depending upon the number of units. The Company estimates that, once developed, it takes approximately six to twelve additional months after licensure for each residence to achieve a stabiled occupancy level of 95% or higher. The Company anticipates that each facility will have an average operating loss (before depreciation) of approximately $350,000 prior to reaching stabilized occupancy. The Company believes quality independent general construction contractors are readily available to build its facilities at competitive prices. The Company has entered into a Construction Management Agreement with Victor L. Lund, the founder of Wedgwood and a director of the Company, to oversee construction of up to 20 facilities through 1998. The Company has also entered into a construction agreement with Embree Healthcare Group, Inc., a non- affiliated general contractor with extensive health care facility construction expertise which is licensed in all 50 states, to build 15 of the Company's facilities over the next approximately 24 months. Development and Construction Risks. The Company's growth strategy is dependent, in part, on its ability to develop and construct a significant number of additional facilities. As of July 1, 1996, the Company had seven facilities under construction and was developing 12 additional facilities. The Company expects to open two new facilities during the remainder of 1996. Development projects generally are subject to various risks, including zoning, permitting, healthcare licensing and construction delays that may result in construction cost overruns and longer development periods and, accordingly, higher than anticipated start-up losses. Although the Company has extensive development experience, closely manages each development project and regularly monitors the contractors constructing the Company's facilities, project management is subject to a number of contingencies over which the Company will have little or no control and which might adversely affect project costs and completion time. Such contingencies include shortages of, or the inability to obtain, labor or materials, the inability of contractors to perform under their contracts, strikes, adverse weather conditions and changes in applicable laws or regulations or in the method of applying such laws and regulations. The Company intends to rely on third-party developers to construct some of the new assisted living facilities planned by the Company. There can be no assurance that the Company will not experience difficulties in working with developers, project managers, general contractors and subcontractors, any of which difficulties could result in increased construction costs and delays. As a result of these various factors, there can be no assurance that the Company will not experience construction delays, that it will be successful in developing and constructing currently planned or additional facilities or that any developed facility will be economically successful. If the Company's planned development is delayed, the Company's business, operating results and financial condition could be adversely affected. Need for Additional Financing; Risk of Rising Interest Rates, Development Delays and Cost Overruns. To achieve its growth objectives, the Company will need sufficient financial resources to fund its development, construction and acquisition activities. Accordingly, the Company's future growth will depend on its ability to obtain additional financing on acceptable terms. The Company expects to experience negative cash flow for at least 12 to 18 months following July 1, 1996 as it continues to develop and construct assisted living facilities. There can be no assurance that any newly constructed facilities will achieve a stabilized occupancy 11 rate and attain a resident mix that meet the Company's expectations or generate sufficient positive cash flow to cover operating and financing costs associated with such facilities. The Company will, from time to time, seek additional funding through public or private financing, including equity or debt financing. If additional funds are raised or acquisitions are made in exchange for equity securities, stockholders may experience dilution. Further, such equity securities may have rights, preferences or privileges senior to those of the Common Stock. To the extent the Company finances its activities through debt, sale/leaseback or leasing arrangements, the Company may become subject to certain financial and other covenants which may restrict its ability to pursue its rapid growth strategy. There can be no assurance that adequate equity, debt, sale/leaseback or leasing financing will be available as needed or on terms acceptable to the Company. A lack of available funds may require the Company to delay, scale back or eliminate all or some of its development and acquisition projects and could have a material adverse effect on the Company's business, financial condition and results of operations. See Item 6. "Management's Discussion and Analysis or Plan of Operation - Liquidity and Capital Resources." Repair and Maintenance. The Company conducts routine repairs and maintenance of its facilities on a regular basis, as needed. Several of the Company's facilities acquired in the Wedgwood Acquisition have been in operation for ten years or more. The Company has reviewed each facility and plans to spend up to approximately $1.5 million in repairs, maintenance and improvements to certain of the Wedgwood facilities over the next 18 months. The Company has no other current plans for significant expenditures relating to its existing facilities, and considers them to be in good repair and working order. Facility Description The Company's existing facilities as of July 1, 1996 range in size from 21 to 168 units, and range from one to three stories and from 10,000 to 148,000 square feet. Most of the new facilities to be constructed by the Company will have 44 to 60 units, one or two stories and 35,000 to 70,000 square feet. Each facility has or will have a large family room, usually equipped with a fireplace, a spacious open dining area, library, TV room, commercial kitchen, beauty salon, laundry facilities, and indoor and outdoor recreational areas. Units generally range in size from approximately 330 to 400 square feet for a studio unit, to 470 to 650 square feet for a one bedroom unit, and to 680 to 850 square feet for a two bedroom unit. Assisted living units typically include a private bathroom, kitchenette, closets, living and sleeping areas, as well as a lockable door, emergency call system, individual temperature controls, fire alarm and sprinkler system, among other amenities. Alzheimer's care units are approximately the same size as studios and contain only sleeping, limited storage and, in some of the units, bathroom areas. They do not have emergency call systems but do have sprinkler and fire alarm systems. The three existing facilities as of July 1, 1996 that offer Alzheimer's services have distinct Alzheimer's wings of 10 to 20 units, and a non-Alzheimer's wing of 24 to 49 units. The facilities under construction and to be constructed in the future will generally have a distinct Alzheimer's wing of up to 20 units and a non-Alzheimer's wing of up to 50 units. The two wings are not accessible by the residents of the other wing. Operations The day-to-day operations of each facility are managed by an administrator who is responsible for all operations of the facility, including overseeing the quality of care and services, marketing, coordinating social activities, monitoring financial performance and ensuring appropriate maintenance of grounds and building. The Company also consults with outside providers, such as pharmacists and dieticians, to assist residents with medication review, menu planning and response to any special dietary needs. Personal care, dietary services, housekeeping and laundry services are performed primarily by line staff who are either part or full-time employees of the Company and who are trained to perform a variety of such services. Most building 12 maintenance services, typically, are performed by part or full-time employees, while elevator, HVAC maintenance and landscaping services are generally performed by third party contractors. The Company's senior management and other personnel located at the Addison, Texas and Vancouver, Washington executive offices provide support services to each of the Company's facilities, including development of operational standards, budgets and quality assurance programs, recruiting, training, and financial and accounting services, such as data processing, accounts payable, billing and payroll services. Corporate personnel and facility administrators collaborate with respect to the establishment of facility goals and strategies, quality assurance oversight, development of Company policies and procedures, development and implementation of new programs, cash management, human resource management and community development. The Company has attracted and continues to seek highly dedicated, experienced personnel. The Company has created formal training programs accompanied by review and evaluation procedures to help ensure quality care for its residents. The Company is adding a national training center at its Addison corporate headquarters to provide training for facility administrators and other personnel. The Company believes that education, training and development enhance the effectiveness of its employees. All employees are required to complete the Company's training program, which includes 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. Administrators receive training in all of these areas, plus marketing, community relations, healthcare management, life skills programming and fiscal management. In addition to classroom training, the Company's facilities provide new employees with on the job training, utilizing experienced staff as trainers and mentors. Quality Assurance The Company coordinates quality assurance programs at each of its facilities through its corporate headquarters staff and through its regional operations staff. The Company's commitment to quality assurance is designed to achieve a high degree of resident and family member satisfaction with the care and services provided by the Company. In addition to ongoing training and performance reviews of all employees, the Company's quality control measures include: 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. Regular Facility Inspections. Facility inspections are conducted by regional vice presidents and other 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 facility audit program is used to assure the inspections are thorough and to facilitate corrective action if required. Third-Party Reviews. To further evaluate customer service, the Company engages an independent service evaluation company to "mystery shop" the Company's facilities. These professionals assess the Company's performance from the perspective of a customer, without the inherent biases of a Company employee. Each assisted living facility is "shopped" annually in person, as well as periodically by telephone. To evaluate medication management, third-party pharmacists conduct periodic reviews of on-site handling and storage of medications, record-keeping and coordination of medications. 