ITEM 1: DESCRIPTION OF BUSINESS - -------------------------------
Overview and Background of Assisted Living Operations
Greenbriar Corporation (the "Company") is an assisted living company that operates assisted and full service independent living communities designed to serve the needs of the elderly population. Assisted living residents generally comprise frail elderly persons who require assistance with the activities of daily living such as ambulation, bathing, eating, personal hygiene, grooming and dressing, but who do not generally require more expensive skilled nursing care. Independent living residents typically require only occasional assistance but receive other support services. In addition, the Company also develops and operates communities for residents suffering from Alzheimer's or other forms of dementia, a growing specialty within the assisted living industry.
As of March 31, 1999, the Company operated 31 communities in 11 states, with a capacity of 2,830 residents, consisting of 20 communities that are owned and 11 that are leased from third parties. One of the Company's leased properties is managed by a third party.
The Company existed from 1974 until 1989 as a real estate investment trust. In late 1989, control of the Company changed to current management, who undertook to dispose of its REIT properties and establish a new focus on services to and products for the elderly. In 1991 the REIT was reorganized as a Nevada Corporation. Until 1994, the Company's business was the acquisition, operation and sale of retirement, nursing and other healthcare communities, as well as commercial real estate and the manufacture and sale or lease of mobility assistance equipment. In 1994 the Company decided to change its business emphasis to the assisted living industry and by early 1996 it had sold its existing nursing homes and retirement centers, most of its commercial real estate and its mobility equipment subsidiaries.
Beginning in 1995 the Company began developing and constructing assisted living communities; however, the significant growth that occurred was through acquisitions that were completed in 1996 and 1997.
The Assisted Living Industry
The Company believes that the assisted living industry is emerging as a preferred alternative to meet the growing demand for a cost-effective setting in which to care for the elderly who do not require the more intensive medical attention provided by a skilled nursing center but who cannot live independently due to physical or cognitive frailties. In general, assisted living represents a combination of housing, general support services and 24-hour a day personal care services designed to aid elderly residents with the activities of daily living ("ADLs") on a scheduled and unscheduled basis. Many assisted living communities may also provide assistance to residents with low acuity medical needs or may offer higher levels of personal assistance for incontinent residents or residents with Alzheimer's disease or other forms of dementia. There are some assisted living communities, and this seems to be a growing trend who provide care for higher levels of acuity. Generally, assisted living residents have higher levels of need than residents of independent retirement communities but lower than residents in skilled nursing centers. Annual expenditures in the assisted living industry have been estimated to be approximately $13 billion, including communities ranging from "board and care" to full-service assisted living communities such as those operated by the Company.
The Company believes that assisted living is one of the fastest growing segments of elderly care and will continue to experience significant growth due to the following:
Consumer Preference - The Company believes that assisted living is increasingly becoming the setting preferred by prospective residents and their families in which to care for the frail elderly. Assisted living offers residents greater independence in a residential setting which the Company believes results in a higher quality of life than that experienced in more institutional or clinical settings such as skilled nursing centers.
Demographic & Social Trends - The target market for the Company's services is generally persons 75 years and older, one of the fastest growing segments of the U.S. population (the average age of a resident in Assisted Living is typically aged 83 or older and that resident is
either widowed or single). According to the U.S. Census Bureau, the portion of the U.S. population age 75 and older is expected to increase by 28.7%, from approximately 13.0 million in 1990 to over 16.8 million by the year 2000, and the number of persons age 85 and older is expected to increase 39.3% during the 1990s. This age group is projected to increase by 33.2% between the years 2000 and 2010. It is estimated by the United States Bureau of census that approximately 50% of the population of seniors over age 85 need assistance with ADLs and approximately 50% of such seniors develop Alzheimer's disease or other forms of dementia. According to Claritas, Inc., a nationally recognized demographics provider, over 54 % of those individuals 80 years of age and older in 1997 had incomes of $15,000 and above and 35 percent had incomes of $25,000 and above. Accordingly, the Company believes that the number of seniors who are able to afford high-quality residential environments, such as those offered by the Company, has increased in recent years.
Lower Average Cost - The Company believes that the average annual cost to residents receiving assisted living care in the Company's communities is significantly less than the cost of receiving similar care in a skilled nursing center. According to the Marion Merrell Dow Inc. Managed Care Digest Series, Institutional Digest 1995, the average annual cost per person in 1994 in the United States for private nursing home care was approximately $36,000.
Changing Supply of Long-term Care Beds - Most of the states in which the Company currently operates have enacted certificate of need ("CON") or similar legislation that restricts the supply of licensed nursing center beds. These laws generally limit the construction of nursing centers and the addition of beds or services to existing nursing centers, and hence tend to limit the available supply of traditional nursing home beds. In addition, some long-term care centers have started to convert traditional nursing home beds into sub-acute beds. The Company also believes that high construction costs and limits on government reimbursement for the full cost of construction and start-up expenses also will constrain the growth and supply of traditional nursing home centers and beds. The Company expects that this tightening supply of nursing beds coupled with the aging population will create an increased demand for assisted living communities.
Business Strategy
The Company believes that significant growth opportunities exist to provide assisted living services to the rapidly growing elderly population. The Company has expanded its operations through the acquisition of individual communities and assisted living companies. The Company also seeks to improve the operating performance of its communities through the continued enhancement of its operations.
The majority of the Company's current communities are operated and marketed on a private-pay, single occupancy basis. Most double occupancy is non-related people who are state-assisted residents. Most of the Company's state-assisted residents are in Texas and North Carolina communities. Texas is one of several states that has a Medicaid waiver program currently operating. North Carolina has one of the best reimbursement rates in the nation for assisted living and was a pioneer in supporting the development of assisted living as one way of containing the cost of caring for the state's aging population.
As America ages, the Company believes that more states will adopt a reimbursement policy similar to those of Texas and North Carolina, which is primarily a double occupancy approach. Some, however, may stress a single occupancy approach. The Company believes that the assisted living industry will continue as a private-pay industry for the foreseeable future, but may become more price-sensitive as more people need assisted living for longer periods due
to increased life spans. Costs of caring for an aging America may become more of a private-pay, state-assisted partnership than currently exists. However, although Medicaid coverage is common, participation is not. Texas had only approximately 1,300 people participating in its Medicaid assisted living program in 1998.
The Company uses the same development strategy for special care units in combined Alzheimer's and assisted living communities and dedicated special care communities. The units and common space are designed for flexibility so that they can be primarily single occupancy but also be used as double occupancy - again, based on market demand.
The Company believes that this occupancy-flexible development strategy will provide a competitive advantage over its competitors who do not have units and common space large enough to readily accommodate double occupancy.
