10-K 1 green10k123103.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2003 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 0-8187 Greenbriar Corporation (Exact name of Registrant as specified in its charter) Nevada 75-2399477 (State or other jurisdiction of (IRS Employer Incorporation or organization) Identification No.) 1755 Wittington Place, Suite 340, Dallas, Texas 75234 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (972) 407-8400 Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange Title of Each Class on Which Registered ---------------------------- ------------------------ Common Stock, $.01 par value American Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Indicate by check mark if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-K contained in this form, and no disclosure will be contained, to the best of issuer's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock held by non-affiliates of the issuer, computed by reference to the closing sales price on March 31, 2004, was approximately $3,732,000. At March 31, 2004, the issuer had outstanding approximately 977,000 shares of par value $.01 Common Stock. Documents Incorporated by Reference: None GREENBRIAR CORPORATION Index to Annual Report on Form 10-K Fiscal year ended December 31, 2003 Part I 3 Item 1: Business and Properties 3 Item 2: Description of Properties 12 Item 3: Legal Proceedings 12 Item 4: Submission of Matters to A Vote of Security Holders 14 Item 5: Market for Common Equity and Related Stockholder Matters 15 Item 6: Selected Financial Data 15 Item 7: Management's Discussion and Analysis or Plan of Operation 16 Item 7(a): Quantitative And Qualitative Disclosures About Market Risk 21 Item 8: Financial Statements 21 Item 9: Changes In And Disagreements With Accountants On Accounting And Financial Disclosure 21 Item 9(a): Controls and Procedures 22 Part III 23 Item 10: Directors And Executive Officers 23 Item 11: Executive Compensation 24 Item 12: Security Ownership Of Certain Beneficial Owners And Management 27 Item 13: Certain Relationships And Related Transactions 28 Item 14: Principal Accounting Fees and Services 30 Part IV 31 Item 15: Exhibits, Financial Statement Schedules And Reports On Form 8-K 31 Exhibits 38 Exhibit 14 Code of Ethics for Senior Financial Officers 38 Exhibit 21.1: Subsidiaries of the Company 40 Exhibit 23.1: Consent of Farmer, Fuqua & Huff, P.C. 41 Exhibit 23.2: Consent of Grant Thornton, LLP 42 Exhibit 31.1 Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Rule 13a-14(a) or Rule 15d-14(a) 43 EXHIBIT 32.1: Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Rule 13a-14(b), 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 44 PART I ITEM 1: BUSINESS AND PROPERTIES ------------------------------- Website Access to Reports Through our Internet website, www.greenbriar.com, we make available free of charge our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission. Overview and Background of Operations Greenbriar Corporation, its subsidiaries and affiliates (the "Company") is principally a real estate company which owns or leases retirement specific real estate and an outlet shopping mall. In addition the Company owns oil and gas leases The Company strives to enhance the value of these properties by proper operations and marketing. The Company can then, if it wishes, sell or lease the properties at their appreciated value. As of March 31, 2004, the Company owns or leases three retirement communities in three states. The Company operates two of the retirement communities with a capacity of 162 residents and leases one community to a third party. The Company owns an outlet shopping mall in Gainesville Texas with approximately 315,000 square feet of retail space available for lease. In addition the Company owns approximately 200 oil wells in East Texas. These are low production wells with maximum production limits of 20 barrels of oil per day. As of March 31, 2004 there are 50 wells in operation. The Assisted Living Industry The Company believes that the assisted living industry has become the preferred alternative to meet the growing demand for a cost-effective setting in which to care for the elderly who do not require more intensive medical attention provided by a skilled nursing center but who cannot live independently due to physical or cognitive frailties. In general, assisted living represents a combination of housing, general support services and full time personal care services designed to aid elderly residents with the activities of daily living ("ADLs") on a scheduled and unscheduled basis. Many assisted living communities also provide assistance to residents with low acuity medical needs or may offer higher levels of personal assistance for incontinent residents or residents with Alzheimer's disease or other forms of dementia. Another growing trend in the industry is the provision of care for higher levels of acuity. Generally, assisted living residents have higher levels of need than residents of independent retirement communities but lower levels than residents in skilled nursing centers. The Oil and Gas Industry Gaywood Oil & Gas, LLC, of which the Company is the sole member, is in a very narrow niche of the oil and gas industry. Gaywood has approximately 200 oil wells in Gregg and Rusk counties in Texas of which 50 were operating as of March 31, 2004. Gaywood has no natural gas leases. Gaywood's only gas production is totally incidental to its oil production and has no significant value. Gaywood's leases are all wells whose potential or actual production is low, averaging slightly over four barrels per day in March 2004. Gaywood's operation of low volume wells is only feasible if the price of oil is above $24 per barrel. Gaywood is neither a refiner nor a retailer of oil products. It sells its entire production to companies who, in turn, either resell or use the products for their own purposes. 3 The oil and gas industry has experienced significant commodity price volatility in recent years. Price decreases in 2002 were driven by weather patterns, a recession and actions by OPEC. Price increases in 2000 and again in 2003 were driven in part by several years of accentuated "boom and bust" cycles of drilling activity, combined with strong growth in demand for energy commodities and continued unrest in the Middle East. The Company has no strategy, as such, for the acquisition of oil and gas properties. Gaywood was an unusual opportunity and the Company decided to pursue this particular acquisition to enhance cash flow and operating income streams. Business Strategy In choosing properties to invest in the Company's strategy is to choose a property that can achieve and sustain a strong competitive position within a chosen market. The Company also seeks to continue to enhance the performance of the properties it operates directly. In its senior living properties the Company seeks to enhance current operations by (i) maintaining and improving occupancy rates at its communities (ii) opportunistically increasing resident service fees, (iii) improving operating efficiencies and (iv) improving market positioning. In its oil and gas properties the Company seeks to keep producing wells properly maintained and to recondition and, where economically feasible, bring into production non-operating leases it owns. Assisted Living Services The Company offers a wide range of full service retirement and assisted living care and services to its residents. The residents are allowed to select among the services offered beyond basic support services and are charged only for the specific services or level of services they need. The services offered by the Company can generally be categorized as follows: Basic Support Services - These services include providing up to three meals per day in a common dining room, special dietary planning, laundry, general housekeeping, organized social and other activities, transportation, maintenance, utilities (except telephone), security and 24-hour emergency call monitoring. Supplemental Services - These services include performing, coordinating or assisting with bill paying, banking, personal shopping, transportation, appointments, pet care and reminder services. 4
Personal Care Services - These services include providing assistance with activities of daily living (the ADLs) such as ambulation, bathing, eating, dressing, personal hygiene and grooming. Wellness Services - These services include assistance with the administration of medication and health monitoring, which are provided as permitted by government regulation. Alzheimer's and Special Care Services - Alzheimer's care includes a higher 24-hour staff ratio to provide oversight and around-the-clock scheduled activities. An Alzheimer's care wing is secured from the rest of the building. Retirement Properties Operating Communities - The following table sets forth certain information with respect to communities that were owned, operated or managed by the Company at March 31, 2004. The Company considers its communities to be in good operating condition and suitable for the purpose for which they are being used. Community Care Resident Operations Community Location Level Units Capacity(1) Commenced Ownership ---------------------------------------------------------------------------------------------------------- Graybrier Southern Pines, NC FE, DC 55 90 Feb-94 Owned (2) Pacific Pointe King City, OR S 114 114 Jan-93 Leased (3) Windsor House Greenville Greenville, SC FE, DC 31 41 Nov-97 Owned (2)(5)
Total Key: S basic support and supplemental services are offered. FE basic support, supplemental, personal care and wellness services are offered ("Frail Elderly"). DC Alzheimer's and special care services are offered ("Dementia Care"). (1) Reflects licensed capacity for Assisted Living and Dementia Care and actual number of units for Independent Living. (2) Subject to first mortgage. Historically, each community has generally been pledged as collateral on a single mortgage and deed of trust securing a note payable to a bank, financial institution, individual or other lender. The mortgages and deeds of trust mature between 2004 and 2018 and bear interest at fixed and variable interest rates ranging from 7.5% to 12% as of December 31, 2003 (3) Leased from a partnership. Initial lease term is 10 years, expiring in 2012. The Company is responsible for all costs including repairs to the community, property taxes and other direct operating costs of the community. The lease includes clauses that allow for rent to increase over time based on a specified schedule. (4) Leased to a third party. Repair and Maintenance - The Company conducts routine repairs and maintenance, as needed, of its properties on a regular basis. The Company has no other current plans for significant expenditures relating to its existing properties and considers them to be in good repair and working order. 5 Retirement Community Description The Company's existing communities as of March 31, 2004 range in size from 41 to 114 units, are from one to three stories and from 20,800 to 106,250 square feet. Most communities have a large family room, usually equipped with a fireplace, a spacious open dining area, library, TV room, commercial kitchen, beauty salon, laundry and indoor and outdoor recreational areas. Units generally range in size from approximately 330 to 400 square feet for a studio unit, 470 to 650 square feet for a one-bedroom unit and 680 to 850 square feet for a two-bedroom unit. Assisted living units, among other amenities, typically include a private bathroom, kitchenette, closets, living and sleeping areas, a lockable door, emergency call system, individual room temperature controls and fire alarm and sprinkler systems. Retirement Operations In properties in the Company's portfolio, the day-to-day operations of each community are managed by an Executive Director who is responsible for all operations of the community, including overseeing the quality of care and services, marketing, coordinating social activities, monitoring financial performance and ensuring appropriate maintenance of the grounds and building. The Executive Director consults with outside providers, such as pharmacists and dieticians, to assist residents with medication review, menu planning and response to any special dietary needs. Personal care, dietary services, housekeeping and laundry services are performed primarily by line staff who are either part or full-time employees of the Company and who are trained to perform a variety of such services. Part or full-time employees perform most building maintenance services, while third party contractors generally perform elevator, HVAC maintenance and landscaping services. The Company's senior management and other personnel provide some support services to each of the Company's communities, including development of operational standards, budgets and quality assurance programs, recruiting, training and financial, accounting and data processing services such as accounts payable, billing and payroll. Corporate personnel and community executive directors collaborate with respect to the establishment of community goals and strategies, quality assurance oversight, development of Company policies and procedures, development and implementation of new programs, cash management, human resource management and community development. The Company has attracted and continues to seek highly dedicated and experienced personnel. All employees are required to complete training programs which include a core curriculum comprised of personal care basics, job related specific training, Alzheimer's disease processes, first aid, fire safety, nutrition, infection control and customer service. Executive Directors receive training in all of these areas, plus marketing, community relations, healthcare management and fiscal management. In addition to some classroom training, the Company's communities provide new employees with on the job training, utilizing experienced staff as trainers and mentors. 6 Summary Oil Reserve Data The following table sets forth summary information concerning Gaywood's proved oil reserves on December 31, 2003, based on a report prepared by Haas Petroleum Engineering Services, Inc., an independent consulting and engineering firm. Reserves were determined using year-end product prices, held constant for the life of the properties. Estimates of economically recoverable reserves and future net revenues are based on a number of variables, which may differ from actual results. Proved and Developed Reserves December 31, 2003 Oil (Mbbl) 14,890.91 Productive Wells The following table summarizes our gross and net interests in productive oil wells at March 31, 2004. Net interests represented in the table are "working interests" which bear the cost of operations. All wells are in the State of Texas. Gross Wells Net Wells 53 50 Oil Well Description The Company's oil wells have all been "abandoned" by the larger oil companies and their leases have devolved to other persons or entities. The Company has ninety nine of these leases with a range of 67.63% to 80% of ownership. The wells produce from 70 to 360 barrels per month. Oil Well Operations The Company's oil wells are maintained by third party contractors, its production is hauled by third party contractors and the entire production is sold under contract to a subsidiary of Black Hills Corporation. This contract is renegotiated annually and is based on the average daily closing price of oil for the previous month as published by Koch Supply & Trading plus a premium of $3.06 per barrel. Quality Assurance In retirement and assisted living a commitment to quality assurance is designed to achieve a high degree of resident and family member satisfaction with the care and services the Company provides. In addition to training and performance reviews of all employees, the Company's quality control measures include: Philosophy of Management - The Company's philosophy of management is to demonstrate by its actions and require from its employees high standards of personal integrity, to develop a climate of openness and trust, to demonstrate respect for human dignity in every circumstance, to be supportive in all relationships, to promote teamwork by involving employees in the management of their own work and to promote the free expression of ideas and opinions.. 7 Regular Community Inspections - Community inspections are conducted by corporate personnel on a regular basis. These inspections cover the appearance of the exterior and grounds, the appearance and cleanliness of the interior, the professionalism and friendliness of staff, resident care plans, the quality of activities and the dining program, observance of residents in their daily living activities and compliance with governmental regulations. In oil production, quality is a matter of proper separation of crude oil from saltwater. These processes are automated at each well and the Company is not aware of any complaints as to the quality of its crude oil. Marketing In retirement and assisted living the Company's marketing and sales efforts are undertaken at the local level. These efforts are intended to create awareness of a community and its services among prospective residents, their families, other key decision-makers and professional referral sources. The communities engage in traditional types of marketing activities, such as special events, direct mailings, print advertising, signs and yellow page advertising. These marketing activities and media advertisements are directed to potential residents and their adult children, who often comprise the primary decision makers for placing a frail elderly relative in an assisted living setting. In its oil business the Company sells its production of crude oil through a contract as described above. The Company has no marketing efforts or responsibility in this facet of its business. Government Regulation The assisted living industry is maturing and, accordingly, the manner and extent to which it is regulated at the Federal and state levels are evolving at a steady pace. Currently, most states have a licensure category or statute that uses the term "assisted living." Several states are proposing regulations using the term. More than forty states have specific language in statute, licensure regulations (including states with draft regulations) or Medicaid policy that addresses the philosophy of assisted living. Several states have or are reviewing licensure regulations and increasing the role of state personnel in monitoring and controlling the assisted living industry. One of the communities the Company operates is not required to have a license for its independent retirement operation. The other community is required to be licensed by the state in which it operates. Any community acquired by the Company must be correctly licensed as required by its state and local laws and must be in compliance with the Americans with Disabilities Act ("ADA"). Such community must also be in compliance with the Fair Housing Amendments Act. In compliance with underlying state bond financing, rents at one community in Oregon must be approved by an agency of the state. The operations of any facility gathering, transporting, processing or storing natural gas and crude oil is subject to stringent and complex laws and regulations pertaining to health, safety and the environment. As an owner or operator of these facilities, the Company must comply with federal, state and local laws that relate to air and water quality, hazardous and solid waste 8 management and disposal, and other environmental matters. Costs of operating oil wells must incorporate compliance with environmental laws, regulations and safety standards. Failure to comply with these laws and regulations may trigger a variety of administrative, civil