13 Marketing The Company's marketing and sales efforts are undertaken on regional and local levels. This effort is intended to create awareness of the Company and its services among prospective residents, their families, other key decision makers and professional referral sources. The corporate marketing staff develops overall strategies for promoting the Company throughout its markets and assesses continuously the success of its efforts. Most facilities have on staff a community relations coordinator dedicated to sales and marketing activities, who is guided and trained by corporate marketing personnel. For smaller facilities with no community relations coordinator, the administrator performs these sales and marketing functions. Prior to opening new facilities, the Company commences an aggressive marketing campaign by opening a sales office in close proximity to the facility. During this pre-opening marketing period, the Company's personnel actively contact local referral sources, which generally account for a majority of resident referrals. In addition, the Company typically engages in more traditional types of marketing activities, such as direct mailings and print advertising, signs and yellow pages 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. In contrast, the assisted living industry is relatively new and, accordingly, the manner and extent to which it is regulated at the federal and state levels is evolving. In the states in which the Company operates, a license is not required to provide basic support services. Currently, assisted living and Alzheimer's care facilities are not specifically regulated as such by the federal government. However, the Company's facilities are subject to regulation and licensing by state and local health and social service agencies and other regulatory authorities. Although regulatory requirements vary from state to state, these requirements generally address, among other things, staff education, training and records; staffing levels; facility services, including administration and assistance with self-administration of medication; physical facility specifications; size and furnishing of facility units and common areas; food and housekeeping services; emergency evacuation plans; and resident rights and responsibilities. The Company's facilities are also subject to various state or local building codes and other ordinances, including safety codes. Management anticipates that the states which are establishing regulatory frameworks for assisted living facilities will require licensing of assisted living facilities and will establish varying requirements with respect to such licensing. The Company has obtained all required licenses for each of its facilities and expects that it will obtain all required licenses for each new facility. Each of the Company's licenses must be renewed annually. Currently, only five states (Kentucky, Georgia, Missouri, New Jersey and Wyoming) have certificate of need ("CON") requirements for assisted living facilities. Of these states, the Company is actively pursuing markets only in Georgia and Wyoming. If federal and state reimbursements increase or there is overbuilding in the industry, other states may initiate CON regulations. If this occurs, the operators who can grow rapidly in the next few years could have a distinct advantage, inasmuch as this barrier to entry could limit destructive overbuilding and competition, such as occurred in some nursing home markets in the past. Like healthcare facilities, assisted living facilities 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 seeks to take 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 facility where deficiencies are noted in the inspection 14 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 facilities are in substantial compliance with all applicable regulatory requirements. No actions are currently pending against any of the Company's facilities nor have any of the Company's facilities been cited in the past for any significant non-compliance with regulatory requirements. Twelve states have already elected to participate in the Medicaid Home and Community Care Options Act of 1990 ("MHCCOA") and several other states are studying the program. Texas, where the Company is headquartered, is one of the states that has already elected to participate in the program. Under MHCCOA, states now have the option to use Medicaid funds to support services for low income, frail older persons, in places of residence other than nursing facilities. The program allows the state to amend its Medicaid statutes to use funds in this manner, thus avoiding the repeated process of obtaining a Medicaid waiver. Any facility participating in this payment program must meet all applicable state and federal rules and regulations. The Company may participate in federal and state reimbursement programs. However, the Company expects the bulk of its revenues to come from private payment. Conversely, if the proposed Medicaid block grants are signed into law, the Company could experience a dramatic increase in revenues from these sources, particularly with respect to its double occupancy units. Many of the Company's existing and to be built facilities can accommodate double occupancy and still provide a quality lifestyle. The Americans with Disabilities Act ("ADA"), enacted July 26, 1990, has had and will have a major effect on the full service residential retirement and assisted living industry. The facilities developed or acquired by the Company must be in compliance with this act. The Fair Housing Amendments Act of 1988 also prohibits discrimination against the handicapped in the sale or rental of a dwelling, or in the provision of services or facilities in connection with such a dwelling. This intensifies the need to be in compliance with the ADA. Regulation of the industry is likely to increase, particularly for those providers accepting Medicaid reimbursements. In compliance with the underlying state bond financing, rents at one facility in Oregon must be approved by an agency of the state. Two other facilities financed with loans guaranteed by the Department of Housing and Urban Development ("HUD") have rents requiring approval by HUD. The Company has not experienced any denials of requested rents or rent increases. Competition The long-term care industry generally is highly competitive and it is anticipated that the assisted living and Alzheimer's care businesses in particular will 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 health 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. While there are currently few assisted living and Alzheimer's care facilities in some of the markets where the Company operates and plans to operate, the Company expects that, as assisted living receives increased attention and the number of states which participate in MHCCOA increases, competition will grow from existing and new companies focusing primarily on assisted living. Nursing home facilities that provide long-term care services are also a source of competition for the Company, particularly with respect to Alzheimer's care services. 15 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 facilities and, with respect to private pay patients or residents, price. The Company believes that it competes favorably in these areas and in its recruitment and retention of qualified healthcare personnel and reputation among local referral sources. The Company also competes with other providers of long- term care in the acquisition and development of additional facilities. As noted, the Company competes with other providers of long-term care with respect to attracting and retaining qualified and skilled personnel. In recent years, the healthcare industry has experienced a shortage of qualified healthcare professionals. The Company's operations require few professionally certified (RN or LPN) staff, primarily for supervision of care staff. While the Company has been able to retain the services of an adequate number of professionals to staff its facilities 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. The Company is seeking sites and acquisition candidates primarily in non-metropolitan communities located in the western and southern regions of the United States which are not currently served or are under served. It is identifying these markets and intends to provide premier services and amenities at average to above average prices. It is also providing special care services in a residential setting for those with memory loss and Alzheimer's, the primary cause of memory loss. These residents are not mixed with other assisted living residents. The Company believes that this combination of target markets and services may improve its ability to compete with non-specialized assisted living facilities and nursing homes. Some markets are already overbuilt for standard assisted living services and more markets will become so as competition increases. However, in many markets there is a need for Alzheimer's residential units, especially a residence dedicated to Alzheimer's care. Therefore, the Company plans to compete in these markets with facilities specifically designed for Alzheimer's and related dementia care. The Company believes that the competing residences providing only standard assisted living will become a customer source for Greenbriar as their residents age in place and need more specialized care. Insurance The provision of personal and healthcare services entails an inherent risk of liability. Compared to more institutional long-term care facilities, assisted living facilities of the type operated by the Company, especially its dementia care facilities, offer residents a greater degree of independence in their daily lives. This increased level of independence, however, may subject the resident and the Company to certain risks that would be reduced in more institutionalized settings. The Company currently maintains liability insurance intended to cover such claims which it believes is adequate based on the nature of the risks, its historical experience and industry standards. The Company also carries property insurance on each facility in amounts which it believes to be adequate and standard in the industry. Environmental Matters Under various federal, state and local environmental laws, ordinances and regulations, a current or previous owner or operator of real estate may be required to investigate and clean up hazardous or toxic substances or petroleum product releases at such 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 such property or to borrow using such 16 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 facility, whether or not such facility is owned or operated by such person. 