The Company's top management has extensive acquisition experience and contacts in the assisted living and long-term care industry. The Company believes that building by acquisition is the best way to meet its growth goals. Full service retirement and assisted living industry is very fragmented and still primarily a single proprietor business.
Acquisition Strategy - The Company may acquire one or more communities or entire assisted living companies as a means of entry into new markets and may also make acquisitions within its existing regions to gain further market share and leverage its existing operating infrastructure. In reviewing acquisition opportunities, the Company considers, among other things, the competitive climate, the current reputation of the community or its operator, the quality of its management, the need and costs to reposition the community in the marketplace, the construction quality and any need for renovations of the community and the opportunity to improve or enhance its operating results. The Company also sells some of the communities it acquires when they don't fit with the Company's long range strategy.
Operating Strategy - The Company's operating strategy is to achieve and sustain a strong competitive position within its chosen markets as well as to continue to enhance the performance of its operations. The Company will also seek to enhance its current operations by (i) maintaining and improving occupancy rates at its communities; (ii) opportunistically increasing resident service fees and (iii) improving operating efficiencies.
Offer Residents Customized Care and Service Packages - The Company continually seeks to expand its range of services to meet the evolving needs of its residents. The Company offers each of its residents a personalized assisted living service plan which may include any combination of basic support care, personal care, supplemental services, wellness services and, if needed, Alzheimer's and special care services, all subject to the level of services allowed to be offered by the licensing in place at each community. By offering services in an "unbundled" manner, charging only for the services needed and involving the active participation of the resident, the Company is able to customize its service plans to meet the specific needs of each resident. As a result, the Company believes that it is able to maximize customer satisfaction while avoiding the high cost of delivering all services to all residents without regard to need or choice. The care plan for each resident is periodically reviewed and updated by the Company, the resident, the resident's family and the resident's physician. The Company also uses preferred home health agencies in many of its communities to increase the level of services it can provide residents.
Maintain and Improve Occupancy Rates - The Company also seeks to maintain and improve occupancy rates by continuing to (i) attract new residents through marketing programs directed towards family decision makers, namely adult children and potential residents, (ii) actively seek referrals from hospitals, rehabilitation hospitals, physicians clinics, home healthcare agencies and other acute and sub-acute healthcare providers in the markets served by the Company and (iii) develop new market niches such as respite care, adult day care and other specialty care programs sought by caregivers.
Selectively Increase Service Pricing Levels - The Company regularly reviews opportunities to increase resident service fees within its existing markets, while maintaining competitive market positions. In keeping with this strategy, the Company will continue to offer high quality assisted living services at average to above average prices and generally target private-pay residents. The Company's private-pay residents are typically seniors who can afford to pay for services from both their own and their family financial resources. Such resources may include social security, investments, proceeds from the sale of a residence, contributions from family members and insurance proceeds from long-term care insurance policies.
Improve Operating Efficiencies - The Company seeks to improve the operating results of its communities by actively monitoring and managing its operating costs. In addition, the Company believes that concentrating communities within selected geographic regions may enable the Company to achieve operating efficiencies through economies of scale, reducing corporate and regional overhead and providing for more effective management supervision and financial controls. The Company is also able to obtain volume discounts through enhanced purchasing power for a variety of items including food, supplies, insurance, equipment and other items.
Offer Alzheimer's and Other Dementia Services - As of March 1999, the Company had 12 communities with distinct special care wings specifically designed to serve the needs of individuals with Alzheimer's disease and other forms of dementia. In some of its existing communities, the Company plans to convert a portion of its existing units into a distinct Alzheimer's wing which will allow the Company to offer services to the elderly with this disease and other forms of dementia, will create an opportunity for residents to age in place within the same community and will allow special security and support of Alzheimer's residents. The Company believes this will allow it to continue serving residents for a longer period of time and provide a desirable alternative for its residents and their families. The Company's experience and research indicate that Alzheimer's residents often respond better by sharing a suite with another Alzheimer's resident rather than being in a single occupancy suite. Consequently, the Company's Alzheimer's programs are designed to allow double occupancy, although rooms are available on a single occupancy basis.
Assisted Living Services
The Company offers a wide range of full service retirement and assisted living care and services to its residents. The residents are allowed to select among the services offered beyond basic support services and are charged only for the services they need. Management believes this provides the Company with a competitive advantage over other industry service providers who offer discrete levels of services and base their charges on the level of services offered regardless of whether a resident requires or uses all of the services available at a particular level.
The services offered by the Company can generally be categorized as follows:
Basic Support Services - These services include providing up to three meals per day in a common dining room, special dietary planning, laundry, general housekeeping, organized social and other activities, transportation, maintenance, utilities (except telephone), security and 24-hour emergency call monitoring.
Supplemental Services - These services include performing, coordinating or assisting with bill paying, banking, personal shopping, transportation, appointments, pet care and reminder services.
Personal Care Services - These services include providing assistance with activities of daily living (the ADL's) such as ambulation, bathing, eating, dressing, personal hygiene and grooming.
Wellness Services - These services include assistance with the administration of medication and health monitoring by a nurse, which are provided as permitted by government regulation.
Alzheimer's and Special Care Services - The Company has a distinct Alzheimer's special care wing in 12 of its existing communities. Alzheimer's care includes a higher 24-hour staff ratio to provide oversight and around-the-clock scheduled activities. The Alzheimer's care wing is secured from the rest of the building.
Properties
Operating Communities - The following table sets forth certain information with respect to communities that were operated by the Company at March 31, 1999. The Company owns, or leases these communities. The Company considers its communities to be in good operating condition and suitable for the purpose for which they are being used.
Key:
S basic support and supplemental services are offered.
FE basic support, supplemental, personal care and wellness services are offered ("Frail Elderly").
DC Alzheimer's and special care services are offered ("Dementia Care").
(1) Reflects licensed capacity for Assisted Living and Dementia Care and actual number of units for Independent Living.
(2) Subject to first mortgage. Historically, each community has generally been pledged as collateral on a single mortgage or deed of trust securing a note payable to a bank, financial institution, individual or other lender. The mortgages and deeds of trust mature between 1999 and 2018 and bear interest at fixed and variable interest rates ranging from 7.5% to 11.35% as of December 31, 1998. The Crown Pointe community is subject to a mortgage and note payable to the Redevelopment Agency of the City of Corona, California, is payable into a sinking fund semi-annually in increasing amounts from $65,000 to $420,000 through May 2015, and bears interest at a variable interest rate equal to 5.4% at December 31, 1998. Future communities owned and mortgaged by the Company will likely be pledged as collateral for mortgage credit lines, which relate to more than one community. See Item 6. "Management's Discussion and Analysis or Plan of Operation - Liquidity and Capital Resources."