and potentially criminal enforcement measures. The Company is subject to the Fair Labor Standards Act, which governs such matters as minimum wage, overtime and other working conditions. Many of the Company's employees are paid at rates related to the Federal minimum wage and accordingly, increases in the minimum wage will result in an increase in labor costs. Management is not aware of any non-compliance by the Company as regards applicable regulatory requirements that would have a material adverse effect on the Company's financial condition or results of operations. Competition The long-term care industry is highly competitive and the assisted living and Alzheimer's care businesses in particular have and will continue to become increasingly competitive in the future. The Company competes with other assisted living companies and numerous other companies providing similar long-term care alternatives such as home healthcare agencies, community-based service programs, retirement communities and convalescent centers (nursing homes). In addition, the Company competes with a number of tax-exempt nonprofit organizations which can finance capital expenditures on a tax-exempt basis or receive charitable contributions unavailable to the Company and which are generally exempt from income tax. In the markets where the Company operates the level of competition is has increased both from regional, national and local providers. Many of the Company's present and potential competitors have, or may have access to, greater financial, management and other resources than those of the Company. There can be no assurance that competitive pressures will not have a material adverse effect on the two properties the Company operates. However, these same circumstances provide a substantial opportunity for the Company to acquire communities at a price that will allow a profitable resale or lease if the community is operated properly. The Company also competes with other providers of long-term care in the acquisition and development of additional communities. The Company also competes with other providers of long-term care in attracting and retaining qualified and skilled personnel. In recent years, the industry has experienced a shortage of qualified professionals. The Company's operations require some professionally certified (RN or LPN) services, primarily for supervision and training of care staff. The Company has been able to retain the services of an adequate number of professional third party contractors to staff its communities appropriately and maintain its standards of quality care. Insurance The provision of personal services entails an inherent risk of liability compared to more institutional long-term care communities. Assisted living communities of the type operated by the Company, especially as regards dementia care, offer residents a greater degree of independence in their daily lives. This increased level of independence, however, may subject the resident and the 9 Company to certain risks that would be reduced in more institutionalized settings. The Company currently maintains liability insurance intended to cover such claims. However, the number of insurance carriers who offer such insurance has diminished since 1999 and the costs of such insurance continues to escalate. The Company also carries property insurance on each of its properties. Environmental Matters Under various Federal, state and local environmental laws, ordinances and regulations, a current or previous owner or operator of real estate may be required to investigate and clean up hazardous or toxic substances or petroleum product releases at the property, and may be held liable to a governmental entity or to third parties for property damage and for investigation and clean up costs incurred by such parties in connection with the contamination. Such laws typically impose clean up responsibility and liability without regard to whether the owner or operator knew of or caused the presence of the contaminants and the liability under such laws has been interpreted to be joint and several unless the harm is divisible and there is a reasonable basis for allocation of responsibility. The costs of investigation, remediation or removal of such substances may be substantial and the presence of such substances or the failure to remediate properly such property may adversely affect the owner's ability to sell or lease the property or to borrow using the property as collateral. In addition, some environmental laws create a lien on the contaminated site in favor of the government for damages and costs it incurs in connection with the contamination. Persons who arrange for the disposal or treatment of hazardous or toxic substances also may be liable for the costs of removal or redemption of such substances at the disposal or treatment community, whether or not such community is owned or operated by that person or corporation. Finally, the owner or operator of a site may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from a site. The Company has conducted environmental assessments on most of its existing owned or leased properties. These assessments have not revealed any environmental liability that the Company believes would have a material adverse effect on the Company's business, assets or results of operations. The Company is not aware of any such environmental liability. The Company believes that all of its properties are in compliance in all material respects with all Federal, state and local laws, ordinances and regulations regarding hazardous or toxic substances or petroleum products. The Company has not been notified by any governmental authority, and is not otherwise aware, of any material non-compliance, liability or claim relating to hazardous or toxic substances or petroleum products in connection with any of its communities. Control by Insiders As of March 31, 2004, the Company's officers, directors and affiliated entities owning more than 5% of the Company's outstanding stock owned approximately 62% of the outstanding shares of Common Stock. Warwick Summit square, from purchases, owns approximately 21% of the outstanding Common Stock of the Company. Sylvia M. Gilley, widow of former Chairman, President and Chief Executive Officer James R. Gilley, and one corporation wholly owned by Mrs. Gilley, beneficially owned an aggregate of approximately 16 % of the outstanding Common Stock of the Company. Victor L. Lund, a director of the Company and the founder of Wedgwood Retirement Inns (a company acquired by the Company in 1996), 10 beneficially owned approximately 12% of the outstanding shares of Common Stock. Floyd Rhoades, as a result of the stock he received when the Company purchased American Care Communities, Inc., beneficially owns approximately 6% of the Company's outstanding stock. Gene S. Bertcher, Chairman of the Board of Directors and Chief Executive Officer, from purchases owns approximately 7% of the outstanding Common Stock of the Company. Accordingly, such individuals will have the ability, by voting their shares in concert, to significantly influence (i) the election of the Company's Board of Directors and, thus, the direction and future operations of the Company, and (ii) the outcome of all other matters submitted to the Company's stockholders, including mergers, consolidations and the sale of all or substantially all of the Company's assets. In addition, the parties listed above currently hold options or conversion rights to acquire 80,000 shares of Common Stock. The issuance of additional shares of Common Stock pursuant to the exercise of these stock options granted under the Company's stock option plan would increase the number of shares held by the Company's executive officers, directors and affiliated entities in the future. Anti-Takeover Provisions The Company's Articles of Incorporation and Bylaws contain, among other things, provisions (i) authorizing shares of preferred stock with respect to which the Board of Directors has the power to fix the rights, preferences, privileges and restrictions without any further vote or action by the stockholders (ii) requiring holders of at least 80% of the outstanding Common Stock to join together in requesting a special meeting of stockholders and (iii) prohibiting removal of a director other than for "cause" and then only if the holders of at least 80% of the outstanding Common Stock vote for such removal. The Company is also subject to Sections 78.411-78.444 of the Nevada Revised Statutes (the "Control Act") which in general prohibits any business combination involving the Company and a person that beneficially owns 10% or more of the outstanding Common Stock or an affiliate or associate of the Company who within the past three years was the beneficial owner, directly or indirectly, or 10% or more of the outstanding Common Stock, except under certain circumstances. The application of the Control Act and/or the provisions of the Company's Articles of Incorporation and Bylaws could delay, deter or prevent a merger, consolidation, tender offer or other business combination or change of control involving the Company that some or a majority of the Company's stockholders might consider to be in their personal best interests, including offers or attempted takeovers that might otherwise result in such stockholders receiving a premium over the market price of the Common Stock and may adversely affect the market price of and the voting and other rights of, the holders of Common Stock. Employees At March 31, 2004, the Company employed 86 employees, including 39 full-time and 47 part-time employees. The Company believes it maintains good relationships with its employees. None of the Company's employees are represented by a collective bargaining group. Corporate Offices The Company's principal office is approximately 2,500 square feet of leased space in Dallas, Texas. The Company believes the leased space will meet the Company's needs for the foreseeable future. 11 ITEM 2: DESCRIPTION OF PROPERTIES --------------------------------- See Item 1 for a discussion of properties owned or leased by the Company. ITEM 3: LEGAL PROCEEDINGS ------------------------- Benetic Financial vs. Wedgwood et al: This action is against a subsidiary of the Company as well as other corporate and individual defendants. In 1993, Wedgwood Retirement Inns entered into a financing arrangement with a third party lender. The plaintiff alleged that he had a verbal brokerage agreement with Wedgwood and was entitled to a fee. The Company acquired Wedgwood in 1996. In a jury trial the plaintiff was awarded $150,000 on one count of his complaint. However, the jury found for the defendants on all other counts. In his final ruling the judge awarded the defendants legal fees that were in excess of the judgment. The plaintiff appealed and on April 30, 2003 the California Court of Appeals let the $150,000 stand but reversed the judge's award of legal fees. Based upon the ruling of the Court of Appeals the defendants are obligated for the judgment plus $165,093 in interest since 1993. The judgment is against all the defendants as a group. The defendants filed an appeal to the California Supreme Court but the appeal was denied. There are no further legal defenses available. A 1995 sharing arrangement exists whereby Wedgwood and Victor Lund, the former President of Wedgwood and a current director of Greenbriar were obligated to pay 2/3 of any judgment. Greenbriar had previously agreed to indemnify Mr. Lund for any losses in this matter. The Company has recorded its share of the loss in prior years. Internal Revenue Service Pre-Assessment Letter In December 1991 the Company sold four nursing homes to a not-for-profit corporation in exchange for tax exempt bonds issued on behalf or the acquiring corporation by government authorities. The bonds were issued in three lettered series. The aggregate principal amount of the Series A bonds was $8,700,000, the aggregate principal amount of the series B bonds was $1,000,000 and the aggregate amount of the series C bonds was $6,700,000. Interest on the bonds was payable semi-annually. A nationally recognized law firm opined that the interest on the bonds would be tax-exempt. In March 1992, pursuant to a plan promulgated and recommended by a nationally recognized investment banking firm, the Series C bonds were converted to zero coupon status and their value was enhanced by substituting higher grade collateral. The substitute collateral, which consisted of zero coupon U.S. Treasury obligations, was placed in trust to defease the Series C bonds, in exchange for the underlying mortgage. The Series C bonds were then sold for approximately $47,000,000. A gain was recorded equal to the proceeds received by the Company of $6,252,000 after deducting transaction costs and the cost of the higher grade collateral. A nationally recognized law firm opined that the defeasance of the bonds would not adversely affect the tax exempt status. In December 1992, again pursuant to a plan promulgated and recommended by a nationally recognized investment banking firm, the Series A bonds were converted to zero coupon status, their value enhanced by substituting zero coupon U.S. 12 Treasury obligations as collateral and the collateral placed in trust in exchange for the mortgage underlying the Series A bonds in a transaction similar to the sale of the Series C bonds. The Series A bonds were then sold for approximately $20,000,000. A gain was recorded equal to the proceeds received by the Company of $2,081,000 after deducting transaction costs and the cost of the higher grade collateral. On January 8, 2004 the Company was notified by the Internal Revenue Service (IRS) in the form of a Section 6700 Pre-Assessment Letter that the IRS was considering assessing penalties under Section 6700 of the Internal Revenue Code as a result of the Company's organization or assistance in connection with the issuance and sale of the Series A and Series C bonds. In general, Section 6700 of the IRS Code imposes a penalty on any person or organization who organizes or assists in organizing an entity or participates in the sale of any interest in an entity and makes or furnishes or causes another person to make or furnish a statement with respect to the allowably of any deduction, the excludability of any income which the person knows or has reason to know is false or fraudulent as to any material matter. The penalty prescribed in Section 6700 is the lesser of 100% of the gross income derived from the activity or $1,000 for each such activity. Each entity or arrangement shall be treated as a separate activity. If it is ultimately determined that the Company is subject to a fine that fine would be the lesser of $1,000 per activity or the gross proceeds the Company received. Effectively the fine would be calculated based upon a determination as to what constitutes an activity. The IRS has informed the Company that the Series A and C bonds were purchased by 266 individuals or entities. If the penalty is computed by considering each sale an activity the maximum exposure to the Company would be $267,000. However, neither Section 6700 nor, to the Company's knowledge, relevant authorities specify what constitutes an activity. The IRS has indicated that the $1,000 per activity should be computed in a manner other than the number of individuals who purchased the bonds however they have not indicated to the Company any basis or authority for their position. If the IRS's assertions as to the number of activities exceeds 8,333 activities then the Company believes the maximum exposure would be the total proceeds received and income recorded of $8,333,000. The transactions which the IRS is examining involved technically complex financial and legal issues and were undertaken on the advice of and reliance on the investment banking firm, the law firms that issued the tax exempt bond legal opinions and other professionals. The Company believed in 1992 and still believes that its actions were appropriate in all respects. The Company and the IRS are engaged in negotiations regarding settling this twelve year old matter. However, there is no assurance that any settlement will be achieved. In the absence of a settlement, the Company intends to contest the 13 IRS's position in court. Any litigation may be expensive and time consuming. However, if this matter is litigated the Company believes that it will prevail on the merits. Should it not prevail in this matter the Company intends to pursue actions against the professionals who advised the Company regarding the sale of the bonds. Other The Company has been named as a defendant in other lawsuits in the ordinary course of business. Management is of the opinion that these lawsuits will not have a material effect on the financial condition, results of operations or cash flows of the Company. ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ----------------------------------------------------------- The Company held its annual meeting on December 16, 2003. At that meeting the shareholders elected three new members to the Board of Directors. 14
PART II ITEM 5: MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS ---------------------------------------------------------------- The Company's Common Stock is traded under the symbol "GBR" and is listed on the American Stock Exchange. The high and low closing sales prices of the Company's Common Stock on the American Stock Exchange during the last two fiscal years, adjusted for the January 2002 stock dividend and the October 2003 stock split 2003 2002 High Low High Low ----------- ---------- ----------- ---------- First Quarter $8.30 7.25 $24.50 12.50 Second Quarter 9.00 7.30 21.00 8.00 Third Quarter 8.00 4.30 9.50 7.50 Fourth Quarter 13.00 2.60 10.00 5.50 The Company has not paid cash dividends on its Common Stock during at least the last ten fiscal years and it has been the Company's practice to retain all earnings to pay down long-term debt and to finance the future expansion and development of its business. Any determination to pay cash dividends in the future will be at the discretion of the Board of Directors and will be dependent on the Company's financial condition, results of operations, contractual restrictions, capital requirements, business prospects and such other factors as the Board of Directors deems relevant. The Company's ability to pay dividends in the future may be limited by the terms of future debt financing and other arrangements. The closing price on the Company's common stock on March 31, 2004, was $3.82 per share. As of March 31, 2004, there were 478 holders of record of the Company's common stock. ITEM 6: SELECTED FINANCIAL DATA ------------------------------- 2003 2002 2001 2000 1999 Operating revenue $ 5,034 $ 4,422 $ 23,568 $ 33,482 $ 33,587 Operating expenses 5,811 6,767 27,543 6,378 33,606 Operating profit (loss) (777) (2,345) (3,975) (10,115) (19) Earnings (loss) from continuing operations before income taxes $ 222 $ (2,996) $ 9,559 $ (10,115) $ 709 Income tax expense 749 2,824 -- -- Earnings (loss) from continuing operations 222 (3,745) 6,735 (10,115) 709 Loss from discontinued operations (4,628) (317) (508) (627) NET EARNINGS (LOSS) 222 (8,373) 6,418 (10,623) 82
15
Earnings (loss) per common Share-basic and diluted $ 0.31 $ (23.32) $ 15.53 $ (39.17) $ (12.33) BALANCE SHEET DATA: Total assets $ 18,131 $ 12,624 $ 44,022 $ 102,588 $ 119,908 Long-term debt 2,053 8,479 16,693 50,887 50,477 Total liabilities 15,577 11,273 34,753 68,944 69,425 Preferred stock redemption 26,988 27,763 obligation Total stockholders' equity 2,554 1,351 9,269 6,656 22,720