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 of all of the sites currently under construction or development, as well as seven of its existing facilities which it operates plus one facility it leases that is operated by a third party. These assessments have not revealed any environmental liability that the Company believes would have a material adverse effect on the Company's business, assets or results of operations, nor is the Company aware of any such environmental liability. Wedgwood has operated, for periods ranging from one year to 18 years, nine facilities for which environmental assessments have not been obtained. The Company believes that all of its facilities 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 facilities. Employees At March 31, 1996, the Company employed approximately 530 employees, including 392 full-time and 138 part-time employees. The Company believes it maintains good relationships with its employees. None of the Company's employees is represented by a collective bargaining group. Corporate Offices The Company's principal office is a 27,500 square feet facility that it owns in Addison, Texas. The facility includes the executive offices of the Company as well as warehouse space. Wedgwood's principal executive offices are located at 816 NE 87th Avenue, Vancouver, Washington, where Wedgwood leases approximately 6,000 square feet of office space for $6,194 per month. This lease expires during December 1996, but Wedgwood has an agreement to continue to lease the space through December 31, 1997 with a 90 day notice of termination. The Company believes that its office needs in Vancouver readily can be met on terms that are commercially reasonable. The Company's offices are adequate for the foreseeable future. ITEM 2: PROPERTIES - ------- ---------- See Item 1 for a discussion of properties owned or leased by the Company. ITEM 3: LEGAL PROCEEDINGS - ------- ----------------- The Company is involved from time to time in legal proceedings that are incidental to its business. Two suits are still pending from the Company's prior business in the skilled nursing business. In Southern Care Corp. v. Medical Resource Companies of America, Civil Action No. 94-1132-K, Superior Court of Chatham County, Georgia, the plaintiff seeks damages exceeding $1,500,000 relating to the management and operation of four nursing homes the Company sold to plaintiff. The Company has filed a counterclaim for breach of the management contract between the homes and a Company subsidiary. At the same time that Plaintiff unilaterally and without notice terminated the management contract, the Plaintiff also claimed that indebtedness of approximately $6.7 million assigned to the Company was 17 discharged. Plaintiff claims that the discharge occurred at the time of the assignment despite the facts that (i) the assignment had occurred 24 months prior to their claim of discharge, (ii) Plaintiff, at the time of the assignment, had acknowledged in writing that the indebtedness was due and owing, (iii) Plaintiff paid approximately $1.2 million toward the indebtedness subsequent to the assignment, and (iv) Plaintiff apparently has continued to accrue the indebtedness on its financial statements. The Company disputes this claim and has filed a counterclaim to confirm the indebtedness. The Company plans to vigorously contest and defend and vigorously pursue its counterclaims against Plaintiff. The litigation is in the discovery process and is currently not set for trial. Non-binding mediation has been ordered. The Company does not believe it has breached any obligation to Plaintiff regarding management of the nursing homes and does not believe Plaintiff will prevail on the merits, although there can be no assurance in this regard. The Company also does not believe the approximately $6.7 million of indebtedness was discharged, and believes that it will prevail on this counterclaim, although there can be no assurance. The amount of the indebtedness, including accrued interest, is approximately $10 million. The Company's basis in the indebtedness, net of related deferred gains, is approximately $4.2 million. Eldercare Housing Foundation ("Eldercare"), owned a nursing home in Tucson, Arizona and Sunrise Healthcare Corporation ("Sunrise") had a management contract to manage the home. Eldercare subsequently awarded the management contract to CareAmerica, Inc. a Company subsidiary. Sunrise (and a related company, Sundance) filed a lawsuit against CareAmerica, Inc., James R. Gilley (and his wife) and Terry Wilson (and his wife - Mr. Wilson is a former employee of the Company) in Sunrise Healthcare Corporation, et al v. Eldercare Housing Foundation, CareAmerica, Inc., et al, Superior Court of Maricopa County, Arizona, alleging, generally, that the defendants interfered with Sunrise's management contract. The Company's bylaws provided indemnification for officers and employees. The plaintiffs' claim appears to be for losses in the range of $380,000 plus punitive and treble damages, attorney's fees and costs. In addition to its defenses. Eldercare has counterclaims against Sunrise alleging breach of contract and negligent property management for damages in the amount of $943,000. These counterclaims were assigned by Eldercare to CareAmerica. Extensive discovery has been held in this matter and is ongoing. The case is set for trial November 12, 1996. The parties have conducted extensive negotiations in July 1996 but the Company anticipates this matter will be settled. ITEM 6: MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION - ------- --------------------------------------------------------- Overview During 1994 the Company began a series of steps to focus its business on the development, management and ownership of assisted living properties. The Company's historical businesses during the past five years have included ownership and operation of skilled nursing and retirement centers, real estate investments and manufacture and leasing of electric convenience vehicles and wheelchairs. The nursing and retirement centers and convenience vehicle businesses have been sold, and the real estate investments are being liquidated. Revenues and earnings in years prior to 1996 are attributed to these prior businesses. During 1994, the Company began independently to develop its assisted living business, began construction of its first assisted living facility in July 1995, and opened such facility to residents on May 30, 1996. By July 1, 1996, the Company (not including the properties of Wedgwood) had three additional assisted living facilities under construction and nine under development. In order to increase the Company's presence in the assisted living industry, the Company acquired Wedgwood in March 1996. The Wedgwood Acquisition is accounted for as a purchase, and the historical financial statements of the Company do not include any revenues or earnings (losses) attributed to Wedgwood. 18 Liquidity and Capital Resources At March 31, 1996, the Company had positive working capital of $2,258,000. During the first quarter of 1996, the Company sold the Mobility Group, which was a continuation of the Company's program of selling its non- strategic assets and using the proceeds to invest in existing operations. The sale of the Mobility Group is not expected to have any material impact on the Company's liquidity. In March 1996, the Company acquired Wedgwood. As of December 31, 1995, on a pro forma basis, the Company and Wedgwood have combined assets of $88,278,000, combined liabilities of $46,531,000 and combined stockholders' equity of $41,747,000. The Company and Wedgwood combined have sufficient liquidity and capital resources to meet their current obligations. Net cash used for operating activities during the three months ended March 31, 1996 was $251,000, principally constituting general and administrative expenses in excess of the relatively small amount of income from real estate operations and interest income. No revenue from assisted living operations were reported during the quarter. Net cash used in investing activities during the three months ended March 31, 1996 was $834,000, resulting primarily from development and construction of assisted living facilities in Texas in the amount of $1,580,000, offset partially by $739,000 of cash acquired from Wedgwood. During the past five years the Company has met its needs for liquidity and capital resources primarily from profitable sales of assets acquired for investment, and, to a lesser extent, from cash flow from operated businesses. The assets acquired and sold have included real estate properties acquired in the merger in 1993 with EquiVest Inc. ("EquiVest"), six skilled nursing facilities, two retirement centers, the Mobility Group, and an eating disorder facility. Since January 1, 1994, these sources of cash from investment activities included approximately $18,200,000 received in January 1995 from the sale of the Fountainview retirement facility in West Palm Beach, Florida; approximately $26,600,000 in proceeds after 1993 from the sale of the properties acquired in the merger with EquiVest; and approximately $6,900,000 net proceeds from the sale of the Rivermont retirement facility in December 1994. Net cash used in financing activities since January 1, 1994 have consisted primarily of repayments of mortgage indebtedness as real estate investments were sold totaling approximately $50,000,000, payments of preferred dividends totaling approximately $300,000, and repurchases of common stock totaling approximately $2,000,000, offset by additional borrowings of approximately $10,200,000 for real estate investments and working capital. The Company will utilize additional financing to develop additional assisted living facilities currently under construction and development. See Item 1. "Description of Business - Properties." Of the seven facilities under construction as of July 1, 1996 the Company is responsible for arranging financing for six of them and a development partner is responsible for arranging financing for the seventh. The six facilities for which the Company is arranging financing are subject to fixed cost construction contracts and other arrangements estimated to cost approximately $24,800,000 and are estimated to be substantially completed by June 30, 1997. The eleven facilities under development that the Company is responsible for financing are estimated to cost approximately $45,100,000. Of the resulting total of $69,900,000 of development costs that the Company is responsible for financing, the Company has financing committed for five specific facilities costing $21,530,000. The remaining development and construction costs of approximately $48,370,000 are expected to be financed from available sources as described below in the amount of $60,000,000 or from other sources the Company is seeking. As of July 1, 1996, the Company has loans in place or has received commitments for future financing, subject, in the case of the commitments, to final documentation, as follows: 19 (i) Health Care REIT, Inc. has issued a commitment to provide $60 million over three years to acquire and pay 100% of the construction costs of assisted living facilities to be leased to the Company. The term of the leases will range from 11 years to 14 years plus two five year renewal options, with lease payments based upon the interest rate on U.S. Treasury notes plus 3.75%, subject to inflation adjustments not to exceed .25% per year. A 1% commitment fee is required. The Company will have the option to purchase each facility at the end of the term for its original cost plus 50% of the increase in its fair market value. As additional security to the lessor, the Company will provide a letter of credit for 5% of the amount financed, a first lien on personal property and receivables of the facility, and subordination of management fees and rentals from subtenants. (ii) In 1995 Health Care REIT, Inc. provided mortgage loan commitments for two facilities totaling $16,891,000. Of that amount, $4,536,000 was used to refinance one of the facilities (Camelot) and $5,625,000 is being used to construct another facility (Villa de la Rosa) which will open in the fourth quarter of 1996. The balance includes $5,160,000 to fund construction of the Camelot Assisted Living facility scheduled to begin construction in the third quarter of 1996 and $645,000 to fund certain improvements to the existing Camelot facility that are currently under construction, along with $925,000 for the construction of a second phase at Villa de la Rosa, which is not presently scheduled for development and is not included in the development and construction total. The construction loans convert to term loans upon completion of construction. The term loans mature in seven to ten years, initially bear interest at a rate of 4.5% over the corresponding U.S. Treasury Note rate and are secured by the facilities, an assignment of leases, rents and