(3) Leased from third party individuals or partnership. Initial lease terms generally range from 10 to 20 years, and mature between 1999 and 2011. The Company is responsible for all costs including repairs to the community, property taxes and other direct operating costs of the community. Leases generally include clauses that allow for rent to increase over time based on a specified schedule or on an increase in the consumer price index. Generally, the Company has an option to purchase the community after a specified period, or at expiration of the lease, at a price generally equal to market value.
(4) Community is leased from a Real Estate Investment Trust. The lease was part of a sale - leaseback transaction. The lease commenced in 1994 and expires in 2009. The Company has an option to purchase the community in 2004 and in 2009 for an amount equal to the greater of the sales price or the current replacement cost less actual depreciation.
(5) Company owns 60% of real estate and the lessee.
(6) Company owns 49% of lessee. Victor L. Lund, a director of the Company, owns the other 51%, and the Company has an option to purchase his interests in these entities for $10,000.
(7) Leased from a REIT for 15 years expiring in 2011.
Plans for Construction - The Company generally retains independent general contractors to construct its communities. The Company approves all aspects of development including, among other things, site selection, plans and specifications, the proposed construction budget and selection of the architect and general contractor. The Company estimates the average capitalized cost to develop, construct and open a community (including land acquisition, architectural and engineering, construction period interest and loan fees) to be approximately $75,000 per unit, and average construction time for a typical community to be approximately twelve to eighteen months, depending upon the number of units. The Company estimates that, once opened, it takes approximately twelve to eighteen months after licensure for each community to achieve a stabilized occupancy level of 92% or higher. The Company anticipates that each community will have an average operating loss (before depreciation) of approximately $600,000 prior to reaching stabilized occupancy. Expansion projects generally cost less to build and to fully lease.
Development and Construction Risks - The Company's growth strategy is dependent, in part, on its ability to develop and construct additional communities. Development projects generally are subject to various risks, including zoning, permitting, healthcare licensing and construction delays that may result in construction cost overruns, longer development periods and, accordingly, higher than anticipated start-up losses. Although the Company has extensive development experience, closely manages each development project and regularly monitors the contractors constructing the Company's communities, project management is subject to a number of contingencies over which the Company has little or no control and which might adversely affect project costs and completion time. Such contingencies include shortages of, or the inability to obtain, labor or materials, the inability of contractors to perform under their contracts, strikes, adverse weather conditions and changes in applicable laws or regulations or in the method of applying such laws and regulations. The Company intends to rely on third-party developers to construct some of the new assisted living communities planned by the Company. There can be no assurance that the Company will not experience difficulties in working with developers, project managers, general contractors and subcontractors, any of which difficulties could result in increased construction costs and delays. As a result of these various factors, there can be no assurance that the Company will not experience construction delays, that it will be successful in developing and constructing currently planned or additional communities or that any developed community will be economically successful. If the Company's planned development is delayed, the Company's business, operating results and financial condition could be adversely affected.
Need for Additional Financing; Risk of Rising Interest Rates, Development Delays and Cost Overruns - To achieve its growth objectives, the Company will need sufficient financial resources to fund its development, construction and acquisition activities. Accordingly, the Company's future growth will depend on its ability to obtain additional financing on acceptable terms. There can be no assurance that any newly constructed communities will achieve a stabilized occupancy rate and attain a resident mix that meets the Company's expectations or generate sufficient positive cash flow to cover operating and financing costs associated with such communities. The Company will, from time to time, seek additional funding through public or private financing, including equity or debt financing. If additional funds are raised or acquisitions are made in exchange for equity securities, stockholders may experience dilution. Further, such equity securities may have rights, preferences or privileges senior to those of the Common Stock. To the extent the Company finances its activities through
debt, sale/leaseback or leasing arrangements, the Company may become subject to certain financial and other covenants which may restrict its ability to pursue its rapid growth strategy. There can be no assurance that adequate equity, debt, sale/leaseback or lease financing will be available as needed or on terms acceptable to the Company. A lack of available funds may require the Company to delay, scale back or eliminate all or some of its development and acquisition projects and could have a material adverse effect on the Company's business, financial condition and results of operations. See Item 7. "Management's Discussion and Analysis or Plan of Operation - Liquidity and Capital Resources."
Repair and Maintenance - The Company conducts routine repairs and maintenance, as needed, of its communities on a regular basis. Several of the Company's communities acquired in the Wedgwood, American Care and Villa acquisitions have been in operation for ten years or more. The Company has no other current plans for significant expenditures relating to its existing communities, and considers them to be in good repair and working order.
Community Description
The Company's existing communities as of March 1999 range in size from 12 to 163 units, are from one to three stories and from 10,000 to 148,000 square feet. Each community has a large family room, usually equipped with a fireplace, a spacious open dining area, library, TV room, commercial kitchen, beauty salon, laundry and indoor and outdoor recreational areas. Units generally range in size from approximately 330 to 400 square feet for a studio unit, 470 to 650 square feet for a one bedroom unit and 680 to 850 square feet for a two bedroom unit. Assisted living units typically include a private bathroom, kitchenette, closets, living and sleeping areas, a lockable door, emergency call system, individual temperature controls and fire alarm and sprinkler system, among other amenities.
Alzheimer's care units are approximately the same size as studios and contain only sleeping, limited storage and, in some of the units, bathroom areas. Most do not have emergency call systems but do have sprinkler and fire alarm systems.
Operations
The day-to-day operations of each community are managed by an Executive Director who is responsible for all operations of the community, including overseeing the quality of care and services, marketing, coordinating social activities, monitoring financial performance and ensuring appropriate maintenance of the grounds and building. The Company also consults with outside providers, such as pharmacists and dieticians, to assist residents with medication review, menu planning and response to any special dietary needs. Personal care, dietary services, housekeeping and laundry services are performed primarily by line staff who are either part or full-time employees of the Company and who are trained to perform a variety of such services. Most building maintenance services are performed by part or full-time employees, while elevator, HVAC maintenance and landscaping services are generally performed by third party contractors.
The Company's senior management and other personnel, located at the Addison, Texas home office, provide support services to each of the Company's regions and its communities, including development of operational standards, budgets and quality assurance programs, recruiting, training and financial and accounting services such as data processing, accounts payable, billing and payroll services. Corporate personnel, regional and community Executive Directors collaborate with respect to the establishment of community goals and strategies, quality assurance oversight, development of Company policies and procedures, development and implementation of new programs, cash management, human resource management and community development.