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION Overview As of March 31, 2004 the Company owns one assisted living community and leases one community in two states with total capacity of 204 residents.. In addition the Company owns one community that is operated by an independent third party with a capacity of 41 residents. The Company also owns 200 oil wells in East Texas and a 315,000 square foot outlet mall in Gainesville, Texas Since 1996 the Company has owned, leased and operated assisted living and retirement communities throughout the United States. During that period of time the Company has both acquired and sold over seventy communities. The acquiring and disposing of its real estate assets has been an integral part of the Company's business. During the past several years the Company's business strategy has evolved into one of focusing on the real estate component and reducing its operating activities. The Company objective is to become an investor in various entities, principally partnerships, whose intent is to acquire properties and either sell, lease or enter into joint venture agreements with third party operators with respect to these properties Critical Accounting Policies and Estimates The Company's discussion and analysis of its financial condition and results of operations are based upon the Company's Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States. Certain of the Company's accounting policies require the application of judgment in selecting the appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. These judgments and estimates are based upon the Company's historical experience, current trends, and information available from other sources that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The Company believes the following critical accounting policies are more significant to the judgments and estimates used in the preparation of its consolidated financial statements. Revisions in such estimates are recorded in the period in which the facts that give rise to the revisions become known. Deferred Tax Assets Significant management judgment is required in determining the provision for income taxes, deferred tax assets and liabilities and any valuation allowance recorded against net deferred tax assets. The future recoverability of the 16 Company's net deferred tax assets is dependent upon the generation of future taxable income prior to the expiration of the loss carry forwards. The Company believes that it will generate future taxable income to fully utilize the net deferred tax assets. Fiscal 2003 as Compared to Fiscal 2002 Revenues and Operating Expenses from Assisted Living Operations: Revenues were $4,585,000 in 2003 compared to $4,422,000 in 2002. Community operating expenses, which consist of assisted living operations expense, lease expense and depreciation and amortization, were $4,131,000 in 2003 as compared to $3,872,000 in 2002. During the first quarter of 2002 leases held by the company for the operation of two properties were not renewed. As of May 31, 2002 one property was contributed to a partnership in which the Company has a 56% limited partnership interest. The partnership is accounted for using the equity method of accounting. On September 30, 2002 the company sold two properties and on November 1, 2002 the Company sold two subsidiaries each of whom owned an assisted living property. On November 1, 2002 the Company reacquired a property that had been previously leased to a third party. On a same store basis for properties held for all of 2003 and 2002 Revenues were $3,587,000 in 2003 and $3,500,000 in 2002. Community operating expenses were $3,149,000 in 2003 and $3,145,000 in 2002. Revenues and Operating Expenses from Oil & Gas Operations: The Company acquired it's oil & gas operations effective August 1, 2003. Revenues were $449,000, operating expenses were $400,000 and depletion and depreciation was $41,000. Corporate General and Administrative Expenses: These expenses were $1,111,000 in 2003 as compared to $2,329,000 in 2002. The decrease in the corporate general and administrative expenses is primarily a result of a decrease in salaries and related payroll expenses. Due to a significant reduction in the number of Communities operated by the Company the number of employees on the corporate staff was reduced. The downsizing also resulted in an overall decrease in almost all general and administrative cost categories. Write-off of Impaired Assets and Related Expenses: During 2002 the Company wrote down the recorded value of a property it was attempting to sell. Interest and Dividend Income Interest and dividend income was $304,000 in 2003 as compared to $412,000 in 2002. The decrease in interest and dividend income is a result of a reduction in the notes receivable held by the Company Interest Expenses: These expenses decreased to $705,000 in 2003 as compared to $840,000 in 2002. The decrease is due primarily to the reduction in the number of Communities. Gain on Sale of Assets: In 2001 the Company sold a property and received proceeds of both cash and a bond bearing interest at 9.5%. The payment of both principal and interest on the bond was based exclusively on the cash flow from the property sold. For financial statement purposes the bond was valued at zero. In August 2003 the Company exchanged the bond for 100% of Gaywood Oil and Gas LLC. Gaywood was valued by independent engineers as having a fair market value of $1,169,000 which was recorded as a gain by the Company. In September 2003 the Company sold land it was holding for $125,000 cash and recorded a loss of $111,000 on the sale. 17 In November 2002 the Company sold its 56% interest in MREI to Sylvia M. Gilley in exchange for a reduction of $1,120,000 owed to Ms Gilley and a one year extension on the remaining portion of the note due her of $2,255,000. The Company recorded income of $930,000. Other Income ( Expense): Other income was $342,000 in 2003 and ($1,153,000) in 2002 Other income in 2003 includes reimbursement of a prior year insurance claim, the settlement of a lawsuit as well as settlements for certain prior year accounts payable. In September 2002 the Company entered into a venture with a third party to secure partnership interests in future acquisitions of assisted living communities. The agreement required the Company to pay $660,000 over the next twelve months to fund the cost of the due diligence for these acquisitions. There can be no assurance that this venture will be successful and the Company has therefore charged the entire cost to expense. The Company records its 56% investment CREI by the equity method of accounting. The Company's share of the operating losses of this partnership was $621,000. On September 30, 2002 CREI sold it's two properties to a third party for a gain of $2,315,000. The Company has deferred recognition of its 56% participation in the gain. Discontinued Operations In October 2001the Financial Accounting Standard Board issued Statement of Financial Accounting Standards #144 Accounting for the Impairment or Disposal of long Lived Assets. (SFAS #144). The Company adopted SFAS # 144 effective January 1, 2002 which resulted in a presentation of the net operating results of these qualifies properties sold in 2002 as (loss) from discontinued operations for all periods presented. During 2002 the Company disposed of six properties. Revenue for the six properties were approximately $4,698,000 in 2002. Operating expenses for the six properties were approximately $5,325,000 in 2002. The loss on sale of these six properties in 2002 was $4,001,000which includes income tax expense of $440,000. Fiscal 2002 as Compared to Fiscal 2001 Revenues and Operating Expenses from Assisted Living Operations: Revenues decreased to $9,120,000 in 2002 compared to $30,861,000 in 2001. Community operating expenses, which consist of assisted living operations expense, lease expense and depreciation and amortization, were $8,070,000 in 2002 as compared to $25,417,000 in 2001. During the last six months of 2001 the Company disposed of 11 Communities as part of redemption of its Series E and F Preferred Stock. The Company also sold three Communities to not for profit organizations. The Company also sold one Community and leased one Community to independent third parties. In addition the Company entered into a sub-management contract for three properties whereby the sub-manager is retaining the revenue and paying the expenses as their fee for being a sub-manager. The sub-manager also had an option to acquire the communities upon approval of the third party lenders. For reporting purposes the Company for the duration of the sub management agreement no longer recorded the revenue and operating expenses of the three Communities. In May 2002 one of the properties with a sub-management contract was sold and one was returned to the Company and immediately leased to a third party. The final property was shut down and is in the process of being turned over to the lender. 18 During the first quarter of 2002 leases held by the company for the operation of two properties were not renewed. As of May 31, 2002 one property was contributed to a partnership in which the Company has a 56% limited partnership interest. The partnership is accounted for using the equity method of accounting. On September 30, 2002 the company sold two properties and on November 1, 2002 the Company sold two subsidiaries each of whom owned an assisted living property In October 2001 and May 2002 the Company obtained 56% limited partnership interests in two partnerships which own four communities. These communities are accounted for using the equity method of accounting and therefore the Company does not record the revenue and expenses of the communities. Overall the Company recorded revenue and expenses for 24 fewer communities 2002 than the comparable periods in the prior year. The reduction in the revenue and operating expenses for 2002 as compared to 2001 is almost entirely due to the reduction in the number of Communities owned and leased by the company Corporate General and Administrative Expenses: These expenses were $2,329,000 in 2002 as compared to $4,875,000 in 2001. The decrease in the corporate general and administrative expenses is primarily a result of a decrease in salaries and related payroll expenses. Due to a significant reduction in the number of Communities operated by the Company the number of employees on the corporate staff was reduced. In addition salaries for members of senior management have been reduced. Also during 2001 the Company was incurring legal and professional fees with respect to a lawsuit with a preferred shareholder in addition to its customary expenses. Legal fees decreased by $155,052 in 2002 when compared to 2001. Write-off of Impaired Assets and Related Expenses: During 2002 the Company wrote down the recorded value of a property it is attempting to sell. Interest and Dividend Income: Interest and dividend income was $412,000 in 2002 as compared to $212,000 in 2001. The increase in interest and dividend income is a result of interest recorded on a $1,600,000 note receivable related to the Company's investment in the Corinthian Real Estate Investors L.P. in November 2001. Interest Expense: These expenses decreased to $2,279,000 in 2001 as compared to $4,958,000 in 2000. The decrease is due primarily to the reduction in the number of Communities. Gain on Sale of Assets: In August 2003 the Company exchanged a bond, which had a zero value for accounting purposes for 100% of Gaywood Oil & Gas LLC. Gaywood was valued by independent engineers as having a fair market value of $1,169,000 which was recorded as a gain by the Company. In September 2003 the Company sold land it was holding for $125,000 cash and recorded a loss of $111,000 on the sale In November 2002 the Company sold it's 56% interest in MREI to Sylvia M. Gilley in exchange for a reduction of $1,120,000 owed to Ms Gilley and a one year extension on the remaining portion of the note due her of $2,255,000. The Company recorded income of $930,000. 19 Other Income Expenses: In September 2002 the Company entered into a venture with a third party to secure partnership interests in future acquisitions of assisted living communities. The agreement required the Company to pay $660,000 over the next twelve months to fund the cost of the due diligence for these acquisitions. There can be no assurance that this venture will be successful and the Company has therefore charged the entire cost to expense. The Company records its 56% investment CREI by the equity method of accounting. The Company's share of the operating losses of this partnership was $621,000. On September 30, 2002 CREI sold it's two properties to a third party for a gain of $2,315,000. The Company has deferred recognition of its 56% participation in the gain. Discontinued Operations: In October 2001the Financial Accounting Standard Board issued Statement of Financial Accounting Standards #144 Accounting for the Impairment or Disposal of long Lived Assets. (SFAS #144). The Company adopted SFAS # 144 effective January 1, 2002 which resulted in a presentation of the net operating results of these qualifies properties sold in 2002 as (loss) from discontinued operations for all periods presented. During 2002 the Company disposed of six properties. Revenue for the six properties were approximately $4,698,000 in 2002 and $7,293,000 in 2001. Operating expenses for the six properties were approximately $5,325,000 in 2002 and $7,610,000 in 2001. The loss on sale of these six properties in 2002 was $4,001,000 which includes income tax expense of $440,000. Liquidity and Capital Resources At December 31, 2003 the Company had current assets of $3,421,000 and current liabilities of $12,328,000. In December 2003 the Company acquired the Gainesville Outlet Mall in Gainesville, Texas. The Company paid approximately $800,000 in cash and a short term obligation to pay the seller approximately $5,571,000. The Company has negotiated long term financing and anticipates closing on or before April 30, 2004. Also included in current liabilities is an obligation of principal and accrued interest to Sylvia Gilley, wife of the former President of the Company, for $2,580,000. The terms of this obligation are similar to that of preferred stock whereby the Company can only pay this obligation out of available earned surplus. Future acquisitions by the Company are dependent upon obtaining capital and financing through various means, including financing obtained from loans, sale/leaseback transactions, long-term state bond financing, debt or equity offerings and, to the extent available, cash generated from operations. There can be no assurance that the Company will be able to obtain adequate capital to finance its projected growth. Effect of Inflation The Company's principal sources of revenues are from resident fees from Company-owned or leased assisted living communities and management fees from communities operated by the Company for third parties. The operation of the communities is affected by rental rates that are highly dependent upon market conditions and the competitive environment in the areas where the communities are located. Compensation to employees is the principal cost element relative to 20 the operations of the communities. Although the Company has not historically experienced any adverse effects of inflation on salaries or other operating expenses, there can be no assurance that such trends will continue or that should inflationary pressures arise that the Company will be able to offset such costs by increasing rental rates or management fees. Forward Looking Statements "Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995: A number of the matters and subject areas discussed in this filing that are not historical or current facts deal with potential future circumstances, operations, and prospects. The discussion of such matters and subject areas is qualified by the inherent risks and uncertainties surrounding future expectations generally, and also may materially differ from Greenbriar Corporation's actual future experience involving any one or more of such matters and subject areas relating to interest rate fluctuations, ability to obtain adequate debt and equity financing, demand, pricing, competition, construction, licensing, permitting, construction delays on new developments contractual and licensure, and other delays on the disposition, transition, or restructuring of currently or previously owned, leased or managed communities in the Company's portfolio, and the ability of the Company to continue managing its costs and cash flow while maintaining high occupancy rates and market rate assisted living charges in its assisted living communities. Greenbriar Corporation has attempted to identify, in context, certain of the factors that they currently believe may cause actual future experience and results to differ from Greenbriar Corporation's current expectations regarding the relevant matter or subject area. These and other risks and uncertainties are detailed in the Company's reports filed with the Securities and Exchange Commission (SEC), including Greenbriar Corporation's Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q. ITEM 7(A): QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK --------------------------------------------------------------------- Nearly all of the Company's debt is financed at fixed rates of interest. Therefore, the Company has minimal risk from exposure to changes in interest rates. ITEM 8: FINANCIAL STATEMENTS ---------------------------- The financial statements required by this Item begin at page F-1 hereof. ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND -------------------------------------------------------------------------------- FINANCIAL DISCLOSURE -------------------- Effective February 5, 2004, the Company's Board of Directors engaged the Plano, Texas firm of Farmer, Fuqua& Huff, P.C. as the independent accountant to audit Greenbriar's financial statements. During the Registrant's two most recent fiscal years, and any subsequent interim period, Greenbriar did not consult with Farmer, Fuqua & Huff, PC. or any of its members about the application of accounting principles to any specified transaction or any other matter. The engagement effective February 5, 2004, of Farmer, Fuqua & Huff, P.C. as a new independent accountant for Greenbriar necessarily results in the termination or dismissal of the principal accountant which audited Greenbriar's financial statements in the past two fiscal years ended December 31, 2001 and 2002, Grant Thornton, LLP. During the Registrant's two most recent fiscal years and any subsequent interim period, Grant Thornton's report on Greenbriar's financial statements for those two years did not contain an adverse opinion or disclaimer of opinion, nor was such opinion qualified or modified as to uncertainty, audit scope or accounting principles, and no disagreement existed between the Registrant and Grant Thornton concerning any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure. The decision to change accountants was approved by the Company's Audit Committee consisting of Dan Locklear, Chairman, James Huffstickler and Victor Lund. 21 ITEM 9(A): CONTROLS AND PROCEDURES Based on their most recent evaluation, which was completed within 90 days of the filing of this Form 10-K, the Chief Executive Officer/Chief Financial Officer has concluded that the Company's disclosure controls and procedures are effective to insure that information required to be disclosed in reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. There were no significant changes in the Company's internal controls or other factors that could significantly affect these disclosure controls subsequent to the date of the evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. 22 PART III ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS ---------------------------------------------- Term Expires in 2004 Gene S. Bertcher Mr. Bertcher was elected President and Chief Executive Age 55 Officer on January 3, 2003. Mr. Bertcher has been Executive Vice President, Chief Financial Officer and Treasurer of the Company since November 1989 and was a director from November 1989 until September 1996 and re-elected to the board in 1999. He is a certified public accountant Roz Campisi Beadle Ms. Beadle has a background in public relations and Age 47 marketing. She is self employed and has, in the past five years, worked with III Forks Restaurant and RB Ranch. Ms. Beadle is also extremely active in various civic and community services and is currently working with the Congressional Medal of Honor Society and on the Medal of Honor Host City Committee (Gainesville, Texas, USA). Ms. Beadle is a Cutting Horse breeder specializing in the registration, buying, selling and veterinary care of the breed. James E. Mr. Huffstickler is Chief Financial Officer of Sunchase Huffstickler America, Ltd., a multi-state property management company. He Age 61 is a graduate of the University of South Carolina and has worked for Southmark Management, Inc., a nationwide real estate management company. Mr. Huffstickler is a certified public accountant. Dan Locklear Mr. Locklear is chief financial officer of Sunridge Age 51 Management Group, a real estate management company. Mr. Locklear has worked for Johnstown Management Company, Inc. and Trammel Crow Company. Mr. Locklear is a certified public accountant and a licensed real estate broker in the State of Texas. Term Expires in 2005 Victor L. Lund Mr. Lund has been a director of the Company since 1996 when Age 75 a company he founded, Wedgwood Retirement Inns, Inc. (Wedgwood), became a wholly owned subsidiary of the Company. At the time the Company acquired Wedgwood, Mr. Lund was Chairman of the Board, President and CEO 23