management contract, letters of credit, and an assignment of the facilities licenses and permits. (iii)Commitments from First National Bank & Trust Co. of McAlester, Oklahoma of $5.2 million to provide mortgage financing for the two assisted living facilities under construction in Muskogee, Oklahoma and Sherman, Texas. Such loans require a 2% commitment fee and are payable in 10 years based on a 20 year amortization, with interest at prime plus 2% (subject to a minimum interest rate of 8.70% and a maximum interest rate of 12.75%). (iv) In 1995 Investors Real Estate Trust ("IRET") issued a commitment to provide 100% of the construction costs up to $2,810,000 for the Sweetwater Springs, Georgia facility that is presently under construction. Upon completion the facility will be leased to the Company for a term of 15 years. In 1996 the commitment was increased by $1,540,000 to a maximum of $4,350,000 in order to provide for the construction of a second phase of the facility, consisting of 16 Alzheimer's special care units. The monthly lease payments will be based on the funded amount and on annual interest rates of 11.0% for the first five years, 12.65% for the next five years and 14.55% for the last five years of the lease. The Company has an option to purchase the facility at fair market value during the first nine months of the fourteenth year of the lease. The lease is secured by the facility. In addition to development and construction financing Comerica Bank- Texas has issued a commitment to provide $1,600,000 to finance buses and other vehicles to transport residents of the Company's facilities. Each vehicle will be financed at 90% of cost, and the loan for each vehicle will be amortized over 48 months. The interest rate will be prime plus one percent. Therefore, the Company believes it has adequate resources to complete its facilities currently under construction and development and currently plans to use the balance of such committed sources and its net working capital in excess of operating needs for future development of assisted living facilities. 20 The Company will finance the construction, development and lease-up of the 17 facilities under construction or development as of July 1, 1996, for which it is responsible for obtaining financing, which the Company expects to require approximately $70 million of capital (including the $24,800,000 already under construction), through a combination of the sources described above; its own funds and additional funds from other traditional sources of financing, including financial institutions, banks and real estate investment trusts, and possible sales of debts or other securities. Fiscal 1995 as Compared to Fiscal 1994 Revenues. The Company reported total revenue of $9,710,000 and net earnings of $5,797,000 or $1.57 per share for the year ended December 31, 1995 compared to total revenue of $15,019,000 and net earnings of $1,788,000 or $.40 per share for the year ended December 31, 1994. Gain on Sale of Assets. During 1995 the Company continued its program of selling assets that were not essential to its new business focus on assisted living. In January 1996, the Company sold its mobility products subsidiaries, and the financial statements reflect the revenue and costs associated with this operation as discontinued operations. In January 1995 the Company sold what was then its remaining retirement and assisted living facility, The Fountainview, at a gain of $5,149,000. During the month of January 1995, The Fountainview generated revenues of $557,000 and operating expenses of $322,000, but the Company determined to sell it due to the increased competition in West Palm Beach and to the refinancing required as a result of the pending maturity of existing financing. During 1994 the Company owned both The Fountainview and Rivermont Retirement Center, which was sold in December 1994. The revenue and expenses reflected in long term care for 1994 reflect the operations for both The Fountainview and Rivermont for the entire year. Gain on sales of assets for the year ended December 31, 1995 was $7,043,000. This compares to $4,633,000 for the year ended December 31, 1994. The majority of 1995's gain consists of $5,149,000 from the sale of The Fountainview. In April 1995 EquiVest sold a shopping center in Florida for $750,000 and reported a gain of $100,000. In June 1995 the Company sold its economic interest in a legal claim with respect to Wespac Investors Trust III. The sales price was $1,085,000 and the Company recorded a gain of $654,000. Separately, the Company acquired 49% of the outstanding common stock of Wespac Investors Trust III in a private transaction. The Company immediately sold its economic interest in that stock at no gain or loss. As part of a larger transaction that occurred in 1992 the Company received the rights to the interest on certain escrow funds in the year 2028. At the time of the transaction, for accounting purposes, the Company placed no value on that right. In August 1995 the Company sold its rights to the future interest for $1,140,000 in cash. Real Estate Operations. Revenue from real estate operations was $666,000 in 1995 as compared to $2,029,000 in 1994. Cost of operating these properties was $337,000 in 1995 as compared to $1,486,000 in 1994. Real estate operations reflect the revenue and expenses from commercial real estate properties which the Company acquired in 1993 through the acquisition of EquiVest. The Company acquired EquiVest with the stated intention of selling the acquired assets to generate cash. The reduced level of revenue and expense for real estate operations reflects the ongoing sales of EquiVest properties. General and Administrative Expense. General and administrative expenses were $2,764,000 in 1995 as compared to $4,028,000 in 1994. The most significant reason for this decrease was the sale of The Fountainview in January 1995. 21 Interest Income. Interest income was $1,205,000 in 1995 as compared to $418,000 in 1994. Interest expense was $206,000 in 1995 as compared to $2,979,000 in 1994. As the Company sells assets, it increases the cash it has available for investments. The increase in interest income reflects the interest received on those investments. The decrease in interest expense was caused principally by two factors. First, when the Company sold its assets it was also relieved of the obligation to pay interest on liabilities associated with those assets. Second, the Company used certain of its available cash to pay down corporate debt which further reduced interest expense in 1995. Fiscal 1994 as Compared to Fiscal 1993 Revenues. The Company reported total revenues from continuing operations of $15,019,000 and net earnings of $1,788,000 or $.40 per share for the year ended December 31, 1994 compared to total revenues from continuing operations of $8,706,000 and net income of $1,505,000 or $.39 per share for 1993. Long Term Care Facilities. During all of 1994, the Company owned and operated two retirement facilities: The Fountainview in West Palm Beach, Florida and Rivermont Retirement Center in Norman, Oklahoma. For these two facilities, combined 1994 operating revenues were $7,939,000 and combined operating expenses were $5,059,000. Based upon the Company's business plan during 1993, these assets were classified as assets held for sale and there are, therefore, no comparative figures for 1993. During 1993, CareAmerica, Inc., a subsidiary of the Company, managed certain properties for third parties. This effort concluded during 1993. CareAmerica is no longer managing properties for others. Real Estate Operations. On March 31, 1993, the Company merged with EquiVest. EquiVest owned and operated commercial real estate. Real estate operations reflect the revenue and expenses from the EquiVest properties. Revenues from real estate operations decreased from $4,280,000 in 1993 to $2,029,000 in 1994. Expenses from real estate operations decreased from $2,407,000 in 1993 to $1,486,000 in 1994. The Company acquired EquiVest with the stated intention of selling EquiVest's assets. Although 1994 included a full year of operations, several such properties were sold during 1994 and revenues therefore decreased. Gain on Sales of Assets. Gain on sales of assets for the year ended December 31, 1994, was $4,633,000 compared to $2,450,000 for 1993. The gains in 1994 include those from the sale of the Rivermont Retirement facility as well as various EquiVest assets including recognition of a $1,070,000 deferred gain which resulted from cash received relating to sales of properties in 1991 that were accounted for by the installment method. Absent recognition of these gains, the Company would have had losses before income taxes in both 1994 and 1993. General and Administrative Expenses. General and administrative expenses increased from $2,844,000 in 1993 to $4,028,000 in 1994. During 1994 the sale of EquiVest assets provided the opportunity to substantially reduce administrative costs of that operation. The administrative costs of EquiVest decreased from $581,000 in 1993 to $527,000 in 1994. This decrease was offset by the increase in administrative costs due to the consolidation of Fountainview and Rivermont. During 1993 these investments were classified as assets held for sale. Interest Income and Expense. Interest income decreased from $1,326,000 in 1993 to $418,000 in 1994. On March 31, 1993, the Company sold an $8.7 million mortgage bearing interest at 10%. The reduction in interest income is a result of the Company no longer receiving interest from that mortgage. Further, the Company holds a $6.7 million receivable from Southern Care Corporation. The Company is in litigation with Southern Care Corporation in which, among other things, Southern Care is challenging the enforceability of the note. As a result, the Company has ceased accruing income with respect to the note until such time as the litigation is resolved. See Item 3. "Legal Proceedings." Interest expense increased from $1,500,000 in 1993 to $2,979,000 in 1994. The increase is due primarily to the inclusion of Rivermont and Fountainview in 1994. Deferred Taxes. As of December 31, 1994 the Company had a deferred tax asset of $2,185,000. This asset is expected to be recovered within two to three years from earnings from current operations as well as gains from the sales of certain of the Company's real estate assets. 22 Discontinued Operations. During 1994, management determined that it was in the Company's best interest to discontinue its operations in skilled medical care which consist of nursing and eating disorder facilities and sold the two nursing home facilities which it owned in Houston and San Antonio, Texas and an eating disorder facility which it owned in Wickenburg, Arizona. Effect of Inflation The Company's principal sources of revenues are from resident fees from Company-owned or leased assisted living facilities and management fees from facilities operated by the Company for third parties. The operation of the facilities are affected by rental rates which are highly dependent upon market conditions and the competitive environment in the areas where the facilities are located. Compensation to employees is the principal cost element relative to the operations of the facilities. Although the Company has not historically experienced any adverse effects of inflation on salaries or other operating expenses, there can be no assurance that such trends will continue or that should inflationary pressures arise that the Company will be able to offset such costs by increasing rental rates or management fees. Forward Looking Statements Certain statements included in this Managements' Discussion and Analysis are forward looking statements that predict the future development of the Company. The realization of these predictions will be subject to a number of variable contingencies, and there is no assurance that they will occur in the time frame proposed. The risks associated with the potential actualization of the Company's plans include: contractor delays, the availability and cost of financing, availability of managerial oversight and regulatory approvals, to name a few. ITEM 7: FINANCIAL STATEMENTS - ------- -------------------- The financial statements required by this Item begin at page F-1 hereof. 