The Company has attracted and continues to seek highly dedicated, experienced personnel. The Company has created formal training programs accompanied by review and evaluation procedures to help ensure quality care for its residents. The Company believes that education, training and development enhance the effectiveness of its employees. All employees are required to complete training programs which include a core curriculum comprised of personal care basics, job related specific training, Alzheimer's disease processes, first aid, fire safety, nutrition, infection control and customer service. Executive Directors receive training in all of these areas, plus marketing, community relations, healthcare management, life skills programming and fiscal management. In
addition to some classroom training, the Company's communities provide new employees with on the job training, utilizing experienced staff as trainers and mentors.
Quality Assurance
The Company coordinates quality assurance programs at each of its communities through its corporate headquarters staff and through its regional operations staff. The Company's commitment to quality assurance is designed to achieve a high degree of resident and family member satisfaction with the care and services provided by the Company. In addition to ongoing training and performance reviews of all employees, the Company's quality control measures include:
The Greenbriar Way - At Greenbriar the foremost mission is excellence in service to residents. To that end, the Company's leadership dedicates itself to excellence in the supervision and professional development of employees whose day-to-day duty is to provide that service.
The Company's philosophy of management is to demonstrate by its actions and require from its employees high standards of personal integrity; to develop a climate of openness and trust; to demonstrate respect for human dignity in every circumstance; to be supportive in all relationships; to promote teamwork by involving employees in the management of their own work and to promote the free expression of ideas and opinions.
The Greenbriar Chaplaincy Program - The Company has employed a Chaplain as a consultant and he has established a "Spirituality in Aging" program that helps the Company's goal of meeting the emotional and spiritual needs of its residents, their families, and the employees of Greenbriar. The Chaplain is available for immediate support on a toll free number and visits the Company's communities on a scheduled basis to conduct training seminars for residents, families, employees and the public.
Family and Resident Feedback - The Company surveys residents on an annual basis to monitor the quality of services provided to residents and the level of satisfaction of residents and their families. The Company is presently implementing surveys of family members of residents to monitor the quality of services. The Company also plans to establish a toll free customer response telephone line to encourage feedback from residents, family members, and other visitors in its communities.
Regular Community Inspections - Community inspections are conducted by corporate personnel (including the vice president of construction and maintenance, the director of nutritional services and the director of medical services) and regional staff on a regular basis. These inspections cover the appearance of the exterior and grounds, the appearance and cleanliness of the interior, the professionalism and friendliness of staff, resident care plans, the quality of activities and the dining program, observance of residents in their daily living activities and compliance with governmental regulations. A detailed community audit program is used to ensure the inspections are thorough and to facilitate required corrective action.
Marketing
The Company's marketing and sales efforts are undertaken at corporate, regional and local levels. This effort is intended to create awareness of the community and its services among prospective residents, their families, other key decision-makers and professional referral sources. The corporate marketing staff develops overall strategies for promoting the community throughout its markets and continuously assesses the success of its efforts. Most communities have, on staff, a community relations coordinator dedicated to sales and marketing activities who is guided and trained by corporate marketing personnel. For smaller communities who do not have a community relations coordinator, the Executive Director performs the sales and marketing functions.
Prior to opening new communities, the Company commences an aggressive marketing campaign by opening a sales office in close proximity to the new community. During this pre-opening marketing period, the Company's personnel actively contact local referral sources, which generally account for a majority of
resident referrals. In addition, the Company typically engages in more traditional types of marketing activities, such as direct mailings, print advertising, signs and yellow page advertising. These marketing activities and media advertisements are directed to potential residents and their adult children, who often comprise the primary decision makers for placing a frail elderly relative in an assisted living setting.
Government Regulation
Healthcare is an area of extensive and frequent regulatory change. The assisted living industry is relatively new and, accordingly, the manner and extent to which it is regulated at the federal and state levels is evolving at a steady pace. Currently, twenty-three states have a licensure category or statute that uses the term "assisted living". Several states have proposed regulations using the term. Twenty-two states have specific language in statute, licensure regulations (including states with draft regulations) or Medicaid policy that addresses the philosophy of assisted living. Several states, including Texas and North Carolina have or are reviewing the licensure regulations and increasing the role of state personnel in monitoring and controlling the assisted living industry.
In the states in which the Company operates, a license is not required to provide basic support services. Currently, assisted living and Alzheimer's care communities are not specifically regulated as such by the federal government. However, the Company's communities are subject to regulation and licensing by state and local health and social service agencies and other regulatory authorities. Although regulatory requirements vary from state to state, these requirements generally address, among other things, staff education, training and records; staffing levels; community services, including administration and assistance with self-administration of medication; physical community specifications; size and furnishing of community units and common areas; food and housekeeping services; and emergency evacuation plans and resident rights and responsibilities. Most of the Company's communities are required to possess state licenses in order to provide the levels and types of services which they offer. A limited number of the Company's communities are not required to possess such licenses because they do not supply care and/or supervision to an extent requiring them to be licensed under their respective state's laws. The Company's communities are also subject to various state and local building codes and other ordinances, including safety codes. Management anticipates that the states which are establishing regulatory frameworks for assisted living communities will require the licensing of assisted living communities and will establish varying requirements with respect to such licensing. The Company has obtained all required licenses for each of its communities. Each of the Company's licenses must be renewed annually.
Currently, only a few states have CON requirements for assisted living communities. If federal and state reimbursements increase or there is overbuilding in the industry other states may initiate CON requirements. If this occurs, the operators who can grow rapidly in the next few years could have a distinct advantage, in as much as this barrier to entry could limit overbuilding and competition such as occurred in some nursing home markets in the past.
Like healthcare centers, assisted living communities are subject to periodic survey or inspection by governmental authorities. From time to time in the ordinary course of business, the Company receives deficiency reports. The Company reviews such reports and takes appropriate corrective action. Although most inspection deficiencies are resolved through a plan of correction, the reviewing agency typically is authorized to take action against a licensed community where deficiencies are noted in the inspection process. Such action may include imposition of fines, imposition of a provisional or conditional license or suspension or revocation of a license or other sanctions. Any failure by the Company to comply with applicable requirements could have a material adverse effect on the Company's business, financial condition and results of operations. The Company believes that its communities are in substantial compliance with all applicable regulatory requirements.
As noted earlier, many states have already elected to participate in the Medicaid Home and Community Care Options Act of 1990 ("MHCCOA") and several other states are studying the program. Texas, where the Company is headquartered, is one of the states that has already elected to participate in the program. Under MHCCOA, states now have the option to use Medicaid funds to support services for low income, frail older persons, in places of residence other than nursing centers. The program allows the state to amend its Medicaid statutes to use funds in this manner, thus avoiding the repeated process of obtaining a Medicaid waiver. Any community participating in this payment program must meet all applicable state and federal rules and regulations.
The Company participates in federal and state reimbursement programs. However, the Company expects the bulk of its revenues to come from private payments. Conversely, if the proposed Medicaid block grants are signed into law, the Company could experience a dramatic increase in revenues from these sources, particularly with respect to its double occupancy units. Many of the Company's existing communities can accommodate double occupancy and still provide a quality lifestyle.