Oscar Smith Other Executive Officers and Business Experience Mr. Smith Age 61 has been Secretary of the Company since December 2001. He has been Vice President of the Company since June 1994. Prior to joining the Company he owned and operated a multi-unit retail and manufacturing business in Norfolk, Virginia.. Organization of the Board of directors The board of directors has the following committee: Committee Members Audit Dan Locklear - Chairman Roz Campesi Beadle James Huffstickler Compensation James E. Huffstickler, Chairman Roz Beadle Dan J. Locklear Victor L. Lund Section 16(a) Beneficial Ownership Reporting Compliance Based solely upon a review of Forms 3, 4 and 5 furnished to the Company pursuant to Rule 16a-3(e) promulgated under the Securities Exchange Act of 1934 (the "Exchange Act"), or upon written representations received by the Company, the Company is not aware of any failure by any director, officer or beneficial owner of more than 10% of the Company's common stock to file with the Securities and Exchange Commission, on a timely basis. ITEM 11: EXECUTIVE COMPENSATION ------------------------------- The following tables set forth the compensation paid by the Company for services rendered during the fiscal years ended December 31, 2003, 2002 and 2001 to the Chief Executive Officer of the Company and to the other executive officers of the Company whose total annual salary in 2003 exceeded $100,000, the number of options granted to any of such persons during 2003 and the value of the unexercised options held by any of such persons on December 31, 2003. Summary Compensation Table Long Term Compensation- Number of Name and Shares of Principal Common Stock Position Annual Underlying All Compensation- Options Other Year Salary Compensation(1) ------------------------------ ---- -------- -------- -------- Gene S. Bertcher, 2003 134,000 -- $ 6,500 Chairman, President and Chief 2002 14,000 -- 6.500 Executive Officer since 1/3/03 2001 155,000 -- 8,000 and Chief Financial Officer James R. Gilley, 2002 $ 12,000 -- $ 5,500 Chairman, President and Chief 2001 386,000 10,000 8,000
24
Executive Officer (1) Constitutes directors' fees paid by the Company to the named individuals. Option Grants Table (Option Grants in Last Fiscal Year) --------------------------- ------------------- ------------------------- ------------------ ------------------- Percent of Number of Total Options Exercise or Securities Granted to Employees in Base Price Expiration Name Underlying Fiscal Year Per Share Date Options Granted --------------------------- ------------------- ------------------------- ------------------ ------------------- NONE --------------------------- ------------------- ------------------------- ------------------ ------------------- Aggregated Option Exercises in Last Fiscal Year and FY-End Option Values Value of Unexercised Number of Securities In-the-Money Underlying Unexercised Options at 2002 Shares Acquired Value Options at 2002 FY-End FY-End ---------------------- ------ Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable ---------------------- ------------------- -------------- --------------------------------- ------------------------------- ---------------------- ------------------- -------------- -------------- ------------------ -------------- ---------------- NONE ---------------------- ------------------- -------------- -------------- ------------------ -------------- ----------------
Stock Option Plan The Board of Directors administers the Company's 1997 Stock Option Plan (the "1997 Plan") and the 2000 Stock Option Plan (the "2000 Plan") each of which provides for grants of incentive and non-qualified stock options to the Company's executive officers, as well as its directors and other key employees, and consultants. Under the two Plans, options are granted to provide incentives to participants to promote long-term performance of the Company and specifically, to retain and motivate senior management in achieving a sustained increase in stockholder value. Currently, none of the Plans has a pre-set formula or criteria for determining the number of options that may be granted. The exercise price for an option granted is determined by the compensation committee, in an amount not less than 100 percent of the fair market value of the Company's common stock on the date of grant. The compensation committee reviews and evaluates the overall compensation package of the executive officers and determines the awards based on the overall performance of the Company and the individual performance of the executive officers. The Company's stock plans total 50,000 shares of common stock under the 1997 Plan and 50,000 shares of common stock under the 2000 Plan. As of March 31, 2004 options have been granted for all shares reserved under the 1997 Plan and 10,000 shares for the 2000 Plan. Compensation of Directors The Company pays each director a fee of $2,500 per year, plus a meeting fee of $2,000 for each board meeting attended . Performance Graph The following graph compares the cumulative total return on a $100 investment in the company's common stock on December 31, 1999 through December 31, 2003, based on the company's closing stock price on December 31, for each of those years. The same information is provided using the Standard & Poor's 500 index and for an industry peer group1. [GRAPHIC OMITTED][GRAPHIC OMITTED] ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth as of March 31, 2004, certain information with respect to all stockholders known by the company to own beneficially more than 5% of the outstanding common stock (which is the only outstanding class of securities of the company, except for Series B preferred stock, the ownership of which is immaterial), as well as information with respect to the company's common stock owned beneficially by each director, director nominee, and current executive officer whose compensation from the company in 2003 exceeded $100,000, and by all directors and executive officers as a group. Unless otherwise indicated, each of these stockholders has sole voting and investment power with respect to the shares beneficially owned. All share numbers have been adjusted to reflect the company's one for twenty-five reverse stock split at the close of business on November 30, 2001, the company's one for four stock dividend on February 4, 2002 and the Company's 2 for 1 stock split on October 20, 2003. Common Stock ------------------------------------ Name and Address Number Percent of Beneficial Owner of of Shares Class ----------------------------------------------------------------- Sylvia M. Gilley(1 & 2) 186,884 17.7% 6211 Georgian Court Dallas TX 75240 Victor L. Lund(3) 121,496 12.2% 816 NE 87th Avenue Vancouver WA 98664 Floyd B. Rhoades(4) 78,023 7.7% 95 Argonaut Street Aliso Viego CA 92656 Gene S. Bertcher(5) 72,811 7.3% 1755 Wittington Place Dallas TX 75234 Warwick Summit Square, Inc..(6) 200130 20.2% TacCo Financial, Inc.(7) 28,596 2.9% One Hickory Center 1800 Valley View Lane Dallas TX 75234 International Health Products, 9,970 1.0% Inc.(7) One Hickory Center 1800 Valley View Lane Dallas TX 75234 All executive officers and 194,307 19.5% directors as a group(five persons) (1) The shares are owned by a grantor trust for the benefit of Sylvia M. Gilley, the widow of James R. Gilley. (2) Consists of 92,284 shares of common stock owned by JRG Investments Co., Inc., a corporation wholly owned by Sylvia M. Gilley ("JRG"); 11,000 shares of common stock owned by a grantor trust for the benefit of Sylvia M. Gilley, 53,600 shares of common stock owned of record by Mrs. Gilley options to James R. Gilley to purchase 20,000 shares of common stock at $6.90 per share exercisable through December 31, 2009; options to James R. Gilley to purchase 20,000 shares of common stock at $3.75 per share, exercisable through December 31, 2010; options to James R. Gilley to purchase 20,000 shares of common stock at $6.40 per share, exercisable through December 31, 2011;. The shares owned by JRG are pledged to TacCO Financial, Inc. (formerly known as Institutional Capital Corporation and more formerly known as MS Holding Corp.), a non-affiliated entity, as collateral for repayment of a promissory note payable by JRG to Institutional Capital Corporation in the remaining principal amount of $2,996,373. (3) Consists of 121,496 shares of common stock owned by Mr. Lund. (4) Consists of 58,023 shares of common stock owned by Mr. Rhoades, options to Mr., Rhoades to purchase 20,000 shares of common stock at $175.00 per share, and 58 shares owned by his spouse. Mr. Rhoades disclaims beneficial ownership of shares owned by his spouse. (5) Consists of 72,811 shares of common stock owned by Mr. Bertcher (6) Consists of 200130 shares of common stock owned by Warrick Summit Square, Inc (Warrick). (7) Based on a Schedule 13D, dated March 17, 2004, filed by each of these entities and by Gene E. Phillips, each of these entities owns of record the number of shares set forth for such entity in the table above and each of such entities and Mr. Phillips acknowledge they filed such Schedule 13D as a "group". According to the Schedule 13D, TacCo Financial, Inc. may be deemed to beneficially own 28,596 shares. and International Health Products, Inc. may be deemed to beneficially own 9,970 shares. The Schedule 13D further indicates that Warrick has a note payable to a subsidiary of TacCo Financial, Inc. in the amount of $1,752,984.The note is secured by a pledge of all the outstanding shares of Warwick . ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Certain Relationships and Related Transactions The following paragraphs describe certain transactions between the company and any stockholder beneficially owning more than 5% of the outstanding common stock, the executive officers and directors of the company and members of the immediate family or affiliates of any of them, which occurred since the beginning of the 1999 fiscal year. On November 19, 1993 the company sold 10,000 unregistered shares of its common stock to The April Trust, a grantor trust for the benefit of James R. Gilley, Chairman, President and Chief Executive Officer of the company, and his wife, at a price equal to the closing price of the shares on the American Stock Exchange on that date ($281.25) per share for consideration consisting of a $2,250,000 promissory note (for which Mr. Gilley is a co-maker) for the full purchase price thereof, of which $450,000 of the principal amount of the note is a recourse obligation of Mr. Gilley and the grantor trust and the balance of the note is non-recourse. The note bears interest at a rate of 5.5% per annum, which accrues and is payable along with all principal upon maturity on November 18, 2003, and is secured by a pledge of the stock back to the company to hold as collateral for payment of the note pending payment in full. On December 16,1996, the compensation committee extended the due date of the note to November 18, 2008. Effective December 31, 2002 April Trust and the Company agreed to cancel the $2,250,000 promissory note. The 10,000 shares were returned to the Company. From an unrelated matter the Company has a note due James R Gilley's estate of $1,081,000. This note was reduced to $631,000 to reflect the $450,000 recourse portion of the $2,250,000 promissory note. Gene S. Bertcher, an officer of the company, was indebted to the company for an aggregate of $92,500, for notes issued in 1993 as payment for shares of Common Stock. Mr. Bertcher's notes were secured by a pledge of 650 shares of common stock. Such notes bore interest at a rate equal to any cash or stock dividends declared on the purchased stock and were due in a single installment for each such note on or before October 1, 2002. Upon maturity of the note the stock was returned to the Company in full satisfaction of the obligation. As part of the Wedgwood Acquisition and as an accommodation to the sellers to assist them to help achieve a tax-free acquisition, James R. Gilley and members of his family agreed to contribute a retail property in North Carolina to the company in exchange for 27,000 shares of the company's Series D preferred stock. Mr. Gilley and his family had owned the retail property for over five years. The consideration received by James R. Gilley and members of his family, valued at $3,375,000, was based upon an independent appraisal of the North Carolina shopping center. The Series D preferred stock is unregistered, has no trading market unless converted to common stock and is entitled to one vote per share on all matters to come before a meeting of stockholders. The Series D preferred stock bears a cumulative quarterly dividend of 9.5% per year, which approximates the cash flow Mr. Gilley and his family members were receiving from the retail property prior to its contribution to the company. Mr. Gilley and his family members and affiliates transferred all of the shares of Series D preferred stock to The April Trust effective April 1997. On July 1, 2001 the Series D Preferred Stock was converted to a note due June 30, 2004. The note bears interest at the rate of 10% per annum. The Company owned a 56% interest in a partnership, which owned two assisted living communities in Oklahoma. The partnership leased the two communities to an independent third party for three years and entered into a future sales contract that obligated the lessee to purchase the two communities at the end of the lease. If the transaction were completed as planned the Company would receive $1,120,000 for its 56% interest. To reduce its debt the Company entered into an agreement with Sylvia Gilley to transfer its 56% interest to the Sylvia Gilley in exchange for a reduction in the debt of $1,120,000, which reduced its obligation to Sylvia Gilley to $2,255,000. It is anticipated that in the future the company's executive officers will participate in the profits or losses derived from the company's involvement in real estate and senior living property partnerships. The company feels that allowing these officers to participate as partners instead of drawing large salaries will allow the company to hold down its overhead while rewarding those executive officers who help the company prosper. It is the policy of the company that all transactions between the company and any officer or director, or any of their affiliates, must be approved by non-management members of the board of directors of the company. All of the transactions described above were so approved. ITEM 14: PRINCIPAL ACCOUNTING FEES AND SERVICES Audit Fees Farmer, Fuqua & Huff's fees for our 2003 annual audit and review of interim financial statements is estimated to be $40,000. All Other Fees Grant Thornton's fees for all other professional services rendered to the Company during 2003 were $136,783, including audit related services of $94,259 and non-audit services of $42,524. Audit related services included fees for statutory audits, lender required audits and accounting consultations. Non-audit services included fees for tax preparation and tax consultations. Audit Committee Under the Sarbanes-Oxley Act of 2002 (the "SO Act"), and the rules of the Securities and Exchange Commission (the "SEC"), the Audit Committee of the Board of Directors is responsible for the appointment, compensation and oversight of the work of the independent auditor. The purpose of the provisions of the SO Act and the SEC rules for the Audit Committee role in retaining the independent auditor is two-fold. First, the authority and responsibility for the appointment, compensation and oversight of the auditors should be with directors who are independent of management. Second, any non-audit work performed by the auditors should be reviewed and approved by these same independent directors to ensure that any non-audit services performed by the auditor do not impair the independence of the independent auditor. To implement the provisions of the SO Act, the SEC issued rules specifying the types of services that an independent may not provide to its audit client, and governing the Audit Committee's administration of the engagement of the independent auditor. As part of this responsibility, the Audit Committee is required to pre-approve the audit and non-audit services performed by the independent auditor in order to assure that they do not impair the auditor's independence. Accordingly, the Audit Committee has adopted a pre-approval policy of audit and non-audit services (the "Policy"), which sets forth the procedures and conditions pursuant to which services to be performed by the independent auditor are to be pre-approved. Consistent with the SEC rules establishing two different approaches to pre-approving non-prohibited services, the Policy of the Audit Committee covers Pre-approval of audit services, audit-related services, international administration tax services, non-U.S. income tax compliance services, pension and benefit plan consulting and compliance services, and U.S. tax compliance and planning. At the beginning of each fiscal year, the Audit Committee will evaluate other known potential engagements of the independent auditor, including the scope of work proposed to be performed and the proposed fees, and the approve or reject each service, taking into account whether services are permissible under applicable law and the possible impact of each non-audit service on the independent auditor's independence from management. Typically, in addition to the generally pre-approved services, other services would include due diligence for an acquisition that may or may not have been known at the beginning of the year. The Audit Committee has also delegated to any member of the Audit Committee designated by the Board or the financial expert member of the Audit Committee responsibilities to pre-approve services to be performed by the independent auditor not exceeding $25,000 in value or cost per engagement of audit and non-audit services, and such authority may only be exercised when the Audit Committee is not in session.