23 ITEM 13: EXHIBITS LIST AND REPORTS ON FORM 8-K - -------- ------------------------------------- (a) The following exhibits required to be filed by Item 601 of Regulation S-B are filed as part of this Annual Report on Form 10-KSB: Exhibit Number Description of Exhibits - ------ ----------------------- 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 Certificate of Designations, Preferences and Rights of Preferred Stock dated October 7, 1992 relating to Registrant's Series A Preferred Stock (filed as Exhibit 4.1 to Registrant's Form S-4 Registration Statement, Registration No. 33-55968, and incorporated herein by this reference). 4.1.2 Certificate of Designations, Preferences and Rights of Preferred Stock dated May 7, 1993, relating to Registrant's Series B Preferred Stock (filed as Exhibit 4.1.2 to Registrant's Form S-3 Registration Statement, Registration No. 33-64840, and incorporated herein by this reference. 4.1.3 Certificate of Designations, Preferences and Rights of Preferred Stock dated August 18, 1993, relating to Registrants' Series C Preferred Stock (filed as Exhibit 4.1.3 to Registrant's Form 10- KSB for the year ended December 31, 1993). *4.1.3.1 Amendment to Certificate of Designations, Preferences and Rights of Preferred Stock dated August 18, 1993, relating to Registrants' Series C Preferred Stock. *4.1.4 Certificate of Designations, Preferences and Rights of Preferred Stock dated March 15, 1996, relating to Registrants' Series D Preferred Stock. *4.1.5 Certificate of Designations, Preferences and Rights of Preferred Stock dated March 15, 1996, relating to Registrants' Series E Preferred Stock. 4.3.2 Registration Rights Agreement dated April 27, 1990 between Registrant's predecessor and International Health Products, Inc. (assumed by Registrant), which has been assigned to JRG Investments, Inc., relating to 4,150,000 shares of Registrant's Common Stock, the benefits of which were further assigned to Professional Investors Insurance, Inc. as to 600,000 shares in November 1992 (filed on June 5, 1990, as an Exhibit to the Registrant's predecessor's Current Report on Form 8-K and incorporated herein by reference). 4.3.3 Form of Assignment of Registration Rights Agreement dated September 30, 1992 between JRG Investments, Inc. and Professional Investors Insurance, Inc. relating to 600,000 shares of 24 Exhibit Number Description of Exhibits - ------ ----------------------- Registrant's Common Stock (filed as Exhibit 4.3.3 to Registrant's Form S-4 Registration Statement, Registration No. 33-55968, and incorporated herein by this reference). 4.4 Form of Registration Rights Agreement dated December 1, 1991 between Registrant and W. Michael Gilley (filed as Exhibit 4.4 to Registrant's Form S-4 Registration Statement, Registration No. 33-55968, and incorporated herein by this reference). 4.5.1 Stock Purchase Agreement dated May 7, 1993 for the purchase of Complete Corporation and Remuda Acquisition Corporation (filed as Exhibit 4.5.1 to Registrant's Form 10-KSB for the year ended December 31, 1993). 4.5.2 Registration Rights Agreement dated May 7, 1993 granted to the shareholders of Complete Corporation and Remuda Acquisition Corp. (filed as Exhibit 4.5.2 to Registrant's Form 10-KSB for the year ended December 31, 1993). 4.5.3 Agreement and Plan of Merger dated June 30, 1994 with New Life Treatment Centers, Inc. relating to the disposition of Remuda Ranch Center for Anorexia and Bulimia, Inc. (filed as Exhibit 4.5.3 to Registrant's Form 10-KSB for the year ended December 31, 1994). 4.5.4 Amended and Restated Certificate of Incorporation of New Life Treatment Centers, Inc. (filed as Exhibit 4.5.4 to Registrant's Form 10-KSB for the year ended December 31, 1994). 4.5.5 Registration Right Agreement dated July 29, 1994 re. New Life Treatment Centers, Inc. (filed as Exhibit 4.5.5 to Registrant's Form 10-KSB for the year ended December 31, 1994). 4.5.6 Restricted Stock Agreement dated July 29, 1994 re. New Life Treatment Centers, Inc. (filed as Exhibit 4.5.6 to Registrant's Form 10-KSB for the year ended December 31, 1994). 4.6.1 Stock Purchase Agreement dated August 16, 1993 for the issuance of Series C Preferred Stock (filed as Exhibit 4.6.1 to Registrant's Form 10-KSB for the year ended December 31, 1993). 4.6.2 Stock Purchase Agreement dated August 16, 1993 between Clay Capital Corporation and Altman Nursing, Inc. (filed as Exhibit 4.6.2 to Registrant's Form 10-KSB for the year ended December 31, 1993). 4.7.1 Stock Purchase Agreement dated January 30, 1996 between Joseph L. Durant, Innovative Health Services, Inc. and Medical Resource Companies of America (filed as Exhibit 4.7.1 to Registrant's Form 8-K, dated February 20, 1996, and incorporated herein by this reference). 4.8.1 Stock Purchase Agreement dated March 15, 1996 between Wedgwood Retirement Inns, Inc., Victor L. Lund, Paul Dendy, Mark Hall, Frank R. Reeves, Doris Thornsbury, Teresa Waldroff and Medical Resource Companies of America (filed with Registrant's 8-K, dated March 15, 1996, and incorporated herein by this reference). 4.8.2 Amendment to Stock Purchase Agreement (dated March 15, 1996) dated March 15, 1996 between Wedgwood Retirement Inns, Inc., Victor L. Lund, Paul Dendy, Mark Hall, Frank R. Reeves, Doris Thornsbury, Teresa Waldroff and Medical Resource Companies of America (filed with Registrant's 8-K, dated March 15, 1996, and incorporated herein by this reference). 25 Exhibit Number Description of Exhibits - ------ ----------------------- 10.1 Real Estate Lease of Alpha Mobility, Inc. (filed as Exhibit 10.1 to Registrant's Form S-4 Registration Statement, Registration No. 33-55968, and incorporated herein by this reference). 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 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). 10.4.1 Form of Stock Option to purchase 150,000 shares of Registrant's Common Stock issued to Robert L. Griffis on October 12, 1992 (filed as Exhibit 10.4.1 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 of Registrant's Common Stock (filed as Exhibit 10.4.2 to Registrant's Form S-4 Registration Statement, Registration No. 33-55968, and incorporated herein by this reference). 10.4.3 Form of Security Agreement - Pledge (Nonrecourse) between Registrant and Robert L. Griffis securing the Promissory Note referenced in Exhibit 10.4.2 (filed as Exhibit 10.4.3 to Registrant's Form S-4 Registration Statement, Registration No. 33-55968, and incorporated herein by this reference). 10.6.1 Form of Stock Option to purchase 100,000 shares 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 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 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 of Registrant's Common Stock (filed 26 Exhibit Number Description of Exhibits - ------ ----------------------- as Exhibit 10.7.2 to Registrant's Form S-4 Registration Statement, Registration No. 33-55968, and incorporated herein by this reference) 10.7.3 Form of Security Agreement - Pledge (Nonrecourse) between Registrant and Lonnie Yarbrough securing the Promissory Note referenced in Exhibit 10.7.2 (filed as Exhibit 10.7.3 to Registrant's Form S-4 Registration Statement, Registration No. 33-55968, and incorporated herein by this reference). 10.8.1 Form of Stock Option to purchase 80,000 shares of Registrant's Common Stock issued to Dennis McGuire on October 1, 1992 (filed as Exhibit 10.8.1 to Registrant's Form S-4 Registration Statement, Registration No. 33-55968, and incorporated herein by this reference). 10.8.2 Form of $40,000 Promissory Note dated October 1, 1992 payable to Registrant by Dennis McGuire representing the purchase price for 80,000 shares of Registrant's Common Stock (filed as Exhibit 10.8.2 to Registrant's Form S-4 Registration Statement, Registration No. 33-55968, and incorporated herein by this reference). 10.8.3 Form of Security Agreement - Pledge (Nonrecourse) between Registrant and Dennis McGuire securing the Promissory Note referenced in Exhibit 10.8.2 (filed as Exhibit 10.8.3 to Registrant's Form S-4 Registration Statement, Registration No. 33-55968, and incorporated herein by this reference). 10.9.1 Form of Stock Option to purchase 10,000 shares of Registrant's Common Stock issued to Michael Merrell on October 12, 1992 (filed as Exhibit 10.9.1 to Registrant's Form S-4 Registration Statement, Registration No. 33-55968, and incorporated herein by this reference). 10.9.2 Form of $5,000 Promissory Note dated October 12, 1992 payable to Registrant by Michael Merrell representing the purchase price for 10,000 shares of Registrant's Common Stock (filed as Exhibit 10.9.2 to Registrant's Form S-4 Registration Statement, Registration No. 33-55968, and incorporated herein by this reference). 10.9.3 Form of Security Agreement - Pledge (Nonrecourse) between Registrant and Michael Merrell securing the Promissory Note referenced in Exhibit 10.9.2 (filed as Exhibit 10.9.3 to Registrant's Form S-4 Registration Statement, Registration No. 33-55968, and incorporated herein by this reference). 10.9.4 Form of $187,000 promissory note dated December 29, 1994, payable to Registrant by W. Michael Gilley representing the purchase price for 150,000 shares of Registrant's Common Stock (filed as Exhibit 10.9.4 to Registrant's Form 10-KSB for the year ended December 31, 1994). 10.9.5 Form of Security Agreement-Pledge between Registrant and W. Michael Gilley securing the promissory note referenced in Exhibit 10.9.4 (filed as Exhibit 10.9.5 to Registrant's Form 10-KSB for the year ended December 31, 1994). 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 of Registrant's common stock (filed as Exhibit 10.9.6 to Registrant's Form 10-KSB for the year ended December 31, 1994). 27 Exhibit Number Description of Exhibits - ------ ----------------------- 10.9.7 For 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). 10.11 Stock Exchange Agreement dated December 31, 1991 for the acquisition of CareAmerica, Inc. (filed as Exhibit 10.13 to Registrant's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1991 and incorporated herein by reference). 10.12 Employment Agreement and Agreement Not to Compete between Registrant and Dennis McGuire dated November 1, 1990 (filed as Exhibit 10.12 to Registrant's Form S-4 Registration Statement, Registration No. 33-55968, and incorporated herein by this reference). 10.13 Registrant's 1992 Stock Option Plan (filed as Exhibit 10.13 to Registrant's Form S-4 Registration Statement, Registration No. 33-55968, and incorporated herein by this reference). 10.13.1 Amendment to Registrant's 1992 Stock Option Plan (filed as Exhibit 10.13.1 to Registrant's Form 10-KSB for year ended December 31, 1994). 10.20.2 Contract of Sale dated December 28, 1994 with Autumn America Retirement, Ltd. regarding the sale of Fountainview Retirement Center (filed as Exhibit 10.20.2 to Registrant's Form 10-KSB for year ended December 31, 1994). 10.20.3 Exchange Agreement dated December 20, 1994 to settle the Fountainview second mortgage profit participation, (filed as Exhibit 10.20.3 to Registrant's Form 10-KSB for year ended December 31, 1994). 