The Americans with Disabilities Act ("ADA"), enacted July 26, 1990, has had and will continue to have a major effect on the full service residential retirement and assisted living industry. The communities developed or acquired by the Company must be in compliance with this act. The Fair Housing Amendments Act of 1988 also prohibits discrimination against the handicapped in the sale or rental of a dwelling, or in the provision of services or communities in connection with such a dwelling. This intensifies the need to be in compliance with ADA. Regulation of the industry is likely to increase, particularly for those providers accepting Medicaid reimbursements.
Federal and state governments regulate various aspects of the Company's business. The Company is subject to federal and state anti-remuneration laws, such as the federal health care program anti-kickback law which governs various types of financial arrangements among health care providers and others who may be in a position to refer or recommend patients to these providers. This law prohibits direct and indirect payments that are intended to induce the referral of patients to, the arranging of services by, or the recommending of a particular provider of health care items or services. The federal health care program anti-kickback law has been interpreted to apply to some contractual relationships between health care providers and sources of patient referral. Similar state laws vary from state to state, are sometimes vague and have rarely been interpreted by courts or regulatory agencies. Violation of these laws can result in loss of licensure, civil or criminal penalties and exclusion of health care providers or suppliers from furnishing covered items or services to beneficiaries of the federal health care program. The Company cannot be sure that these laws will be interpreted consistently with its practices.
In compliance with underlying state bond financing, rents at one community in Oregon must be approved by an agency of the state. Two other communities financed with loans guaranteed by the Department of Housing and Urban Development ("HUD") have rents requiring approval by HUD.
Competition
The long-term care industry is highly competitive and the assisted living and Alzheimer's care businesses in particular have and will continue to become increasingly competitive in the future. The Company competes with other assisted living companies and numerous other companies providing similar long-term care alternatives such as home healthcare agencies, community-based service programs, retirement communities and convalescent centers (nursing homes). In addition, the Company competes with a number of tax-exempt nonprofit organizations which can finance capital expenditures on a tax-exempt basis or receive charitable contributions unavailable to the Company and which are generally exempt from income tax. In most markets where the Company operates or plans to operate the level of competition is rapidly increasing both from regional, national and local providers. The Company expects this trend to continue and some markets may be overbuilt and more will be overbuilt in the future. If reimbursement programs, such as the Medicaid waiver program, increase assisted living competition will grow from existing and new companies focusing primarily on assisted living. Nursing home centers that provide long-term care services are also a source of competition for the Company, particularly with respect to Alzheimer's care services. Many of the Company's present and potential competitors have, or may have access to, greater financial, management and other resources than those of the Company. There can be no assurance that competitive pressures will not have a material adverse effect on the Company.
The Company competes with other providers of elderly residential care on the basis of the breadth and quality of its services, the quality of its communities and price. The Company believes that it competes favorably in these areas and in its recruitment and retention of qualified healthcare personnel and reputation among local referral sources. The Company also competes with other providers of long-term care in the acquisition and development of additional communities.
As noted, the Company competes with other providers of long-term care. This also applies to attracting and retaining qualified and skilled personnel. In recent years, the healthcare industry has experienced a shortage of qualified healthcare professionals. The Company's operations require few professionally certified (RN or LPN) staff, primarily for supervision of care staff. While the Company has been able to retain the services of an adequate number of professionals to staff its communities appropriately and maintain its standards of quality care, there can be no assurance that continued shortages will not affect the ability of the Company to maintain the desired staffing levels. In some markets, non-licensed staff have become a recruitment challenge. Unemployment rates are significantly below the national average in a few markets.
The Company is seeking sites and acquisition candidates primarily in non-metropolitan communities located in the western, southern and southeastern regions of the United States that are not currently served or are under served. The Company is identifying these markets and intends to provide premier services and amenities at average to above average prices. It is also providing special care services in a residential setting for those with memory loss and Alzheimer's, the primary cause of memory loss. These residents are not mixed with other assisted living residents. The Company believes that this combination of target markets and services may improve its ability to compete with non-specialized assisted living communities and nursing homes.
Insurance
The provision of personal and healthcare services entails an inherent risk of liability compared to more institutional long-term care communities, assisted living communities of the type operated by the Company, especially its dementia care communities, offer residents a greater degree of independence in their daily lives. This increased level of independence, however, may subject the resident and the Company to certain risks that would be reduced in more institutionalized settings. The Company currently maintains liability insurance intended to cover such claims which it believes is adequate based on the nature of the risks, its historical experience and industry standards. The Company also carries property insurance on each community in amounts that it believes to be adequate and standard in the industry.
Environmental Matters
Under various federal, state and local environmental laws, ordinances and regulations, a current or previous owner or operator of real estate may be required to investigate and clean up hazardous or toxic substances or petroleum product releases at the property, and may be held liable to a governmental entity or to third parties for property damage and for investigation and clean up costs incurred by such parties in connection with the contamination. Such laws typically impose clean up responsibility and liability without regard to whether the owner or operator knew of or caused the presence of the contaminants and the liability under such laws has been interpreted to be joint and several unless the harm is divisible and there is a reasonable basis for allocation of responsibility. The costs of investigation, remediation or removal of such substances may be substantial and the presence of such substances, or the failure to remediate properly such property may adversely affect the owner's ability to sell or lease the property or to borrow using the property as collateral. In addition, some environmental laws create a lien on the contaminated site in favor of the government for damages and costs it incurs in connection with the contamination. Persons who arrange for the disposal or treatment of hazardous or toxic substances also may be liable for the costs of removal or redemption of such substances at the disposal or treatment community, whether or not such community is owned or operated by that person or corporation. Finally, the owner or operator of a site may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from a site.
The Company has conducted environmental assessments on most of its existing communities that it operates plus one community it leases that is operated by a third party. These assessments have not revealed any environmental liability that the Company believes would have a material adverse effect on the Company's business, assets or results of operations or is the Company aware of any such environmental liability. Wedgwood operated, for periods ranging from 2 to 19 years, nine communities for which environmental assessments have not been
obtained. The Company believes that all of its communities are in compliance in all material respects with all federal, state and local laws, ordinances and regulations regarding hazardous or toxic substances or petroleum products. The Company has not been notified by any governmental authority, and is not otherwise aware, of any material non-compliance, liability or claim relating to hazardous or toxic substances or petroleum products in connection with any of its communities.