PART IV ITEM 15: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are filed as a part of the report: (1) FINANCIAL STATEMENTS: The following financial statements of the Registrant and the Report of Independent Public Accountants therein are filled as part of this Report on Form 10-K: Report of Farmer, Fuqua & Huff, P.C......................F-1 Report of Grant Thornton, LLP............................F-1a Consolidated Balance Sheets..............................F-2 Consolidated Statement of Operations.....................F-4 Consolidated Statement of Changes in Stockholders' EquityF-5 Consolidated Statements of Cash Flows....................F-6 Notes to Consolidated Financial Statements...............F-8 (2)......FINANCIAL STATEMENT SCHEDULES: Other financial statement schedules have been omitted because the information required to be set forth therein is not applicable, is immaterial or is shown in the consolidated financial statements or notes thereto. (b) REPORTS ON FORM 8-K: The Company did not file any reports on Form 8-K during the quarterly period ended December 31, 2002. (c) Exhibits: The following exhibits are filed as part of, or incorporated by reference into, this Report on Form 10-K: Exhibit Number Description of Exhibit -------------- -------------------------------------------------------------------------------------------- 2.1.1 Stock Purchase Agreement between Villa Residential Care Homes, Inc., William A. Shirley, Jr. and Greenbriar Corporation ("Registrant") (filed as Exhibit 2.1.1 to Registrant's Form 8-K Current Report on January 13, 1998 and incorporated herein by this reference). 2.1.2 Exchange Agreement between Villa Residential Care Homes-Corpus Christi South, L.P. and Greenbriar Corporation ("Registrant") (filed as Exhibit 2.1.2 to Registrant's Form 8-K Current Report on January 13, 1998 and incorporated herein by this reference). 2.1.3 Exchange Agreement between Villa Residential Care Homes-Granbury, L.P. and Greenbriar Corporation ("Registrant") (filed as Exhibit 2.1.3 to Registrant's Form 8-K Current Report on January 13, 1998 and incorporated herein by this reference). 2.1.4 Exchange Agreement between Villa Residential Care Homes-Oak Park, L.P. and Greenbriar Corporation ("Registrant") (filed as Exhibit 2.1.4 to Registrant's Form 8-K Current Report on January 13, 1998 and incorporated herein by this reference). 2.1.5 Exchange Agreement between Villa Residential Care Homes-Fort Worth East, L.P. and Greenbriar Corporation ("Registrant") (filed as Exhibit 2.1.5 to Registrant's Form 8-K Current Report on January 13, 1998 and incorporated herein by this reference). 2.1.6 Exchange Agreement between William A. Shirley, Jr., Lucy M. Brody and C. Kent Harrington and Greenbriar Corporation ("Registrant") (filed as Exhibit 2.1.6 to Registrant's Form 8-K Current Report on January 13, 1998 and incorporated herein by this reference). 2.1.7 Certificate of Decrease in Authorized and Issued Shares dated November 27, 2001, and filed with the State of Nevada on November 30, 2001. 2.2.1 Stock Purchase Agreement between Lone Star Opportunity Fund, L.P. and Greenbriar Corporation ("Registrant") filed as Exhibit 2.2.1 of Registrant's Form 10-KSB for the year ended December 31, 1997. 2.2.4 Form of Registration Rights Agreement between Registrant and Lone Star Opportunity Fund, L.P. as regards 1,400,000 shares of Registrant's Series F Senior Convertible Preferred Stock and 800,000 shares of Registrant's Series G Senior Non-Voting Preferred Stock filed as Exhibit 2.2.4 of Registrant's Form 10-KSB for the year ended December 31, 1997. 2.2.5 Agreement between Lone Star Opportunity Fund, L.P. and Registrant regarding certain minimum values of Registrant's stock filed as Exhibit 2.2.5 of Registrant's Form 10-KSB for the year ended December 31, 1997. 3.1 Articles of Incorporation of Medical Resource Companies of America ("Registrant") (filed as Exhibit 3.1 to Registrant's Form S-4 Registration Statement, Registration No. 33-55968, and incorporated herein by this reference). 3.1.1 Restated Articles of Incorporation of Greenbriar Corporation. 3.2 Bylaws of Registrant (filed as Exhibit 3.2 to Registrant's Form S-4 Registration Statement, Registration No. 33-55968, and incorporated herein by this reference). 3.2.1 Amendment to Section 3.1 of the Bylaws of Registrant adopted upon approval of the Merger (filed as Exhibit 3.2.1 to Registrant's Form S-4 Registration Statement, Registration No. 33-55968, and incorporated herein by this reference). 3.3 Certificate of Decrease in Authorized and Issued Shares. 4.1.2 Certificate of Designations, Preferences and Rights of Preferred Stock dated May 7, 1993, relating to Registrant's Series B Preferred Stock (filed as Exhibit 4.1.2 to Registrant's Form S-3 Registration Statement, Registration No. 33-64840, and incorporated herein by this reference. 4.1.4 Certificate of Designations, Preferences and Rights of Preferred Stock dated March 15, 1996, relating to Registrants' Series D Preferred Stock. 4.1.6 Certificate of Voting Powers, Designations, Preferences and Rights of Registrant's Series F Senior Convertible Preferred Stock dated December 31, 1997, filed as Exhibit 2.2.2 of Registrant's Form 10-KSB for the year ended December 31, 1997. 4.1.7 Certificate of Voting Powers, Designations, Preferences and Rights of Registrant's Series G Senior Non-Voting Convertible Preferred Stock dated December 31, 1997, filed as Exhibit 2.2.3 of Registrant's Form 10-KSB for the year ended December 31, 1997. 10.3.2 Form of $62,500 Promissory Note dated December 27, 1991 payable to Registrant by Gene S. Bertcher representing the purchase price for 250,000 shares (50,000 post December 1995 shares) of Registrant's Common Stock (filed as Exhibit 10.3.2 to Registrant's Form S-4 Registration Statement, Registration No. 33-55968, and incorporated herein by this reference). 10.3.3 Form of Renewal of Promissory Note dated October 14, 1992 extending the maturity date of the Promissory Note referenced in Exhibit 10.3.2 (filed as Exhibit 10.3.3 to Registrant's Form S-4 Registration Statement, Registration No. 33-55968, and incorporated herein by this reference). 10.3.4 Form of Security Agreement - Pledge (Non-recourse) between Gene S. Bertcher and Registrant securing the Promissory Note referenced in Exhibit 13.3.2. (Filed as Exhibit 10.3.4 to Registrant's Form S-4 Registration Statement, Registration No. 33-55968, and incorporated herein by this reference). 25 26 10.4 Form of Umbrella Agreement between Greenbriar Corporation, James R. Gilley and Jon Harder, Sunwest Management, Inc. et al. 10.4.2 Form of $75,000 Promissory Note dated October 12, 1992 payable to Registrant by Robert L. Griffis representing the purchase price for 150,000 shares (30,000 post December 1995 shares) of Registrant's Common Stock (filed as Exhibit 10.4.2 to Registrant's Form S-4 Registration Statement, Registration No. 33-55968, and incorporated herein by this reference). 10.4.3 Form of Security Agreement - Pledge (Non-recourse) between Registrant and Robert L. Griffis securing the Promissory Note referenced in Exhibit 10.4.2 (filed as Exhibit 10.4.3 to Registrant's Form S-4 Registration Statement, Registration No. 33-55968, and incorporated herein by this reference). 10.6.1 Form of Stock Option to purchase 100,000 shares (20,000 post December 1995 shares) of Registrant's Common Stock issued to Oscar Smith on October 1, 1992 (filed as Exhibit 10.6.1 to Registrant's Form S-4 Registration Statement, Registration No. 33-55968, and incorporated herein by this reference). 10.6.2 Form of $50,000 Promissory Note dated October 1, 1992 payable to Registrant by Oscar Smith representing the purchase price for 100,000 shares (20,000 post December 1995 shares) of Registrant's Common Stock (filed as Exhibit 10.6.2 to Registrant's Form S-4 Registration Statement, Registration No. 33-55968, and incorporated herein by this reference). 10.6.3 Form of Security Agreement - Pledge (Non-recourse) between Registrant and Oscar Smith securing the Promissory Note referenced in Exhibit 10.6.2 (filed as Exhibit 10.6.3 to Registrant's Form S-4 Registration Statement, Registration No. 33-55968, and incorporated herein by this reference). 10.7.1 Form of Stock Option to purchase 80,000 shares (16,000 post December 1995 shares) of Registrant's Common Stock issued to Lonnie Yarbrough on October 12, 1992 (filed as Exhibit 10.7.1 to Registrant's Form S-4 Registration Statement, Registration No. 33-55968, and incorporated herein by this reference). 10.7.2 Form of $40,000 Promissory Note dated October 12, 1992 payable to Registrant by Lonnie Yarbrough representing the purchase price for 80,000 shares (16,000 post December 1995 shares) of Registrant's Common Stock (filed as Exhibit 10.7.2 to Registrant's Form S-4 Registration Statement, Registration No. 33-55968, and incorporated herein by this reference). 10.7.3 Form of Security Agreement - Pledge (non-recourse) between Registrant and Lonnie Yarbrough securing the Promissory Note referenced in Exhibit 10.7.2 (filed as Exhibit 10.7.3 to Registrant's Form S-4 Registration Statement, Registration No. 33-55968, and incorporated herein by this reference). 10.9.6 Form of $62,500 promissory note dated December 29, 1994, payable to Registrant by L.A. Tuttle representing the purchase price of 50,000 shares (10,000 post December 1995 shares) of Registrant's Common Stock (filed as Exhibit 10.9.6 to Registrant's Form 10-KSB for the year ended December 31, 1994). 10.9.7 Form of Security Agreement-Pledge between Registrant and L.A. Tuttle securing the promissory note reference in Exhibit 10.9.6 (filed as Exhibit 10.9.7 to Registrant's Form 10-KSB for the year ended December 31, 1994). 10.13.1 Registrant's 1992 Stock Option Plan (filed as Exhibit 10.13 to Registrant's Form S-4 Registration Statement, Registration No. 33-55968, and incorporated herein by this reference). 10.13.2 Registrant's 1997 Stock Option Plan (filed as Exhibit 4.1 to Registrant's Form S-8 Registration Statement, Registration No. 333-33985 and incorporated herein by this reference). 10.13.3 Registrant's 2000 Stock Option Plan (filed as Exhibit 4.1 to Registrant's Form S-8 Registration Statement, Registration No. 333-50868 and incorporated herein by this reference). 10.21.1 Extended and Consolidated Promissory Note in the principal amount of $5,700,000 dated effective May 23, 1992 payable by JRG Investment Co., Inc. to M.S. Holding Co. Corp. (filed as Exhibit 10.22.1 to Registrant's Form S-4 Registration Statement, Registration No. 33-55968, and incorporated herein by this reference). 10.22.2 Extended and Consolidated Pledge Agreement dated effective May 23, 1992 between JRG Investment Co., Inc. and M.S. Holding Co. Corp. securing the Note referenced in Exhibit 10.22.1 (filed as Exhibit 10.22.2 to Registrant's Form S-4 Registration Statement, Registration No. 33-55968, and incorporated herein by this reference). 10.22.3 Pledge Agreement dated as of May 23, 1992 between James R. Gilley and M.S. Holding Co. Corp. (filed as Exhibit 10.22.3 to Registrant's Form S-4 Registration Statement, Registration No. 33-55968, and incorporated herein by this reference). 10.22.4 Irrevocable Proxy from James R. Gilley to M.S. Holding Co. Corp. relating to shares of capital stock of JRG Investment Co., Inc. (filed as Exhibit 10.22.4 to Registrant's Form S-4 Registration Statement, Registration No. 33-55968, and incorporated herein by this reference). 10.22.5 Blank Assignment and Power of Attorney signed by JRG Investment Co., Inc. relating to 482,000 (96,400 post December 1995 shares) shares of Registrant's Common Stock (filed as Exhibit 10.22.5 to Registrant's Form S-4 Registration Statement, Registration No. 33-55968, and incorporated herein by this reference). 10.22.6 Blank Assignment and Power of Attorney signed by JRG Investment Co., Inc. relating to 1,268,000 shares (236,600 post December 1995 shares) of Registrant's Common Stock (filed as Exhibit 10.22.6 to Registrant's Form S-4 Registration Statement, Registration No. 33-55968, and incorporated herein by this reference). 10.22.7 Three Blank Assignments and Powers of Attorney signed by JRG Investment Co., Inc., each relating to 600,000 shares (120,000 post December 1995 shares) of Registrant's Common Stock (filed as Exhibit 10.22.7 to Registrant's Form S-4 Registration Statement, Registration No. 33-55968, and incorporated herein by this reference). 10.22.8 Blank Assignment and Power of Attorney signed by JRG Investment Co., Inc. relating to 2,281,818 shares of Registrant's Common Stock (filed as Exhibit 10.22.8 to Registrant's Form S-4 Registration Statement, Registration No. 33-55968, and incorporated herein by this reference). 10.22.9 Blank Assignment and Power of Attorney signed by JRG Investment Co., Inc. relating to 905,557 shares of Registrant's Series A Preferred Stock (filed as Exhibit 10.22.9 to Registrant's Form S-4 Registration Statement, Registration No. 33-55968, and incorporated herein by this reference). 10.37 Employment Agreements dated December 31, 1996 10.37.1 Modified Employment Contract between the Company and James R. Gilley 10.37.2 Modified Employment Contract between the Company and Gene S. Bertcher 10.38 Stock Purchase Warrant dated December 31, 1996 between registrant and The April Trust 10.39 Portfolio Divestiture Agreement between certain subsidiaries of the Company, the Company, Health Care REIT and HCRI Texas Properties, Ltd. 14* Code of Ethics for Senior Financial Officers 16.1 Letter from Grant Thornton, LLP agreeing with statements filed with the Company's Form 8-K, dated February 9, 2004 and incorporated herein by reference. 21.1* Subsidiaries of Registrant. 23.1* Consent of Farmer, Fuqua & Hunt, P.C. 23.2* Consent of Grant Thornton, LLP 31.1* Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Rule 13a-14(a) or Rule 15d-14(a) 32.1* Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Rule 13a-14(b), 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 99.1 Press Release regarding a pre-assessment letter from the Internal Revenue Service dated January 8, 2004, filed with the Company's Form 8-K on January 8, 2004, and incorporated herein by reference. * Filed herewith.