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). 10.21.2 Extended and Consolidated Pledge Agreement dated effective May 23, 1992 between JRG Investment Co., Inc. and M.S. Holding Co. Corp. securing the Note referenced in Exhibit 10.22.1 (filed as Exhibit 10.22.2 to Registrant's Form S-4 Registration Statement, Registration No. 33-55968, and incorporated herein by this reference). 10.21.3 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). 10.21.4 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). 10.21.5 Blank Assignment and Power of Attorney signed by JRG Investment Co., Inc. relating to 482,000 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). 28 Exhibit Number Description of Exhibits - ------ ----------------------- 10.21.6 Blank Assignment and Power of Attorney signed by JRG Investment Co., Inc. relating to 1,268,000 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). 10.21.7 Three Blank Assignments and Powers of Attorney signed by JRG Investment Co., Inc., each relating to 600,000 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). 10.21.8 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). 10.21.9 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). 10.22 Purchase and Sale Agreement dated February 1, 1993 for the purchase of nursing homes in Houston and San Antonio, Texas (filed as Exhibit 10.23 to Registrant's Form S-4 Registration Statement, Registration No. 33-55968, and incorporated herein by this reference). 10.23.3 Assets Purchase Agreement dated December 13, 1994 with Hermann Park Manor and HCCI-Houston, Inc. for the Sale of Hermann Park manor (filed as Exhibit 10.23.3 to Registrant's Form 10-KSB for the year ended December 31, 1994). 10.23.4 Assets Purchase Agreement dated December 13, 1994 with Alta Vista Nursing Center, Inc. and HCCI-Houston, Inc. for the Sale of Alta Vista Nursing Center (filed as Exhibit 10.23.4 to Registrant's Form 10-KSB for the year ended December 31, 1994). 10.25.1 Agreement dated September 14, 1994 to terminate and settle Executive Employment Agreement with Arthur G. Weiss (filed as Exhibit 10.25.1 to Registrant's Form 10-KSB for the year ended December 31, 1994). 10.30.2 Memorandum of Understanding amending Exhibit 10.30.1. (Filed as Exhibit 10.30.2 to Registrant's Form 10-KSB for the year ended December 31, 1993). 10.30.3 Letter dated January 6, 1995, terminating Stock Purchase Agreement relating to Bankers Protective Life Insurance Company. (Filed as Exhibit 10.30.3 to Registrant's Form 10-KSB for the year ended December 31, 1994). 10.33 Stock Option Agreement dated November 21, 1993 between Registrant and Arthur G. Weiss. (Filed as Exhibit 10.33 to Registrant's Form 10-KSB for the year ended December 31, 1993). 10.34 Stock Option Agreement dated November 21, 1993 between Registrant and Gene S. Bertcher. (Filed as Exhibit 10.34 to Registrant's Form 10-KSB for the year ended December 31, 1993). 10.35.1 Purchase Agreement dated December 6, 1994 with Arizona Baptist Retirement Centers, Inc. for the Sale of Rivermont at the Trails. (Filed as Exhibit 10.35.1 to Registrant's Form 10-KSB for the year ended December 31, 1994). 29 Exhibit Number Description of Exhibits - ------ ----------------------- 11.1 Statement Regarding Computation of Earnings per Share of Registrant. 22.1 Subsidiaries of Registrant. **23.1 Consent of Grant Thornton. **27.1 Financial Data Schedule required by Item 601 of Regulation S-B. - --------------------------- * Filed with the original of the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1995, filed with the Securities and Exchange Commission on April 14, 1996, or with Amendment No. One to the original of the Company's Annual Report on Form 10-KSB/A, and incorporated herein by reference. ** Filed herewith. b) Reports on Form 8-K - None 30 SIGNATURES In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934 (the "Act"), the Company has duly caused this Amendment No. Two to its Annual Report on Form 10-KSB to be signed on its behalf by the undersigned, thereunto duly authorized. GREENBRIAR CORPORATION July 22, 1996 By: /s/ Gene S. Bertcher ------------------------------- Gene S. Bertcher, Director, Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) 31 INDEX TO FINANCIAL STATEMENTS Page ---- Report of Independent Certified Public Accountants F-2 Financial Statements Consolidated Balance Sheets as of December 31, 1994 and 1995 F-3 Consolidated Statements of Earnings for the years ended December 31, 1994 and 1995 F-5 Consolidated Statement of Changes in Stockholders' Equity for the years ended December 31, 1994 and 1995 F-6 Consolidated Statements of Cash Flows for the years ended December 31, 1994 and 1995 F-7 Notes to Consolidated Financial Statements F-9 F-1 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, 1994 and 1995, and the related consolidated statements of earnings, changes in stockholders' equity, and cash flows for the years then ended. 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 generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Greenbriar Corporation and subsidiaries as of December 31, 1994 and 1995, and the consolidated results of their operations and their consolidated cash flows for the years then ended, in conformity with generally accepted accounting principles. GRANT THORNTON LLP Dallas, Texas March 8, 1996 F-2 Greenbriar Corporation CONSOLIDATED BALANCE SHEETS (Amounts in thousands, except per share data) December 31,
1995 Pro forma ASSETS 1994 1995 (Note O) ------- ------- ------- (unaudited) CURRENT ASSETS Cash and cash equivalents $ 8,311 $ 7,199 $ 7,781 Accounts receivable - trade, less allowance of $601 in 1994 1,925 23 170 Deferred income tax benefit 2,185 2,150 - Real estate under contract of sale 14,889 - - Other current assets 1,455 1,536 2,017 ------- ------- ------- Total current assets 28,765 10,908 9,968 REAL ESTATE 3,204 3,190 5,473 NET ASSETS OF MOBILITY GROUP 3,330 3,371 3,371 INVESTMENT IN SECURITIES, AT COST 1,678 1,853 1,853 MORTGAGE NOTES RECEIVABLE 6,700 7,368 7,368 PROPERTY AND EQUIPMENT, AT COST Land 100 322 5,998 Buildings and improvements 767 767 45,742 Equipment and furnishings 192 203 1,786 Construction in progress - 1,576 1,928 ------- ------- ------- 1,059 2,868 55,454 Less accumulated depreciation 186 252 252 ------- ------- ------- 873 2,616 55,202 RESTRICTED CASH AND INVESTMENTS - - 2,846 OTHER ASSETS 414 466 1,280 ------- ------- ------- $44,964 $29,772 $87,361 ======= ======= =======
F-3 Greenbriar Corporation CONSOLIDATED BALANCE SHEETS - CONTINUED (Amounts in thousands, except per share data) December 31,
1995 Pro forma LIABILITIES AND STOCKHOLDERS' EQUITY 1994 1995 (Note O) ------ ------ ---------- (unaudited) CURRENT LIABILITIES Note payable $ 5,008 $ - $ - Current maturities of long-term debt 379 8 1,525 Long-term debt collateralized by properties under contract of sale 8,933 - - Accounts payable - trade 1,149 412 1,360 Accrued expenses 1,753 343 1,735 Other current liabilities 1,405 130 499 -------- ------- ------- Total current liabilities 18,627 893 5,119 LONG-TERM DEBT 1,110 901 37,218 DEFERRED INCOME TAXES - - 1,111 DEFERRED GAIN 3,083 3,083 3,083 STOCKHOLDERS' EQUITY Series A cumulative preferred stock, $.10 par value; liquidation value of $1,085 in 1994; authorized, 10,000 shares; issued and outstanding, 1,085 shares in 1994 108 - - Series B cumulative convertible preferred stock, $.10 par value; liquidation value of $1,351 in 1994 and $1,330 in 1995; authorized, 100 shares; issued and outstanding, 14 shares 1 1 1 Series C cumulative convertible preferred stock, $.10 par value; liquidation value of $2,000; authorized, issued and outstanding, 20 shares 2 2 2 Series D cumulative preferred stock, $.10 par value authorized, 675 shares - - 68 Series E cumulative preferred stock, $.10 par value authorized, 1,913 shares - - 191 Common stock, $.01 par value; authorized, 20,000 shares; issued and outstanding, 3,708 and 3,452 shares in 1994 and 1995, respectively 185 35 35 Additional paid-in capital 36,442 33,957 49,633 Accumulated deficit (12,156) (6,584) (6,584) ------- ------- ------- 24,582 27,411 43,346 Less stock purchase notes receivable (including $2,438 from related parties) (2,438) (2,516) (2,516) ------- ------- ------- 22,144 24,895 40,830 ------- ------- ------- $44,964 $29,772 $87,361 ------- ------- -------
The accompanying notes are an integral part of these statements. F-4 Greenbriar Corporation CONSOLIDATED STATEMENTS OF EARNINGS (Amounts in thousands, except share data) Years ended December 31,
1994 1995 ---------- --------- Revenue Long-term care facilities $7,939 $ 557 Real estate operations 2,029 666 Gain on sales of assets 4,633 7,043 Interest 418 1,205 Other - 239 ------- ------- 15,019 9,710 Expenses Long-term care facilities 5,059 322 Real estate operations 1,486 337 General and administrative 4,028 2,764 Interest 2,979 206 ------- ------- 13,552 3,629 ------- ------- Earnings from continuing operations before income taxes 1,467 6,081 Income tax expense 240 186 ------- ------- Earnings from continuing operations 1,227 5,895 Discontinued operations Loss from operations, net of income taxes (617) (98) Gain on disposal, net of income taxes 1,178 - ------- ------- NET EARNINGS 1,788 5,797 Preferred stock dividend requirement (327) (225) ------- ------- Earnings allocable to common stockholders $1,461 $5,572 ------- ------- Earnings per share Continuing operations $.24 $1.60 Net earnings $.40 $1.57 Weighted average number of common and equivalent shares outstanding 3,679 3,539
The accompanying notes are an integral part of this statement. F-5 Greenbriar Corporation CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (Amounts in thousands)
Stock Additional purchase Preferred stock Common stock paid in Accumulated notes Treasury Total ------------------ ------------------- Shares Amount Shares Amount capital deficit receivable stock equity -------- -------- -------- --------- ----------- ------------ ----------- --------- -------- Balances at January 1, 1994 1,075 $ 107 18,395 $ 183 $36,132 $(13,616) $(2,250) $(7) $20,549 Issuance of shares - - 147 2 179 - (188) 7 - Dividends on preferred stock, including imputed dividends of $42 44 4 - - 131 (328) - - (193) Net earnings - - - - - 1,788 - - 1,788 ------ ------- ------- ----- ------- -------- ---------- -------- ------- Balances at December 31, 1994 1,119 111 18,542 185 36,442 (12,156) (2,438) - 22,144 Issuance of shares - - 116 1 77 - (78) - - Conversion of preferred stock (1) - 19 - - - - - - Conversion of subordinated debt - - 67 1 199 - - - 200 Purchase of common stock - - (1,226) (12) (1,998) - - - (2,010) Purchase of preferred stock (1,085) (108) - - (976) - - - (1,084) Dividends on preferred stock 1 - - - 73 (225) - - (152) One-for-five reverse stock split - - (14,066) (140) 140 - - - - Net earnings - - - - - 5,797 - - 5,797 ------ ------- ------- ----- ------- -------- ---------- -------- ------- Balances at December 31, 1995 34 $ 3 3,452 $ 35 $33,957 $ (6,584) $(2,516) $ - $24,895 ====== ======= ======= ===== ======= ======== ========== ======== =======
The accompanying notes are an integral part of these statements. F-6 Greenbriar Corporation CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands) Years ended December 31,