Control by Insiders
As of March 31, 1999, the Company's officers, directors and affiliated entities owning more than 5% of the Company's outstanding stock owned approximately 61.1% of the outstanding shares of Common Stock. Mr. James R. Gilley, President, Chief Executive Officer and Chairman of the Board of the Company, a corporation wholly owned by him and his spouse, beneficially owned an aggregate of approximately 30.9% of the outstanding Common Stock of the Company. Mr. Victor L. Lund, a director of the Company and the founder of Wedgwood, beneficially owned approximately 15.9% of the outstanding shares of Common Stock. Floyd B. Rhoades, a director of the Company and founder of American Care, beneficially owned approximately 10.7% of the outstanding shares of Common Stock. In addition, the Gilley family owns series D Voting Preferred Stock, which for stockholder votes is the equivalent of 675,000 Common Shares. Accordingly, such individuals will have the ability, by voting their shares in concert, to control or significantly influence (i) the election of the Company's Board of Directors and, thus, the direction and future operations of the Company, and (ii) the outcome of all other matters submitted to the Company's stockholders, including mergers, consolidations and the sale of all or substantially all of the Company's assets. In addition, the Company's officers and directors, including James R. Gilley, currently hold options or conversion rights to acquire 1,594,990 shares of Common Stock, certain of which options are subject to vesting requirements. The issuance of additional shares of Common Stock pursuant to the exercise of these stock options granted to management under the Company's stock option plan would increase the number of shares held by the Company's executive officers and directors in the future.
Anti-Takeover Provisions
The Company's Articles of Incorporation and Bylaws contain, among other things, provisions (i) establishing a classified board of directors (ii) authorizing shares of preferred stock with respect to which the Board of Directors has the power to fix the rights, preferences, privileges and restrictions without any further vote or action by the stockholders (iii) requiring holders of at least 80% of the outstanding Common Stock to join together in requesting a special meeting of stockholders and (iv) prohibiting removal of a director other than for "cause" and then only if the holders of at least 80% of the outstanding Common Stock vote for such removal. The Company is also subject to Sections 78.411-78.444 of the Nevada Revised Statutes (the "Control Act") which in general prohibits any business combination involving the Company and a person that beneficially owns 10% or more of the outstanding Common Stock or an affiliate or associate of the Company who within the past three years was the beneficial owner, directly or indirectly, or 10% or more of the outstanding Common Stock, except under certain circumstances. The application of the Control Act and/or the provisions of the Company's Articles of Incorporation and Bylaws could delay, deter or prevent a merger, consolidation, tender offer or other business combination or change of control involving the Company that some or a majority of the Company's stockholders might consider to be in their personal best interests, including offers or attempted takeovers that might otherwise result in such stockholders receiving a premium over the market price of the Common Stock and may adversely affect the market price of and the voting and other rights of, the holders of Common Stock.
Employees
At March 31, 1999, the Company employed 1184 employees, including 754 full-time and 430 part-time employees. The Company believes it maintains good relationships with its employees. None of the Company's employees are represented by a collective bargaining group.
Corporate Offices
The Company's principal office is a 27,500 square foot building that it owns in Addison, Texas. The Company's Addison office will meet the Company's needs for the foreseeable future.
ITEM 2:
ITEM 2: DESCRIPTION OF PROPERTIES - ---------------------------------
See Item 1 for a discussion of properties owned or leased by the Company.
ITEM 3:
ITEM 3: LEGAL PROCEEDINGS - -------------------------
The Company is involved from time to time in legal proceedings that are incidental to its business. The following are the legal proceedings that are pending at March 1999.
Southern Care Corp. vs Greenbriar, et al.
In Southern Care Corp. v. Medical Resource Companies of America, (former name of Greenbriar) Civil Action No. 94-1132-K, Superior Court of Chatham County, Georgia, the plaintiff seeks damages exceeding $1,500,000 relating to the management and operation of four nursing homes the Company sold to plaintiff. The Company has filed a counterclaim for breach of the management contract between the homes and a Company subsidiary.
The Company does not believe it has breached any obligation to Plaintiff regarding management of the nursing homes and does not believe Plaintiff will prevail on the merits, although there can be no assurance in this regard. At the same time that Plaintiff unilaterally and without notice terminated the management contract, the Plaintiff also claimed that indebtedness of approximately $6.7 million assigned to the Company was discharged.
In 1995 the plaintiff and the Company each filed cross motions for summary judgment on the issue of whether the indebtedness was discharged. On December 3, 1997 the Georgia Court of Appeals granted Greenbriar's motion for summary judgment where they determined that the indebtedness was not discharged. In February 1998 the Georgia Supreme Court refused to hear the matter. The amount of indebtedness, including accrued interest, is approximately $11 million. The Company's basis for financial statement purposes in the indebtedness, net of related deferred gains, is approximately $ 4.2 million.
The Company has been named as defendant in other lawsuits in the ordinary course of business. Management is of the opinion that these lawsuits will not have a material effect on the financial condition of the Company.
ITEM 4:
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - -----------------------------------------------------------
No matters were submitted to a vote of security holders during the fourth quarter of the year ended December 31, 1998.
PART II
ITEM 5:
ITEM 5: MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS - ----------------------------------------------------------------
The Company's Common Stock is traded under the symbol "GBR" and is listed on the American Stock Exchange. The high and low closing sales prices of the Company's Common Stock on the American Stock Exchange during the last two fiscal years:
1998 1997 High Low High Low ----------- ---------- ----------- ----------
First Quarter $17.38 $13.75 $19.25 $13.88 Second Quarter 12.88 8.94 23.00 18.13 Third Quarter 8.75 1.63 23.25 19.50 Fourth Quarter 3.94 1.37 21.00 17.63
The Company has not paid cash dividends on its Common Stock during at least the last ten fiscal years and, for the foreseeable future, the Company expects to retain all earnings to finance the future expansion and development of its business. Any determination to pay cash dividends in the future will be at the discretion of the Board of Directors and will be dependent on the Company's financial condition, results of operations, contractual restrictions, capital requirements, business prospects and such other factors as the Board of Directors deems relevant. The Company's ability to pay dividends in the future may be limited by the terms of future debt financing and other arrangements.
No dividends can be paid on the Company's common stock if dividends are in arrears on the Company's preferred stock.
The closing price on the Company's common stock on March 31, 1999, was $2.19 per share. As of March 31, 1999, there were 2,953 holders of record of the Company's common stock.