SIGNATURES In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934 (the "Act"), the Company has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized GREENBRIAR ORPORATION April 11, 2003 by: /s/ Gene S. Bertcher Gene S. Bertcher, President, Chief Executive Officer\ and Chairman of the Board of Directors In accordance with the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. April 11, 2003 ____/s/ Gene S. Bertcher___________ -------------------- Gene S. Bertcher, President, Chief Executive Officer and Director April 11, 2003 ___/s/ Roz Campesi Beadle________ ---------------------- Roz Campesi Beadle, Director April 11, 2003 ___/s/ James Huffstickler__________ James Huffstickler, Director April 11, 2003 ___/s/ Dan Locklear______________ Dan Locklear, Director April 11, 2003 ___/s/ Victor Lund_______________ Victor. Lund, Director 27 Report of Independent Certified Public Accountants Board of Directors and Stockholders Greenbriar Corporation We have audited the accompanying consolidated balance sheet of Greenbriar Corporation (a Nevada corporation) and subsidiaries as of December 31, 2003 and the related consolidated statements of operations, changes in stockholders' equity and cash flows for the year ended December 31, 2003. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Greenbriar Corporation and subsidiaries as of December 31, 2003, and the consolidated results of their operations and their consolidated cash flows for the year ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note P to the consolidated financial statements, the Company was notified by the Internal Revenue Service of potential penalties that may be assessed against the Company as a result of the sale of certain bonds in 1992. The Company is currently in discussions with the Internal Revenue Service to resolve the matter. The Company cannot predict the outcome of these discussions, nor the ultimate amount of penalties, if any, which may be assessed. This condition raises substantial doubt about the Company's ability to continue as a going concern. These consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ FARMER, FUQUA & HUFF, P.C. Plano, Texas April 13, 2004 Report of Independent Certified Public Accountants Board of Directors and Stockholders Greenbriar Corporation We have audited the accompanying consolidated balance sheet of Greenbriar Corporation (a Nevada corporation) and subsidiaries as of December 31, 2002, and the related consolidated statements of operations, changes in stockholders' equity and cash flows for each of the two years in the period ended December 31, 2002. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Greenbriar Corporation and subsidiaries as of December 31, 2002, and the consolidated results of their operations and their consolidated cash flows for each of the two years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. As discussed in Note O to the consolidated financial statements, on January 1, 2002, the Company adopted the provisions of Statement of Financial Accounting Standards No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets." /s/ GRANT THORNTON, LLP Dallas, Texas March 18, 2003
Greenbriar Corporation and Subsidiaries CONSOLIDATED BALANCE SHEETS (Amounts in thousands) December 31, ASSETS 2003 2002 -------- -------- CURRENT ASSETS Cash and cash equivalents $ 688 $ 661 Accounts receivable - trade 100 22 Notes receivable 2,435 1,238 Other current assets, net 198 323 -------- -------- Total current assets 3,421 2,244 NOTES RECEIVABLE, from sale of properties 4,107 7,997 Less deferred gains (3,720) (6,127) -------- -------- 387 1,870 PROPERTY AND EQUIPMENT, AT COST Land and improvements 2,758 678 Buildings and improvements 9,410 6,850 Equipment and furnishings 1,317 1,387 Proven oil and gas properties (full cost method) 1,361 -- -------- -------- 14,846 8,915 Less accumulated depreciation, depletion, and amortization (2,233) (2,282) -------- -------- 12,613 6,633 DEFERRED INCOME TAX BENEFIT 1,161 1,161 DEPOSITS 232 311 OTHER ASSETS, NET 317 405 -------- -------- $ 18,131 $ 12,624 ======== ========
F-2
Greenbriar Corporation and Subsidiaries CONSOLIDATED BALANCE SHEETS - CONTINUED (Amounts in thousands, except share amounts) December 31, LIABILITIES AND STOCKHOLDERS' EQUITY 2003 2002 -------- -------- CURRENT LIABILITIES Current maturities of long-term debt, including amounts To related parties of $2,783,000 $ 4,690 $ 113 Current notes payable 5,571 -- Accounts payable - trade 503 405 Accrued expenses 633 367 Other current liabilities 931 668 -------- -------- Total current liabilities 12,328 1,553 LONG-TERM DEBT 2,053 8,479 INVESTMENT IN AFFILIATE -- 46 DEFERRED GAIN 740 740 OTHER LONG-TERM LIABILITIES 456 455 -------- -------- Total liabilities 15,577 11,273 CONTINGENCIES -- -- STOCKHOLDERS' EQUITY Preferred stock (liquidation value of $100) 1 1 Common stock, $.01 par value; authorized, 4,000,000 shares; issued and outstanding, 977,000 shares in 2003 and 688,000 in 2002 10 7 Additional paid-in capital 55,966 54,988 Accumulated deficit (53,423) (53,645) -------- -------- 2,554 1,351 -------- -------- $ 18,131 $ 12,624 ======== ========
The accompanying notes are an integral part of these statements. F-3
Greenbriar Corporation and Subsidiaries CONSOLIDATED STATEMENTS OF OPERATIONS (Amounts in thousands, except share amounts) Year ended December 31, 2003 2002 2001 -------- -------- -------- Revenue Assisted living operations $ 4,585 $ 4,422 $ 23,568 Oil and gas operations 449 -- -- -------- -------- -------- 5,034 4,422 23,568 -------- -------- -------- Operating expenses Assisted living operations 2,522 2,233 15,006 Oil and gas operations 400 -- -- Lease expense 1,412 1,618 2,391 Depreciation, depletion, and amortization 331 321 2,035 Termination of employment contracts -- -- 1,349 General and administrative 1,111 2,329 4,875 Management fees 35 -- -- Write-down of assets -- 266 1,887 -------- -------- -------- 5,811 6,767 27,543 -------- -------- -------- Operating loss (777) (2,345) (3,975) Other income (expense) Interest and dividend income 304 412 212 Interest expense (705) (840) (3,280) Net gain on sale of assets 1,058 930 -- Other income (expense), net 342 (1,153) 16,602 -------- -------- -------- 999 (651) 13,534 -------- -------- -------- Earnings (loss) before income taxes 222 (2,996) 9,559 Income tax expense -- 749 2,824 -------- -------- -------- Earnings (loss) from continuing operations 222 (3,745) 6,735 Discontinued operations Loss from operations -- (627) (317) Loss on disposal, including taxes of $440 -- (4,001) -- -------- -------- -------- Loss from discontinued operations -- (4,628) (317) -------- -------- -------- NET EARNINGS (LOSS) 222 (8,373) 6,418 Preferred stock dividend requirement -- (4) (160) -------- -------- -------- Net earnings (loss) allocable to common stockholders $ 222 $ (8,377) $ 6,258 ======== ======== ========
The accompanying notes are an integral part of these statements. F-4
Greenbriar Corporation and Subsidiaries CONSOLIDATED STATEMENTS OF OPERATIONS - Continued (Amounts in thousands, except share amounts) Year ended December 31, 2003 2002 2001 ----------- ----------- ----------- Basic and diluted earnings (loss) per share Continuing operations $ .31 $ (4.88) $ 8.15 Discontinued operations -- (6.79) (.39) ----------- ----------- ----------- Net earnings (loss) per share $ .31 $ (11.67) $ 7.76 =========== =========== =========== Weighted average number of common shares outstanding: Basic and diluted 706,000 718,000 806,000
The accompanying notes are an integral part of these statements. F-4
Greenbriar Corporation and Subsidiaries CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (Amounts in thousands) Preferred stock Common stock -------------------- -------------------- Shares Amount Shares Amount -------- -------- -------- -------- Balance at January 1, 2001 2,521 254 730 7 Accretion of redemption obligation - preferred stock -- -- -- -- Conversion of preferred stock to common stock (1,845) (185) 106 1 Conversion of preferred stock to debt (675) (68) -- -- Dividends on preferred stock -- -- -- -- Common stock acquired -- -- (118) (1) Net earnings -- -- -- -- -------- -------- -------- -------- Balance at December 31, 2001 1 1 718 7 Write-off of stock purchase notes receivable -- -- (30) -- Dividend on preferred stock -- -- -- -- Other -- -- -- -- Stock purchase notes receivable reclassified as a reduction of related party debt -- -- -- -- Net loss -- -- -- -- -------- -------- -------- -------- Balance at December 31, 2002 1 1 688 7 Dividend on preferred stock -- -- -- -- Conversion of obligation to common stock -- -- 23 -- Common stock acquired -- -- (5) -- Common stock issued -- -- 271 3 Net earnings -- -- -- -- -------- -------- -------- -------- Balance at December 31, 2003 1 $ 1 977 $ 10 ======== ======== ======== ========
The accompanying notes are an integral part of this statement. F-5
Greenbriar Corporation and Subsidiaries CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (Amounts in thousands) Stock Additional purchase paid in Accumulated notes capital deficit receivable Total -------- -------- -------- -------- Balance at January 1, 2001 60,288 (51,526) (2,367) 6,656 Accretion of redemption obligation - preferred stock (179) -- -- (179) Conversion of preferred stock to common stock 184 -- -- -- Conversion of preferred stock to debt (3,307) -- -- (3,375) Dividends on preferred stock -- (160) -- (160) Common stock acquired (90) -- -- (91) Net earnings -- 6,418 -- 6,418 -------- -------- -------- -------- Balance at December 31, 2001 56,896 (45,268) (2,367) 9,269 Write-off of stock purchase notes receivable (1,908) -- 1,905 (3) Dividend on preferred stock -- (4) -- (4) Other -- -- 12 12 Stock purchase notes receivable reclassified as a reduction of related party debt -- -- 450 450 Net loss -- (8,373) -- (8,373) -------- -------- -------- -------- Balance at December 31, 2002 54,988 (53,645) -- 1,351 Dividend on preferred stock -- -- -- -- Conversion of obligation to common stock -- -- -- -- Common stock acquired (9) -- -- (9) Common stock issued 987 -- -- 990 Net earnings -- 222 -- 222 -------- -------- -------- -------- Balance at December 31, 2003 $ 55,966 $(53,423) $ -- $ 2,554 ======== ======== ======== ========
Greenbriar Corporation and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands) Year ended December 31, -------------------------------- 2003 2002 2001 -------- -------- -------- Cash flows from operating activities Net earnings (loss) $ 222 $ (8,373) $ 6,418 Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities Depreciation and amortization 330 321 2,329 (Gain) loss from affiliate (131) 612 -- (Gain) loss on sale of properties (1,058) 3,561 (16,635) Employment contract termination -- -- 1,349 Write down of impaired assets -- 266 1,887 Deferred income taxes -- 1,189 2,400 Changes in operating assets and liabilities Accounts receivable - trade (45) 395 252 Other current and noncurrent assets 174 (927) 809 Accounts payable and other liabilities 22 (929) (1,391) -------- -------- -------- Net cash provided by (used in) operating activities (486) (3,885) (2,582) Cash flows from investing activities Purchase of property and equipment (1,225) (285) (24,294) Net repayment of notes receivable 334 -- -- Proceeds from sale of investments -- 1,098 -- Purchase of investments -- -- (1,098) Proceeds from sales of properties 126 7,460 33,550 -------- -------- -------- Net cash provided by (used in) investing activities (765) 8,273 8,158
The accompanying notes are an integral part of these statements. F-7
Greenbriar Corporation and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued (Amounts in thousands) Year ended December 31, --------------------------------------------- 2003 2002 2001 -------- -------- -------- Cash flows from financing activities Proceeds from common stock issuance 792 -- -- Proceeds from borrowings 500 1,730 15,788 Payments on debt (90) (6,699) (18,045) Distributions from equity partnership's financing cash flow 85 -- -- Dividends on preferred stock -- (4) (160) Repurchase of common stock (9) -- -- Extinguishment of preferred stock redemption obligation -- -- (4,200) -------- -------- -------- Net cash provided by (used in) financing activities 1,278 (4,973) (6,617) -------- -------- -------- Net increase (decrease) in cash and cash equivalents 27 (585) (1,041) Cash and cash equivalents at beginning of year 661 1,246 2,287 -------- -------- -------- Cash and cash equivalents at end of year $ 688 $ 661 $ 1,246 ======== ======== ========
F-8 Greenbriar Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Operations -------------------- Greenbriar Corporation, its subsidiaries and affiliates (the "Company") is principally a real estate company which owns or leases retirement specific real estate and an outlet shopping mall. In addition the Company owns oil and gas leases. The Company strives to enhance the value of these properties by proper operations and marketing. The Company can then, if it wishes, sell or lease the properties at their appreciated value. As of December 31, 2003, the Company owns or leases three retirement communities in three states. The Company operates two of the retirement communities with a capacity of 162 residents and leases one community to a third party. The Company owns an outlet shopping mall in Gainesville, Texas with approximately 315,000 square feet of retail space available for lease. In addition the Company owns approximately 200 oil wells in East Texas. These are low production wells with maximum production limits of 20 barrels of oil per day. As of March 31, 2004 there are 50 wells in operation. A summary of the significant accounting policies applied in the preparation of the accompanying consolidated financial statements follows: Principles of Consolidation --------------------------- The consolidated financial statements include the accounts of Greenbriar Corporation and its majority-owned subsidiaries (collectively, the Company) and are prepared on the basis of accounting principles generally accepted in the United States of America. All significant intercompany transactions and accounts have been eliminated. Assisted Living Community Revenue --------------------------------- Assisted living community revenue is reported at the estimated net realizable value based upon expected amounts to be recovered from residents, third party payors, and others for services rendered. Services provided by certain of the Company's communities are reimbursed under various state assistance plans. Depreciation ------------ Depreciation is provided for in amounts sufficient to relate the cost of property and equipment to operations over their estimated service lives, ranging from 3 to 40 years. Depreciation is computed by the straight-line method. F-9 Greenbriar Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE A - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued Use of Estimates ---------------- In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash Equivalents ---------------- The Company considers all short-term deposits and money market investments with a maturity of less than three months to be cash equivalents. Impairment of Notes Receivable ------------------------------ Notes receivable are identified as impaired when it is probable that interest and principal will not be collected according to the contractual terms of the note agreements. The accrual of interest is discontinued on such notes, and no income is recognized until all past due amounts of principal and interest are recovered in full. No notes were deemed to be impaired at December 31, 2002 and 2003. Impairment of Long-Lived Assets ------------------------------- The Company reviews its long-lived assets and certain identifiable intangibles for impairment when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. In reviewing recoverability, the Company estimates the future cash flows expected to result from use of the assets and eventually disposing of them. If the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the asset, an impairment loss is recognized based on the asset's fair value. The Company determines the fair value of assets to be disposed of and records the asset at the lower of fair value less disposal costs or carrying value. Assets are not depreciated while held for disposal. Reclassifications ----------------- Certain prior year amounts have been reclassified to conform with the current year presentation. F-10
NOTE A - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued Stock Options ------------- The Company has elected to follow Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) in its primary financial statements and has provided supplemental disclosures required by Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based Compensation" and by Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure an Amendment of SFAS No. 123." Options were granted at market during 2003 and 2001, are exercisable immediately, and expire 5 and 10 years from date of grant, respectively. SFAS 123 requires disclosure of pro forma net earnings (loss) and pro forma net earnings (loss) per share as if the fair value method had been applied in measuring compensation cost for stock-based awards. Reported and pro forma net earnings (loss) and net earnings (loss) per share amounts are set forth below (in thousands, except per share data): 2003 2002 2001 ------- ------- ------- Net earnings (loss) allocable to common stockholders As reported $ 222 $(8,377) $ 6,258 Deduct: total stock-based compensation under fair value based method for all awards (43) (464) (369) ------- ------- ------- Pro forma $ 179 $(8,841) $ 5,889 ======= ======= ======= Net earnings (loss) per share As reported $ .31 $(11.67) $ 7.76 Pro forma $ .25 $(12.31) $ 7.31