1994 1995 --------- --------- Cash flows from operating activities Net earnings $ 1,788 $ 5,797 Adjustments to reconcile net earnings to net cash used in operating activities Discontinued operations (561) 98 Depreciation and amortization 1,306 182 Gain on sales of assets (4,633) (7,043) Recognition of deferred gain (1,070) - Stock dividends on investment securities - (175) Changes in operating assets and liabilities Accounts receivable (72) 1,902 Refundable income taxes 945 - Deferred income tax benefit 369 35 Other current and noncurrent assets (2,381) (9) Accounts payable and other liabilities 818 (3,546) ------- ------- Total adjustments (5,279) (8,556) -------- ------- Net cash provided by (used in) operating activities of: Continuing operations (3,491) (2,759) Discontinued operations (231) 209 ------- ------- Net cash used in operating activities (3,722) (2,550) Cash flows from investing activities Proceeds from sales of assets 32,196 21,885 Proceeds from sales of discontinued operations 6,557 - Additions to real estate (462) (54) Purchase of property and equipment (608) (1,809) Net cash effect of sale of subsidiary (273) - Additions to mortgage notes receivable - (668) Investing activities of discontinued operations (344) (348) ------- ------- Net cash provided by investing activities 37,066 19,006
The accompanying notes are an integral part of these statements. F-7 Greenbriar Corporation CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED (Amounts in thousands) Years ended December 31,
1994 1995 --------- --------- Cash flows from financing activities Proceeds from borrowings Affiliates $ 1,000 $ - Other 10,156 - Payments on debt Affiliates (1,625) - Other (35,434) (14,321) Dividends on preferred stock (193) (152) Purchase of common and preferred stock - (3,095) -------- -------- Net cash used in financing activities (26,096) (17,568) -------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 7,248 (1,112) Cash and cash equivalents at beginning of year 1,063 8,311 -------- -------- Cash and cash equivalents at end of year $ 8,311 $ 7,199 ======== ========
See Note C for supplemental disclosure of cash flows and noncash investing and financing transactions. The accompanying notes are an integral part of these statements. F-8 Greenbriar Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Operations -------------------- As discussed in Note B, Greenbriar Corporation (formerly Medical Resource Companies of America) has disposed of substantially all of its nonassisted-living operating assets. Its business will consist of development and operation of assisted living facilities which provide housing, hospitality and personal and healthcare services to elderly individuals. At December 31, 1995, the Company had one facility under construction and sites under contract for four facilities. In March 1996, the Company acquired a business that operates 16 facilities. See Note O. A summary of the significant accounting policies applied in the preparation of the accompanying consolidated financial statements follows. Principles of Consolidation --------------------------- The consolidated financial statements include the accounts of Greenbriar Corporation and its majority-owned subsidiaries (collectively, the Company). All significant intercompany transactions and accounts have been eliminated. Depreciation ------------ Depreciation is provided for in amounts sufficient to relate the cost of property, plant and equipment to operations over their estimated service lives. Depreciation is computed by the straight-line method. Profit Recognition on Sales of Real Estate ------------------------------------------ Gains on sales of real estate are recognized when the requirements of Statement of Financial Accounting Standards No. 66, "Accounting for Sales of Real Estate," are met. Until the requirements for full profit recognition have been met, a transaction is accounted for using either the deposit, cost recovery, installment sale or financing method, whichever is appropriate under the circumstances. Use of Estimates ---------------- In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash Equivalents ---------------- The Company considers all short-term deposits and money market investment with a maturity of less than three months to be cash equivalents. Impairment of Notes Receivable ------------------------------ A note receivable is identified as impaired when it is probable that interest and principal will not be collected according to the contractual terms of the note agreement. The accrual of interest is discontinued on such notes, and no income is recognized until all past due amounts of principal and interest are recovered in full. F-9 Greenbriar Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE A - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued 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 using 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. NOTE B - DISCONTINUED OPERATIONS In 1994, management concluded that operation of skilled medical care facilities, consisting of nursing homes and eating disorder clinics, was not in the best interest of the Company. In June 1994, the Company sold its investment in Remuda Ranch Center for Anorexia and Bulimia, Inc. for shares of the buyer's preferred stock, which is not marketable, valued at $1,678,000. The sale resulted in a gain of $804,000. The preferred stock bears a cumulative dividend of 8% and is convertible into shares of common stock equal to approximately 4.9% of the outstanding shares at December 31, 1995. Valuation was based on estimated discounted future cash flows. In December 1994, the Company's subsidiary, Altman Nursing, Inc., sold its two skilled nursing facilities for an aggregate price of $6,400,000, which resulted in a gain of $981,000. The aggregate gain of $1,785,000 has been presented net of applicable income taxes of $607,000. In 1995, management decided to sell the mobility products segment. The segment was sold in February 1996 for stock and notes valued at approximately $4,300,000. A gain of approximately $930,000, less applicable income taxes, will be recorded in the first quarter of 1996. Summarized balance sheet data for the mobility products segment is as follows (amounts in thousands):
December 31, ----------------- 1994 1995 -------- ------- Assets Current assets Cash $ 65 $ 220 Inventories 370 363 Other 158 174 ------ ------ Total current assets 593 757 Net property, plant and equipment 1,052 989 Other noncurrent assets, primarily goodwill and patents 1,945 1,811 ------ ------ 3,590 3,557 Liabilities Current liabilities 260 186 ------ ------ Net assets $3,330 $3,371 ====== ======
F-10 Greenbriar Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED NOTE B - DISCONTINUED OPERATIONS - Continued The operations of the skilled medical care segment and the mobility products segment have been presented in the accompanying financial statements as discontinued operations. Summarized operating results of these segments are as follows (in thousands):
1994 1995 ------- ------ Revenues $13,581 $2,027 ======= ====== Loss before income taxes (935) (149) Income tax benefit (318) (51) ------- ------ Net loss from operations $ (617) $ (98) ======= ======
NOTE C - CASH FLOW INFORMATION Supplemental information on cash flows and noncash investing and financing transactions is as follows (in thousands):
Years ended December 31, ------------------ 1994 1995 -------- ------- Supplemental cash flow information Interest paid $ 3,722 $ 211 Income taxes paid 27 46 Supplemental data on noncash investing and financing activities Stock dividend paid on preferred shares 93 73 Sale of stock in exchange for notes receivable from employees and officers 186 78 Conversion of subordinated debt to common stock - 200 Sale of subsidiary Securities received $(1,678) $ - Assets sold 4,462 - Liabilities transferred (3,861) - Gain on sale 804 - ------- ----- Net cash effect of sale of subsidiary $ (273) $ - ======= =====
F-11 Greenbriar Corporation NOTES TO CONSOLIDATED FINANCIAL STATMENTS-CONTINUED NOTE D - DEBT Long-term debt is comprised of the following (in thousands):
December 31, ------------------- 1994 1995 --------- -------- Mortgage note payable to a bank, payable monthly through maturity in 1996. $ 8,933 $ - Mortgage notes payable to a corporation bearing interest at 11.52%; principal and interest payable in monthly installments through maturity in 2004. 916 909 Note payable to a corporation bearing interest at 5%; principal and interest payable in monthly installments through maturity in December 1995. 341 - Convertible note payable to an individual bearing interest at 6%; interest due quarterly and principal due at maturity in 1998 (convertible into common stock at $3 per share). 200 - Other 32 - ------- ---- 10,422 909 Less: Current maturities (379) (8) Debt collateralized by properties under contract of sale (8,933) - ------- ---- $ 1,110 $901 ======= ====
NOTE E - INCOME TAXES At December 31, 1995, the Company had net operating loss carryforwards of approximately $7,500,000 which expire between 1999 and 2008. However, approximately $5,100,000 of these net operating loss carryforwards have limitations that restrict utilization to approximately $600,000 for any one year. Also, carryforwards of $1,800,000, which expire between 2006 and 2008, may only be used to offset future taxable income of the subsidiaries in which the losses were generated. The following is a summary of the components of income tax expense from continuing operations (in thousands): F-12 Greenbriar Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE E - INCOME TAXES - Continued
Year ended December 31, ------------------ 1994 1995 ----- ----- Current $160 $151 Deferred 80 35 --- --- $240 $186 === ===
Deferred tax assets and associated valuation allowances were comprised of the following (in thousands):
December 31, ------------------- 1994 1995 ------- -------- Deferred tax assets: Net operating loss carryforwards $ 4,650 $ 2,570 Real estate 488 141 Charitable contribution carryforwards - 606 Tax credits 125 220 Accrued expenses 60 103 Other 187 195 ------- ------- Total deferred tax assets 5,510 3,835 Valuation allowance (3,325) (1,430) Deferred tax liabilities: Investment in securities - (237) Other - (18) ------- ------- Total deferred tax liabilities - (255) ------- ------- Net deferred tax asset $ 2,185 $ 2,150 ======= =======
Management expects the net deferred tax asset will be recovered within two to three years from earnings of the Company. F-13 Greenbriar Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED NOTE E - INCOME TAXES - Continued Following is a reconciliation of income tax expense from continuing operations with the amount of tax computed at the statutory rate (in thousands):
Year ended December 31, ---------------- 1994 1995 ------ -------- Tax at the statutory rate $ 499 $ 2,004 Amortization of intangibles 113 30 Change in deferred tax asset valuation allowance, exclusive of reductions for sold company in 1994 (547) (1,895) Correction of prior period estimates 138 - Other 37 47 ----- ------- Tax expense $ 240 $ 186 ----- -------
Reductions in the deferred tax asset valuation allowance result from assessments made by the Company each year of its expected future taxable income available to absorb its carryforwards. NOTE F - STOCKHOLDERS' EQUITY On November 17, 1995, the Board of Directors authorized a one-for-five reverse stock split effective December 1, 1995. All share and per share data has been retroactively restated to give effect to the stock split. The Series A preferred stock had a liquidation value of $1 per share and an initial dividend rate of 6% that escalated to a maximum rate of 12% in 1994. For accounting purposes, the preferred stock was deemed issued at a discount. Such discount was being accreted in a manner that resulted in a constant imputed dividend rate of 12%. Dividends were payable in cash or additional shares at the stockholders' option. The Series A preferred stock was redeemed in 1995. The Series B preferred stock has a liquidation value of $1 per share and is convertible into common stock over a ten-year period at prices escalating from $25.00 per share in 1993 to $55.55 per share by 2001. Dividends at a rate of 6% are payable in cash or preferred shares at the option of the Company. At December 31, 1995 and 1994, there were cumulative, unpaid dividends of approximately $73,000. The Series C preferred stock has a liquidation value of $1 per share and is convertible into common stock at a price of $15.00 per share. Dividends are payable in cash at a rate of 6%. F-14 Greenbriar Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED NOTE F - STOCKHOLDERS' EQUITY - Continued Information relating to stock option activity during 1995 and 1994 is as follows:
Year ended December 31, ------------------- 1994 1995 --------- -------- Outstanding at beginning of year 327,500 155,500 Granted - 10,000 Cancelled (30,000) - Expired - (10,000) Reacquired (142,000) - -------- ------- Outstanding at end of year 155,500 155,500 -------- -------
The options are exercisable at various times through 2005 at prices ranging from $11.25 to $13.20 per share. In 1994, the Company purchased options covering 142,000 shares of common stock from a former employee/director for $178,000. At December 31, 1995, options to purchase 133,500 shares were exercisable. NOTE G - EARNINGS PER SHARE Earnings per share are determined by dividing net earnings, adjusted for preferred stock dividends, by the weighted average number of common shares outstanding during the period. Dilutive stock options are included in weighted average shares outstanding. Fully diluted earnings per share, giving effect to assumed conversion of convertible preferred stock and notes, are not presented because the effect of these securities is insignificant. NOTE H - RELATED PARTY TRANSACTIONS 1994 ---- The Company sold to W. Michael Gilley, Executive Vice-President/Director of the Company, 30,000 shares of common stock for a noninterest-bearing note of $187,500; principal is due in December 1999. Additional loans to executives and directors of $55,000 were made in 1994. Also, a former executive of the Company was paid commissions of $145,000 relating to the sale of property. Sylvia Gilley, wife of the Company's Chief Executive Officer, James R. Gilley, made a loan of $1,000,000 to the Company. The loan was repaid during 1994. 1995 ---- The Company purchased land from Sylvia Gilley for $221,000. F-15 Greenbriar Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED NOTE I - SALES OF ASSETS Gains on the sale of assets result from the following transactions (amounts in thousands):
1994 Gain ------ ------ Sale of Fountainview retirement center for cash of approximately $18,000 $5,149 Sale of economic interest in legal claim for for $1,085 in cash 654 Sale of rights to the interest on escrow funds for cash of $1,140 1,140 Other 100 ------ $7,043 ------ 1995 ------ Sale of Rivermont retirement center for cash of approximately $6,900 $1,720 Sale of five commercial properties for approximately $22,000 in cash and $2,050 in rates 1,095 Sale of investment securities for cash of $2,730 736 Recognition of deferred gain on long-term care facilities sold in 1991 for approximately $15,400 in notes 1,070 Other 12 ------ $4,633 ======
NOTE J - CONTINGENCIES The Company and a subsidiary, CareAmerica, Inc. (CareAmerica) are defendants in lawsuits brought by a corporation that purchased nursing homes from the Company in 1991. The plaintiff alleges mismanagement of the homes during the period that CareAmerica provided management services, seeks damages in excess of $1,500,000, seeks cancellation of $6,700,000 of mortgage notes payable to the Company and secured by the nursing homes, and seeks recovery of interest payments made on the mortgage notes. The Company has filed a counterclaim for breach of the management contract and to confirm the indebtedness. The plaintiff terminated the contract and claimed that the mortgage notes had previously been discharged. The Company believes that the plaintiff's actions, including payments against the indebtedness, are inconsistent with the plaintiff's claims that the notes have been discharged. The Company intends to vigorously contest these lawsuits and pursue its counterclaims against the plaintiff. The Company is also defendant in several other lawsuits 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 or financial position of the Company. F-16 Greenbriar Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED NOTE K - SEGMENT INFORMATION The Company's operations are classified into two business segments: real estate and residential retirement centers. The real estate segment involves the ownership and operation of commercial real estate. The residential retirement segment involves the ownership and management of retirement centers. The Company's mobility products segment has been presented as a discontinued operation (Note B). Information with respect to business segments for the years ended December 31, 1995 and 1994 is set forth below (amounts in thousands):
Real Residential Corporate estate retirement and other Total -------- ---------- ------------ --------- 1995 ------ Revenues $ 789 $ 5,706 $ 3,215 $ 9,710 Gain on sale of assets 93 5,149 1,801 7,043 Earnings from continuing operations before income taxes 271 5,274 536 6,081 Identifiable assets 3,326 1,527 24,919 29,772 Depreciation 77 43 62 182 Capital expenditures 54 353 11 418 1994 ------ Revenues $ 5,132 $ 9,660 $ 227 $15,019 Gain on sale of assets 2,913 1,720 - 4,633 Earnings (loss) from continuing operations before income taxes 2,483 1,848 (2,864) 1,467 Identifiable assets 11,608 15,038 18,318 44,964 Depreciation 239 683 66 988 Capital expenditures 462 43 573 1,078
NOTE L - FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate values: Cash and cash equivalents - The carrying amount approximates fair value because of the short maturity of these instruments. Investment in securities - The investment in securities consists of 8% convertible preferred stock of a private company. Fair value, based on estimated future discounted cash flows, approximates carrying value. F-17 Greenbriar Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED NOTE L - FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued Mortgage notes receivable - The mortgage notes receivable consist primarily of $6,700,000 of notes with a stated interest rate of 14%, due in 2021 from the plaintiff in the lawsuit discussed in Note J. It is not practicable to estimate the fair value of the notes. 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. At December 31, 1995, the carrying amount of long-term debt approximates its fair value. Accounts receivable and payable - The carrying amount approximates fair value because of their short maturity. NOTE M - NOTES RECEIVABLE
Stock Purchase Notes -------------------- December 31, -------------- 1994 1995 ------ ------ (in thousands) Related party Note from James R. Gilley, chief executive officer, principal and interest at 5-1/2%, due November 2003 $2,250 $2,250 Note from W. Michael Gilley, executive vice-president/director, noninterest-bearing and due in December 1999 188 188 Other employees 78 - ------ ------ $2,516 $2,438 ====== ======
All stock purchase notes are collateralized by common stock of the company and are presented in the balance sheet as a deduction from stockholders' equity.
Mortgage Notes - -------------- December 31, ---------------- 1994 1995 ------ ------ Notes receivable from a corporation, collateralized by a third lien on real property, interest at 14% due annually, principal due in 2021 $6,700 $6,700 Other notes 668 - ------ ------ $7,368 $6,700 ====== ======
F-18 GREENBRIAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED NOTE M - NOTES RECEIVABLE - Continued In connection with certain litigation in which the Company is defendant (see Note J), the maker of the $6,700,000 note stopped making the interest payments required under the note. As a result, the Company ceased recording the accrual of interest income. Had the Company been accruing interest on this note, the amount recognized would have been approximately $900,000 in 1995. No interest income was recognized on this note in 1995. Based on the value of the underlying collateral at December 31, 1995, no impairment reserve is required for this note. NOTE N - FOURTH QUARTER ADJUSTMENTS During the fourth quarter of 1995, the Company made an adjustment to reduce the deferred tax valuation allowance by $1,895,000. During the fourth quarter of 1994, the Company wrote off goodwill related to a 1992 acquisition of approximately $150,000, made other adjustments reducing earnings by approximately $175,000 and reduced the deferred tax valuation allowance by approximately $550,000. The goodwill write off resulted from the decision to discontinue the sale of mobility products to third parties. The adjustments to the deferred tax valuation allowance resulted from assessments made by the Company of its expected future taxable income available to absorb its net operating loss carryforwards. NOTE O - ACQUISITION OF WEDGWOOD RETIREMENT INNS, INC. AND AFFILIATES In March 1996, the Company acquired substantially all of the assets and liabilities of a number of companies under common control and managed by Wedgwood Retirement Inns, Inc. The business of these companies consists of the operation of 16 assisted living, congregate and Alzheimer's facilities. To structure the Wedgwood acquisition as a tax-free exchange, the Company also acquired a shopping center in North Carolina from James R. Gilley and members of his family (the Gilley Group). Due to the fact that the Gilley Group is a majority shareholder of Greenbriar and owner of the shopping center, the property was recorded at the Gilley Group's historical cost basis of approximately $2,300,000. Consideration given was 675,000 shares of Series D preferred stock. Wedgwood's assets were valued at approximately $58,000,000 ($54,000,000 of property and equipment) and liabilities assumed were approximately $44,000,000. In exchange, Greenbriar issued 1,949,950 shares of Series E preferred stock, valued at approximately $14,000,000, to the Wedgwood shareholders. The Series D and E preferred stock is convertible, upon approval of the common stockholders, into 1,962,458 shares of common stock. The 1995 unaudited pro forma balance sheet presents the consolidated financial position of the Company as if the acquisition had occurred at December 31, 1995. The pro forma balance sheet is for illustrative purposes only and does not purport to be indicative of the actual financial position had the transaction been consummated as of that date. F-19 EX-23.1 2 GRANT THORNTON CONSENT EXHIBIT 23.1 Consent of Independent Certified Public Accountants We have issued our report dated March 8, 1996, accompanying the consolidated financial statements included in the Annual Report of Greenbriar Corporation on Form 10-KSB for the year ended December 31, 1995. We hereby consent to the incorporation by reference of said report in the Registration Statements of Greenbriar Corporation on Form S-3 (File No. 33-64840) and Form S-8 (File No. 33-65856). /s/ Grant Thornton LLP - ------------------------------ GRANT THORNTON LLP Dallas, Texas July 24, 1996 EX-27 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM 10-KSB AUDITED CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1995 AND THE AUDITED CONSOLIDATED STATEMENT OF EARNINGS FOR THE YEAR ENDED DECEMBER 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS DEC-31-1995 JAN-01-1995 DEC-31-1995 7,199 0 23 0 0 10,908 2,868 252 29,772 893 901 0 3 35 24,857 29,772 0 9,710 0 659 0 0 206 6,081 186 5,895 (98) 0 0 5,797 1.57 0
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