ITEM 6:
ITEM 6: SELECTED FINANCIAL DATA - --------------------------------
ITEM 7:
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION - -----------------------------------------------------------------
Overview
During 1994 the Company began a series of steps to focus its business on the development, management and ownership of assisted living properties. The Company's historical businesses during the past five years have included ownership and operation of skilled nursing and retirement centers, real estate investments and manufacture and leasing of electric convenience vehicles and wheelchairs. The nursing and retirement centers and convenience vehicle businesses have been sold and the real estate investments are being liquidated. During 1994, the Company began independently to develop its assisted living business, began construction of its first assisted living community in July 1995, and opened that community to residents on May 30, 1996. By July 1, 1996, the Company (not including the communities of Wedgwood and American Care) had three additional assisted living communities under construction. In order to increase the Company's presence in the assisted living industry, create geographic diversity and obtain experienced personnel, the Company acquired Wedgwood in March 1996, American Care in December 1996, Windsor in October 1997 and Villa in December 1997. The acquisitions of Wedgwood, Windsor and Villa have been accounted for as purchases, and the historical financial statements of the Company do not include any revenues or earnings (losses) attributed to those operations prior to the acquisition. The American Care acquisition has been accounted for as a pooling of interests and, accordingly, the Company's financial statements have been restated to include the accounts and operations of American Care for all periods prior to the acquisition. At December 31, 1997 the Company operated 55 communities which were owned, leased or managed for third parties.
During the third quarter of 1998 the Company made several strategic decisions as to its future direction. It was decided that the Company redirect itself with the following objectives:
o Terminate existing management contracts whereby the Company would manage communities for a fee. As of January 1, 1998 the Company had 2 such contracts.
o Reduce the percentage of residents in the Company's communities who were dependent on direct assistance from governmental agencies for payment of their fees. As of January 1, 1998 approximately 50% of the residents at the Company's communities received government assistance.
o Move toward direct ownership of the communities operated by the Company as opposed to long term lease arrangements. As of January 1, 1998 approximately 50% of the Company's communities were operated under long-term lease arrangements.
o Divest of communities with limited future profit potential or geographic locations that were isolated from other Company operations.
As of December 31, 1998 the Company had terminated its management contracts to manage for others and reduced to 31 the number of Communities that it operated. The Company owns or has current options to purchase all but five of its communities. The percentage of residents who are private pay is approximately 90%.
Fiscal 1998 as Compared to Fiscal 1997
Revenues and Operating Expenses from Assisted Living Operations. Revenues increased to $53,521,000 in 1998 as compared to $38,979,000 in 1997. Community operating expenses, which consist of assisted living community expense, lease expense and depreciation and amortization, were $49,924,000 in 1998 as compared to $34,306,000 in 1997. The primary reason for the increase was the acquisitions of Windsor and Villa. Windsor and Villa were acquired in the fourth quarter of 1997 in transactions that were accounted for as purchases. The revenue and related expenses for the communities acquired through these acquisitions are not included in the amounts for 1997. The revenues and related expenses for these communities for 1998 were $12,651,000 and $9,746,000 respectively. The balance of the increase is due to the opening by the Company of new communities during 1998 and increased census at the existing communities.
Corporate General and Administrative Expenses. These expenses were $5,292,000 in 1998 as compared to $5,652,000 in 1997. The overall decrease, despite the growth of the Company, was due to the reorganization of the regional and corporate office that resulted in the elimination of one of the regional offices and a reduction in Corporate staff in the third quarter of 1998.
Interest and Dividend Income. Interest and dividend income was $1,094,000 in 1998 as compared to $479,000 in 1997. In the first quarter of 1998, the Company received proceeds from the sale of preferred stock of $22,000,000. The increase in interest and dividend income is due to an increase in cash available for investment purposes.
Interest Expenses. These expenses decreased to $6,432,000 in 1998 as compared to $6,801,000 in 1997. The decrease is reflective of the sale of an owned community in 1998 as well as the payoff of approximately $2,500,000 of debt in the first quarter of 1998.
Other Income (Expense). Other income (expense) for 1998 was ($3,569,000). This expense is a result of the divestiture of 22 communities in six separate transactions with third parties and the termination of 3 agreements to manage communities for third parties. Nine leased communities in North Carolina, whose primary reimbursement source was Medicaid, were transferred to a Florida based company for no consideration. The leases on two other North Carolina communities, whose primary pay or source was Medicaid, were terminated. One other owned North Carolina community was sold to a company for proceeds of $5,800,000. A leased community in Florida was sold to a Tennessee based company for proceeds of $375,000. Eight leased communities in Texas, whose primary reimbursement source was Medicaid were transferred to a Fort Worth based company for no consideration. One other owned community in Oregon was subleased to a local operator.
The transaction involving the transfer of the eight Texas leased communities was a three party transaction since all of the eight communities were leased from one REIT. In this transaction, the Company obtained an option to purchase the remaining five communities leased from this REIT for $28,000,000.
The loss on these divestitures is a result of the book values of these properties being in excess of any consideration received.
Discontinued Operations. Earnings from discontinued operations consist of real estate operations that are classified for sale. The real estate operations had a net operating loss of ($34,000) in 1998 and net operating income of $153,000 in 1997. The decrease in 1998 was the result of the sales of the North Carolina shopping center in April of 1997 and a Georgia shopping center in June of 1998. The sale in 1998 resulted in a loss of ($169,000) net of income tax.
Fiscal 1997 as Compared to Fiscal 1996
Revenues and Operating Expenses from Assisted Living Operations. Revenues increased to $38,979,000 in 1997 as compared to $29,785,000 in 1996. The primary reasons for the increase were the acquisition of Wedgwood and the continued growth of Greenbriar. Wedgwood was acquired effective March 31, 1996 and as such the financial statements for 1996 reflect nine months of Wedgwood operations as compared to twelve months of operations in 1997. In addition, the Company's total owned or leased communities increased from 32 at December 31, 1996 to 52 at December 31, 1997. Community operating expenses, which consist of assisted living community expenses, lease expense and depreciation and amortization, were $34,306,000 in 1997 as compared to $25,152,000 in 1996. The primary reasons for these increases, as discussed above, are the acquisition of Wedgwood and the continued growth of Greenbriar.
(1) Stabilized communities are those communities that have been operating for one year or have achieved stabilized occupancy of 92% or more.
(2) Start-up communities are those communities that have not been operating for one year or have not achieved a stabilized occupancy of 92% or more.
Corporate General and Administrative Expenses - These expenses were $5,652,000 in 1997 as compared to $6,731,000 in 1996. The overall decrease, despite the growth of the Company, was due to the consolidation of accounting and administrative functions into the Dallas office. During 1996 Greenbriar, Wedgwood and American Care were operated as three separate companies. Each company had its own corporate office, executive officers, corporate staff, accounting department and other related costs. In the first quarter of 1997 all of these corporate functions were centralized in Dallas.
Interest and Dividend Income - Interest and dividend income was $479,000 in 1997 as compared to $771,000 in 1996. The decrease is due to a decrease in cash available for investment.
Interest Expense. These expenses increased to $6,801,000 in 1997 as compared to $4,457,000 in 1996. The increase is due to the increase in the number of communities the Company owned in 1997 as compared to in 1996.