The fair value of these options was estimated at the date of grant during 2003 and 2001 using the Black-Scholes option pricing model with the following weighted-average assumptions: no dividends; expected volatility of 20 percent in 2003, and 317 percent in 2001; risk-free interest rates of 4.24 percent for 2003, 5.0 percent for 2001; and weighted average expected lives of 5 years for 2003 and 6.8 years for 2001. F-11 NOTE A - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued Earnings (Loss) Per Common Share -------------------------------- Basic earnings (loss) per common share is based on the weighted average number of common shares outstanding. Diluted earnings (loss) per share is computed based on the weighted average number of common shares outstanding plus the number of additional common shares that would have been outstanding if dilutive potential common shares had been issued. In 2003, 2002 and 2001, stock options for approximately 140,000, 280,000, and 280,000 shares, respectively, were excluded from diluted shares outstanding because their effect was anti-dilutive. Investment in Affiliate ----------------------- The Company accounts for its investment in affiliate, in which it is a limited partner, by the equity method of accounting. Stock Split and Stock Dividend ------------------------------ The Company declared a one-for-twenty-five reverse stock split effective December 1, 2001. Due to the reduced stock float available in the public market, the Company declared a twenty-five percent stock dividend to stockholders of record on January 25, 2002 and a two-for-one stock split on October 31, 2003. All share data has been restated to give effect to the stock split and stock dividend. Sales of Real Estate -------------------- Gains on sales of real estate are recognized to the extent permitted by SFAS No. 66, "Accounting for Sales of Real Estate." Until the requirements of SFAS No. 66 have been met for full profit recognition, sales are accounted for by the installment or cost recovery method, whichever is appropriate. New Accounting Pronouncements ----------------------------- In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which addresses how and when to measure impairment on long-lived assets and how to account for long-lived assets that an entity plans to dispose of either through sale, abandonment, exchange, or distribution to owners. The Company adopted SFAS No. 144 as of January 1, 2002. See Note O for a discussion of the impact on the Company from the adoption of SFAS No. 144. F-12 NOTE A - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" (FIN 45). FIN 45 requires that upon issuance of a guarantee, a guarantor must recognize a liability for the fair value of an obligation assumed under a guarantee. FIN 45 also requires additional disclosures by a guarantor in its interim and annual financial statements about the obligations associated with guarantees issued. The recognition provisions of FIN 45 are effective for any guarantees issued or modified after December 31, 2002. . The disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. The adoption of FIN 45 is not expected to have a material effect on the Company's financial position or results of operations. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. SFAS No. 148 is effective for fiscal years beginning after December 15, 2002. The interim disclosure provisions are effective for financial reports containing financial statements for interim periods beginning after December 15, 2002. The Company has adopted the disclosure provisions of this statement. In December 2003, the FASB issued a revised FIN 46, "Consolidation of Variable Interest Entities." FIN 46 clarifies the application of Accounting Research Bulletin 51, "Consolidated Financial Statements." For certain entities that do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties or in which equity investors do not have the characteristics of a controlling financial interest ("variable interest entities"). Variable interest entities within the scope of FIN 46 will be required to be consolidated by their primary beneficiary. The primary beneficiary of a variable interest entity is determined to be the party that absorbs a majority of the entity's expected losses, receives a majority of its expected returns, or both. FIN 46 applies immediately to variable interest entities created after December 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first fiscal year or interim period beginning after March 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before January 1, 2004. Our determination is that the adoption of the provisions of FIN 46 will not have a material impact upon our financial condition or results of operations. F-13
NOTE B - CASH FLOW INFORMATION Supplemental information on cash flows is as follows (in thousands): Year ended December 31, ------------------------ 2003 2002 2001 ------ ------ ------ Interest paid $ 515 $2,215 $4,958 Income taxes paid -- 129 82 Noncash investing and financing activities (in thousands): Assets transferred in settlement of preferred stock redemption obligations, net of mortgage loans of $36,981 -- -- 6,837 Notes received from sale of assets -- 1,050 6,400 Note given in connection with purchase of property by affiliated partnership -- -- 1,600 Notes given in connection with purchase of property 5,804 -- -- Common stock received in payment of note receivable -- -- 80 Common stock received in settlement of preferred stock obligation -- -- 11 Common stock issued in connection with satisfaction of note to executive officer 198 -- -- Purchase of oil and gas property in exchange for note receivable 1,169 -- --
NOTE C - DEFERRED GAINS ON SALE OF PROPERTY As a result of the sale of two communities in 2001 the Company holds tax-exempt notes for a total of $4,030,000 bearing interest at 9.5%. The notes mature on April 1, 2032, and August 1, 2031 respectively. The repayment of the notes is limited to the cash flow of the respective properties either from operations, refinancing or sale. The Company has deferred gains in the amount of $3,720,000 and $6,127,000 in 2003 and 2002, respectively. The deferred gains and interest income will be recognized as cash is received. F-14 NOTE D - EMPLOYMENT CONTRACT TERMINATIONS In January 1997, the Company negotiated employment contracts with James Gilley (the then Chief Executive Officer) and Gene Bertcher (the then Chief Financial Officer) of the Company. Both individuals had been employed by the Company since 1989. The employment contracts called for combined annual salaries of $640,000 per year and provided that, if the contracts were terminated or amended, the individuals would be entitled to a cash payment of three years salary for Gilley and two years salary for Bertcher. In light of the reduced size of the Company, the independent directors and the officers in October 2001 agreed to modify the employment agreements with the two officers. The two officers each agreed to continue their roles in the Company for $12,000 per year for three years. The revisions in the contracts triggered contract termination payments requiring the Company to immediately pay the two officers $1,740,000. However, the two officers agreed to accept non-interest bearing notes due December 31, 2004. These notes have certain acceleration provisions if the Company violates the terms of the revised employment contracts. For accounting purposes, interest has been imputed on the notes at 8.5%, resulting in a discount of $391,000. The net amount of the notes of $1,349,000 was expensed in 2001. In 2002, the notes were reduced by $881,600 as an offset for amounts due the company. During 2003, the note to Bertcher was satisfied by issuing stock in the amount of $197,809, net of discount of $29,591. At December 31, 2003, the balance of the notes payable to Gilley, net of remaining discount of $103,000, was $528,000. NOTE E - AFFILIATED PARTNERSHIPS In October 2001, the Company became a 56% limited partner in Corinthians Real Estate Investors LP (CREI), a partnership formed to acquire two properties. The general partner is a limited liability corporation whose controlling member was James Gilley. Mr. Gilley was the former CEO of the Company. Mr. Gilley's estate has a 25.9% interest, the general partner has a .1% interest, the Company's chief financial officer has a 10.5% interest, and other employees of the Company have interests aggregating 7.5%. In October 2001, CREI acquired a retirement community for approximately $9,100,000 and in January 2002, it acquired an assisted living community for approximately $2,800,000. The Company issued a $1,600,000 note to the seller in 2001 as partial payment for the purchase of the retirement community. CREI gave the Company a $1,600,000 note in consideration for payment of that amount of the purchase price. The note bears interest at 8.75% and was due December 30, 2003. The balance of the purchase price was funded by borrowings by CREI from a third party in the amount of $7,840,000, which was guaranteed by the Company. CREI also had debt in the amount of $3,975,000 at December 31, 2001 collateralized by the assisted living community that was guaranteed by the Company. CREI paid both of the latter two amounts in 2002. The Company accounts for its investment in CREI by the equity method. The Company recorded income of $131,733 in 2003 and losses of $692,338 and $95,947 for 2002 and 2001, respectively. These amounts are included in other income (expense), net in the accompanying financial statements. In September 2002, CREI sold its two properties for cash and notes and paid off its debt. As part of the proceeds, CREI received a note for $1,600,000 which was transferred to the Company in satisfaction of its $1,600,000 note receivable from CREI. CREI also assigned to the Company a $400,000 participation in another note in payment of other CREI debt to the Company. F-15 NOTE E - AFFILIATED PARTNERSHIPS - Continued The Company transferred the $1,600,000 note it received in 2002 to the original owner of the retirement community in payment of the Company's $1,600,000 debt. The Company guaranteed payment of the $1,600,000 note. CREI recognized a gain on sale in the amount of $1,322,000. The Company has deferred recognition of its share ($740,000) of the gain because of the aforementioned guaranty. CREI has deferred a gain on sale in the amount $994,000 that will be recognized on the installment method. The Company will realize its $577,000 (56%) portion of the $944,000 upon collection of the notes held by CREI. The notes are due September 30, 2004. In January 2002 the Company became a 56% limited partner in a partnership, Muskogee Real Estate Investors (MREI), which acquired two assisted living communities in Muskogee, OK, including one community acquired from the Company. In September 2002 MREI leased the two communities to a third party for three years. The lessee has committed to purchase the two properties during the three-year period for $6,000,000. The current debt on the property is approximately $4,000,000. The Company had a note to Sylvia M. Gilley, wife of the former CEO of the Company, for $3,375,000. In November 2002, the Company transferred its 56% interest in MREI to Mrs. Gilley in exchange for a reduction of $1,120,000 on the debt and a one-year extension on the due date of the Company's note to Mrs. Gilley. The Company recognized a gain of $929,956 on the transaction. The Company accounted for its investment in MREI using the equity method. The Company recorded income of $80,215 during 2002. In September 2002 the Company entered into an agreement with an independent third party to jointly acquire properties in the future. The third party entity is affiliated with the various entities that acquired or leased the properties from CREI and MREI mentioned above. Affiliates of this group also purchased properties in Harlingen, TX and Sherman, TX from the Company on September 30, 2002 and acquired the Company's interest in entities that operated properties in Roswell, NM and Seaside, OR. The agreement provides that the Company will be allowed to participate in the acquisition of twelve communities and receive a 50% partnership interest. The Company has agreed to pay $660,000, payable at $55,000 per month from October 2002 through September 2003, to cover the due diligence expenses incurred by the third party. The Company's $660,000 obligation has been accrued and charged to expense in 2002. The agreement further provides that at any time during the twenty-four months subsequent to the formation of a partnership and the acquisition of properties, the third party can purchase the Company's partnership interest in each of the 12 properties for a stipulated amount per property. F-17 NOTE E - AFFILIATED PARTNERSHIPS - Continued Following are unaudited condensed financial statements of CREI at December 31, 2002 and 2003 and the years ended December 31, 2002 and December 31, 2003(in thousands): Balance Sheets 2003 2002 ------- ------- Current assets $ 63 $ 67 Notes receivable 994 994 Other assets 165 171 ------- ------- $ 1,222 $ 1,232 ======= ======= Current liabilities $ 228 $ 248 Deferred gain 994 994 ------- ------- 1,222 1,242 Partners' equity (deficit) 142 (10) Distributions (142) -- ------- ------- $ 1,222 $ 1,232 ======= ======= Statements of Operations Revenue $ 164 $ 2,233 Expenses Operating -- 1,284 Depreciation -- 747 General and administrative 12 111 Interest -- 1,328 ------- ------- 152 3,470 ------- ------- Gain on sale of properties -- 1,322 ------- ------- Net income $ 152 $ 85 ======= ======= F-18 NOTE F - FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate values at December 31, 2003 and 2002: Cash and cash equivalents - The carrying amount approximates fair value because of the short maturity of these instruments. Long-term debt - The fair value of the Company's long-term debt is estimated based on market rates for the same or similar issues. The carrying value of long-term debt approximates its fair value. Notes receivable - The fair value of the note receivable from an affiliate partnership is estimated to approximate fair value based on its short maturity. It is not practical to estimate the fair value of notes receivable from sale of properties because no quoted market exists and there are no comparable debt instruments to provide a basis for valuation. NOTE G - ACQUISITION AND SALE OF ASSETS ACQUISITION OF GAYWOOD OIL AND GAS, LLC Effective August 1, 2003 the Company acquired Gaywood Oil & Gas, LLC (Gaywood) a company that has oil and gas leases in the East Texas Field. The oil wells in this field have low but steady oil production. The Texas Railroad Commission, which regulates the oil & gas industry in Texas, limits production in this field to 20 barrels of oil per day for each operating well. There are approximately 200 existing wells on the leases owned by Gaywood. At December 31, 2003 Gaywood had 50 operating wells, generating approximately 4,000 barrels of oil per month. Greenbriar has elected to account for it's oil and gas operations using the full cost method of accounting. Gaywood was formed and acquired the leases in October 2002 however the production was insignificant until January of 2003. The following pro forma financial information reflects Greenbriar as if Gaywood had been acquired on January 1, 2003. Twelve Months Ended December 31, 2003 ----------------- Revenue $5,723,000 Net Earnings $ 247,000 Net Earnings per share $ .35 F-19
ACQUISITION OF GAYWOOD OIL AND GAS, LLC - Continued The Company purchased Gaywood with 9.5% interest bearing bonds which were carried at zero in the Company's financial statements. Gaywood was valued by independent reserve engineers as having a fair market value of $1,169,000 which was recorded as a gain by the Company. The purpose of this acquisition was to acquire a cash flowing asset with future potential value in excess of purchase price. Gaywood was acquired from a trust for the benefit of Mr. Gene E. Phillips' spouse and children. On October 16, 2003 Mr. Phillips and six other entities filed a Schedule 13D with the Securities and Exchange Commission indicating that the six entities owned, in total, 55,000 shares (approximately 8% of the Company's outstanding common stock) and the entire group may be deemed to constitute a person within the meaning of Section 13d of the Securities act of 1934. SALE OF UNDEVELOPED LAND On September 10, 2003 the Company sold on acre of undeveloped land for $125,000 in cash to an entity which has been deemed to be an affiliate of Gene E. Phillips. The sale resulted in a loss of approximately $111,000. ACQUISITION OF GAINESVILLE OUTLET MALL, LLC Effective December 10, 2003 the Company acquired Gainesville Outlet Mall, LLC (Gainesville) a company that has approximately 315,000 square feet of retail space available for lease in Gainesville, Texas. At the time of acquisition Gainesville had approximately 65% of its retail space leased, generating approximately $180,000 of gross rent revenue per month. The Company paid approximately $800,000 in cash at closing, $200,000 in earnest money and due diligence fees, and two short term obligations to pay the seller approximately $5,571,000. The Company has negotiated long term financing and anticipates closing on or before April 30, 2004. NOTE H - NOTES PAYABLE LONG TERM DEBT Long-term debt is comprised of the following (in thousands): December 31, -------------------- 2003 2002 ------ ------ Notes payable to financial institutions maturing through 2015; fixed and variable interest rates ranging from 5.25% to 10.5% ; collateralized by real property, fixtures, equipment and the assignment of rents $2,090 $3,956
F-20
LONG TERM DEBT - Continued December 31, --------------- 2003 2002 ------ ------ Notes payable to individuals and companies maturing through 2023; variable and fixed interest rates ranging from 7% to 14%; collateralized by real property, personal property, fixtures, equipment and the assignment of rents 1,851 1,753 Notes payable to wife of former Chief Executive Officer, bearing interest at 10% and maturing on July 1, 2004 2,255 2,255 Notes payable to executive officers, noninterest-bearing and maturing December 31, 2004, net of discount of $260 and $391 at December 31, 2002 and 2001, respectively, representing interest imputed at 8.5% 528 598 Line of credit with bank, bearing interest at 8% and maturing March 31, 2005 19 30 ------ ------ 6,743 8,592 Less current maturities 4,690 113 ------ ------ $2,053 $8,479 ====== ======
Aggregate annual principal maturities of long-term debt at December 31, 2002 are as follows (in thousands): 2004 4,690 2005 95 2006 104 2007 890 2008 96 Thereafter 868 ------- $ 6,743 CURRENT NOTES PAYABLE The Company has two notes payable to institutions of $4,800,000 and $771,000 at December 31, 2003, bearing interest at a rate of 15% and is presently due by April 30, 2004, as prescribed under the extension terms of the original notes. These notes are secured by real estate and fixtures with a net book value of $6,800,000, as well as an assignment of rents and leases associated with said property. F-21 NOTE I - OPERATING LEASES The Company leases certain communities under operating leases which expire through 2011 and has operating leases for equipment and office space. The leases generally provide that the Company pay property taxes, insurance, and maintenance. Future minimum payments following December 31, 2003 are as follows (in thousands): 2004 $ 827 2005 827 2006 827 2007 844 2008 853 Thereafter 3,588 ------ $7,766 Lease expense in 2003, 2002 and 2001 was $1,412, $1,650, and $3,139, respectively. NOTE J - INCOME TAXES At December 31, 2003, the Company had net operating loss carryforwards of approximately $21,500,000, which expire between 2003 and 2021. However, approximately $7,900,000 of these net operating loss carryforwards have limitations that restrict utilization to approximately $1,530,000 for any one year. The following is a summary of the components of income tax expense of continuing operations (in thousands): Year ended December 31, ------------------------ 2003 2002 2001 ------ ------ ------ Current - state $ -- $ -- $ 424 Deferred - federal -- 749 2,400 ------ ------ ------ $ -- $ 749 $2,824 ====== ====== ====== F-22 NOTE J - INCOME TAXES - Continued Deferred tax assets and liabilities were comprised of the following (in thousands): December 31, -------------------- 2003 2002 -------- -------- Deferred tax assets: Net operating loss carryforwards $ 7,163 $ 7,308 Note receivable 680 680 Alternative minimum tax credit carryforwards 235 235 Accounts receivable -- -- Accrued expenses 2,241 2,285 Financing obligations -- -- Other 583 583 -------- -------- Total deferred tax assets 10,902 11,091 Deferred tax liabilities - property and equipment (3,198) (3,198) Valuation allowance (6,543) (6,732) -------- -------- Net deferred tax asset $ 1,161 $ 1,161 ======== ======== Following is a reconciliation of income tax expense attributable to continuing operations with the amount of tax computed at the federal statutory rate of 34% (in thousands): Year ended December 31, ------------------------------ 2003 2002 2001 ------- ------- ------- Tax expense (benefit) at the statutory rate $ 75 $(1,019) $ 3,250 State taxes net of federal benefit -- -- 380 Change in deferred tax asset valuation allowance, attributable to continuing operations (75) 1,768 (431) Other -- -- (375) ------- ------- ------- Tax expense $ -- $ 749 $ 2,824 ======= ======= ======= Changes in the deferred tax valuation allowance result from assessments made by the Company each year of its expected future taxable income available to absorb its carryforwards. The Company believes that it is more likely than not that the net deferred tax asset at December 31, 2003 of $1,161,000 will be realized. However, this evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. Accordingly, the ultimate realization of the net deferred tax asset could be less than the carrying amount. F-23
NOTE K - STOCKHOLDERS' EQUITY Outstanding Preferred Stock --------------------------- Preferred stock consists of the following (amounts in thousands): Year ended December 31, ----------- 2003 2002 ---- ---- Series B cumulative convertible preferred stock, $.10 par value; liquidation value of $100; authorized, 100 shares; issued and outstanding, 1 share $ 1 $ 1 ==== ====
The Series B preferred stock has a liquidation value of $100 per share and is convertible into common stock over a ten-year period at prices escalating from $500 per share in 1993 to $1,111 per share by 2002. The right to convert expires April 30, 2003. Dividends at a rate of 6% are payable in cash or preferred shares at the option of the Company. Stock Options ------------- In 1997, the Company established a long-term incentive plan (the 1997 Plan) for the benefit of certain key employees. Options granted to employees under the 1997 Plan become exercisable over a period as determined by the Company and may be exercised up to a maximum of 5 years from date of grant. The 1997 Plan allowed up to 50,000 shares of the Company's common stock to be reserved for issuance. In 2000, the Company adopted the 2000 Stock Option Plan, under which up to 50,000 shares of the Company's common stock are reserve for issuance. The Company granted options to two officers during 1996 through 2001, aggregating 80,000 shares not covered by either plan. These options were granted at market, were exercisable immediately, and expire 10 years from date of grant. NOTE K - STOCKHOLDERS' EQUITY - Continued Information with respect to stock option activity is as follows: Weighted average exercise Shares price ------- -------- Outstanding at January 1, 2001 140,850 $ 91.90 Granted 20,000 6.40 - ------- -------- Outstanding at December 31, 2001 160,850 $ 81.28 Expired (5,050) 182.58 - ------- -------- Outstanding at December 31, 2002 155,800 $ 78.00 Granted 60,000 2.60 Cancelled, rescinded, or annulled (70,800) 109.27 Expired (3,000) 112.50 Outstanding at December 31, 2003 142,000 $ 30.27 = ======= ======== Options exercisable at December 31, 2001 160,850 $ 81.28 = ======= ======== Options exercisable at December 31, 2002 155,800 $ 78.00 = ======= ======== Options exercisable at December 31, 2003 142,000 $ 30.27 = ======= ======== Weighted average fair value per share of options granted during 2003 and 2001 was $0.71 and $7.60, respectively. Additional information about stock options outstanding at December 31, 2003 is summarized as follows: Options outstanding and exercisable --------------------------------------------------- Weighted average Number remaining Weighted average Range of exercise prices outstanding contractual life exercise price ------------------------ ----------- ------------------ ---------------- $2.60 60,000 5.0 $ 2.60 $3.75 to $6.90 60,000 7.0 5.68 $100.00 to $150.39 2,000 2.0 150.39 $175.00 20,000 4.0 175.00 F-25 NOTE L - OTHER INCOME (EXPENSE) Other income (expenses) consists of the following: (amounts in thousands) Year ended December 31, -------------------------------- 2003 2002 2001 -------- -------- -------- Gain on sale of properties $ -- $ -- $ 16,635 Equity Earnings in CREI 131 -- -- Property acquisition due diligence expenses -- (660) -- Accrued tenant revenue 121 -- -- Other 90 (493) (33) -------- -------- -------- $ 342 $ (1,153) $ 16,602 ======== ======== ======== NOTE M - WRITE-OFF OF IMPAIRED ASSETS During 2001, the Company identified four properties that were not meeting performance expectations. These properties are in a geographic region where, after the transfer to LSOF, the Company does not have a significant presence. In the fourth quarter of 2001, the Company wrote these properties down to their net realizable value of $5,066,000 with a charge to earnings of $1,887,000. One of these properties was sold in 2002. The Company continues to hold the other three properties. During 2002, the Company wrote off $266,000 related to a property it is attempting to sell. As of December 31, 2003 the Company is not aware of further impairment of remaining assets. F-26 NOTE N - DISCONTINUED OPERATIONS AND SALES OF REAL ESTATE In October 2001, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supersedes FASB SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" and the accounting and reporting provisions for disposals of a segment of a business as addressed in APB Opinion No. 30, "Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions". SFAS No. 144 establishes a single accounting model for long-lived assets to be disposed of by sale and addresses various implementation issues of SFAS No. 121. In addition, SFAS No. 144 extends the reporting requirements of discontinued operations to include components of an entity that have either been disposed of or are classified as held for sale. The Company adopted SFAS No. 144 as of January 1, 2002. During 2002, the Company disposed of six properties. Revenues for the six properties were $4,698,000 and $7,293,000 in 2002 and 2001, respectively. The Company's adoption of SFAS No. 144 resulted in the presentation of the net operating results of these qualifying properties sold during 2002, as loss from discontinued operations for all periods presented. Losses on sale of these properties totaling $4,001,000 (including income tax expense of $440,000) are reflected as losses on sales of real estate from discontinued operations in the accompanying consolidated statements of operations. Financial statements for 2001 have been reclassified to reflect the operations of these properties as discontinued operations. The adoption of SFAS No. 144 did not have an impact on net earnings or loss. Pursuant to SFAS No. 144, the results of operations and gains or losses on properties sold prior to the adoption of SFAS No. 144, are not reflected in discontinued operations. Therefore, the presentation of results of operations for 2002 is not comparable with 2001. NOTE O - SEGMENTS The Company and its subsidiaries are principally engaged in the business of acquiring, enhancing and selling real estate properties. Since 1996 those activities have, almost exclusively, involved assisted living facilities. Effective August 1, 2003 the Company acquired 100% of the stock in Gaywood Oil & Gas LLC, a limited liability company that owns working interests in certain oil producing wells. The acquisition was done for investment purposes and substantially all costs associated with the oil and gas operations are operating expenses incurred directly by Gaywood. The Company continues to allocate all of its corporate overhead expenses to its core real estate operation. F-27 NOTE O - SEGMENTS - Continued Segment information and reconciliation to income (loss) from operations are as follows: Twelve months ended December 31, 2003 (amounts in thousands) ------------------------------------- Real Estate Oil & Gas Operations Operations Consolidated ------------------------------------- Revenue $ 4,585 $ 449 $ 5,034 Depletion, depreciation and amortization 290 41 331 Net income 214 8 222 Total assets 16,626 1,361 17,987 NOTE P - CONTINGENCIES BENETIC FINANCIAL VS. WEDGWOOD ET AL: This action is against a subsidiary of the Company as well as other corporate and individual defendants who are unrelated to the Company. In 1993, Wedgwood Retirement Inns entered into a financing arrangement with a third party lender. The plaintiff alleged that he had a verbal brokerage agreement with Wedgwood and was entitled to a fee. The Company acquired Wedgwood in 1996. In a jury trial the plaintiff was awarded $150,000 on one count of his complaint. However, the jury found for the defendants on all other counts. In his final ruling the judge awarded the defendants legal fees that were in excess of the judgment. The plaintiff appealed and on April 30, 2003 the California Court of Appeals let the $150,000 stand but reversed the judge's award of legal fees. Based upon the ruling of the Court of Appeals the defendants are obligated for the judgment plus $165,093 in interest since 1993. The judgment is against all the defendants as a group. The defendants have filed an appeal to the California Supreme Court but the appeal was denied. There are no further legal defenses available. There remains the issue of the allocation of the award among the defendants. Management has provided a reserve that it believes is sufficient to cover its expected liability in this matter. F-28 INTERNAL REVENUE SERVICE EXAMINATION In December 1991 the Company sold four nursing homes to a not-for-profit corporation in exchange for tax exempt bonds issued on behalf or the acquiring corporation by government authorities. In 1992, the bonds were converted to zero coupon status and their value was enhanced by substituting higher grade collateral. The substitute collateral which consisted of zero coupon U.S. Treasury obligations was placed in trust to defease the bonds, in exchange for the underlying mortgage. The bonds were then sold for approximately $67,000,000. A gain was recorded equal to the proceeds received by the Company of $8,333,000 after deducting transaction costs and the cost of the higher grade collateral. On January 8, 2004 the Company was notified by the Internal Revenue Service (IRS) in the form of a Section 6700 Pre-Assessment Letter that the IRS was considering assessing penalties under Section 6700 of the Internal Revenue Code as a result of the Company's organization or assistance in connection with the issuance and sale of the bonds. The transactions which the IRS is examining involved technically complex financial and legal issues and were undertaken on the advise of and reliance on the investment banking firm, the law firms that issued the tax exempt bond legal opinions and other professionals. The Company believed in 1992 and still believes that its actions were appropriate in all respects. The Company and the IRS are engaged in negotiations regarding settling this twelve year old matter, however there is no assurance that any settlement will be achieved. In the absence of a settlement, the Company intends to contest the IRS's position in court. Any litigation may be expensive and time consuming however if this matter is litigated the Company believes that it will prevail on the merits. If the Company were unsuccessful in their negotiations or litigation, the loss could range from $267,000 to $8,333,000. OTHER The Company is defendant in various lawsuits generally arising in the ordinary course of business. Management of the Company is of the opinion that these lawsuits will not have a material effect on the consolidated results of operations, cash flows or financial position of the Company. As discussed in Note F, the Company is guarantor of debt of a third party in the amount of $1,600,000. F-29
NOTE Q - QUARTERLY DATA (UNAUDITED) The table below reflects the Company's selected quarterly information for the years ended December 31, 2003 and 2002. Certain 2003 and 2002 amounts have been reclassified to conform to the current presentation of discontinued operations. Year ended December 31, 2003 ---------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- Revenue $ 1,070 $ 1,118 $ 1,342 $ 1,774 Operating expenses 1,266 1,235 1,491 1,819 Net income (loss) (262) (177) 855 (194) Income (loss) allocable to common shareholders (262) (177) 855 (194) Income (loss) per common share - basic and diluted (.38) (.26) 1.21 (.27) Year ended December 31, 2002 ---------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter Revenue $ 1,237 $ 1,185 $ 1,035 $ 965 Operating expenses 1,810 1,634 1,520 1,803 Net loss (458) (1,037) (4,473) (2,405) Loss allocable to common shareholders (458) (1,037) (4,473) (2,405) Loss per common share - basic and diluted (.64) (1.45) (6.23) (3.35)
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