In December 1997 management determined that it was in the best interests of the Company to exchange its note receivable of $2,000,000 for certain of the borrower's trade receivables. Due to the uncertainty as to the value of the trade receivables the Company has fully written off the note and has placed no value on the trade receivables. Further, the Company has preferred stock of $2,300,000 in the above borrower. Due to deteriorating financial condition of the borrower the Company has fully written off its investment.
When the Company acquired Wedgwood certain representations were made by the seller. Subsequent to the acquisition two lawsuits were filed against the Company and the seller. In October 1977 the Company and the seller entered into an agreement whereby the Company would indemnify the seller for any damages resulting from the lawsuits and agreed to assume responsibility for all legal fees associated with the lawsuits. In return the seller agreed to give the Company 125,000 shares of Greenbriar stock. Subsequent to the agreement both the defendants were awarded a summary judgment and a directed verdict, including legal fees, by the respective courts. The Company has recorded a gain on the transaction of the fair market value of the stock, net of legal fees.
In October the Company agreed to an early payoff on a loan on three of its communities. The loan, which was refinanced at a lower rate of interest had a prepayment penalty.
Discontinued Operations - Earnings from discontinued operations consist of the real estate operations that are classified for sale. The real estate operations had net earnings of $153,000 in 1997 and $238,000 in 1996. The decrease in 1997 was a result of the sale of the North Carolina shopping center in April 1997. The sale resulted in a gain of $322,000, net of income tax, in 1997.
Liquidity and Capital Resources
At December 31, 1998, the Company had current assets of $8,323,000 and current liabilities of $7,802,000.
In December 1997 the Company sold Series F and Series G preferred shares for $22,000,000 less selling and offering costs of $453,000. Payment was received in January 1998.
The Series F voting preferred stock has a liquidation value of $10.00 per share and each share is convertible into 5.7 shares of common stock. The holder has the option to convert beginning in January 2000 and must convert by January 2001. Cumulative dividends are payable in cash at a rate of 6%.
The Series G preferred stock has a liquidation value of $10.00 per share and each share is convertible into 5.7 shares of common stock. The holder has the option to convert beginning in January 2000 and must convert by January 2001. Cumulative dividends are payable in cash at a rate of 6%.
In connection with the sale, the Company entered into an agreement which provides that, on the date of conversion, if the value of the Company's common stock has not increased at the annual rate of at least 14% during the period the preferred shares are outstanding, the Company is required to make a cash payment ("Cash Payment") to the preferred stockholders equal to the market price deficiency on the shares received upon conversion.
The 14% guaranteed return is being accreted by a charge to accumulated deficit. The amount of the Cash Payment that would be required assuming conversion at each balance sheet date will be transferred from stockholders equity to temporary equity. At December 31, 1998, a Cash Payment of $21,748,000 would have been due assuming conversion took place.
The Series F & G preferred stockholders have the option to convert beginning in January 2000. The Company has no information as to whether or not such early conversion will occur. Further, any Cash Payment that might be required will be determined by price of the Company's common stock when such conversion occurs. Should the Series F & G preferred stockholders elect to convert in January 2000 and should the price of the Company's common stock remain the same as is was on December 31, 1998, the Cash Payment obligation as of January 2000 would be approximately $ 24,800,000.
The Company is proceeding with a plan to refinance its existing portfolio of Communities. At current interest rates and property values the Company believes it can refinance its existing Communities and if necessary sell certain Communities and obtain cash sufficient to meet the potential Cash Payment. In addition the Company will seek out additional third party financing. While the Company believes it will be able to meet any potential Cash Payment requirement there can be no assurance that the Company's plan will be successful.
At December 31, 1998 and since the date of issuance of the Series F and G preferred stock, the Company was not in compliance with one of the financial ratio covenants of the stock purchase agreement. The Company believes this situation stems from a computational mistake that was made at the time this particular ratio test was originally determined.
The Company has brought this mistake to the attention of the representative of the preferred shareholder and anticipates that the ratio will be modified to reflect the original intentions of the parties. The representatives have not indicated to the Company that they consider that a default has occurred. However, an event of default (1) permits the holder to elect a number of persons to the board of directors that will constitute 70% of the board, (2) gives the holder, upon giving the Company written notice of an event of default, the right
(Put Right) to require the Company to repurchase, "out of funds legally available therefor," any or all of the preferred stock for an amount equal to the liquidation value ($22,000,000 in the aggregate) plus accumulated but unpaid dividends, plus a premium of 20%, and (3) entitles the holder to additional dividends of $1.20 per share (an aggregate of $660,000 per quarter). Any additional dividends paid pursuant to this provision would reduce the amount of the Cash Payment resulting from the aforementioned 14% guaranteed return.
Future development activities of the Company are dependent upon obtaining capital and financing through various means, including financing obtained from sale/leaseback transactions, construction financing, long-term state bond financing, debt or equity offerings and, to the extent available, cash generated from operations. There can be no assurance that the Company will be able to obtain adequate capital to finance its projected growth.
Year 2000
The Company has assessed the potential impact of Year 2000 ("Y2K") issues as regards its business, results of operations and financial condition. Critical information systems and equipment are purchased from third party vendors and each has assured the Company that its particular component is Y2K compliant. Internal tests have confirmed these assessments. The Company is evaluating other Y2K implications associated with the infrastructure of its individual communities such as HVAC, security, elevator and community specific utility systems and believes it will have substantially completed any remediation needed by the end of the second quarter of 1999.
Y2K's potential impact on the Company's operations is also dependent on third party vendors for such services as utilities, banking services and food. Communication with the significant providers of these services has been initiated but it is not possible, at present, to project the effect on the Company if third party remediation efforts are not successful.
While the Company expects to adequately resolve all Y2K issues, a "reasonably likely worst case" scenario would include supplier disruption, potential delay in state reimbursement programs and minor utility disruptions. The Company intends to address the possible consequences of these issues through community-specific contingency plans and a prudent level of liquidity.
Although the Company cannot quantify the potential effect of Y2K issues on its operating results, liquidity or financial position it is reasonably certain that the total cost of compliance will not be material and can easily be funded through operating cash flows as problems are incurred.
Effect of Inflation
The Company's principal sources of revenues are from resident fees from Company-owned or leased assisted living communities and management fees from communities operated by the Company for third parties. The operation of the communities is affected by rental rates that are highly dependent upon market conditions and the competitive environment in the areas where the communities are located. Compensation to employees is the principal cost element relative to the operations of the communities. Although the Company has not historically experienced any adverse effects of inflation on salaries or other operating expenses, there can be no assurance that such trends will continue or that should inflationary pressures arise that the Company will be able to offset such costs by increasing rental rates or management fees.
Forward Looking Statements
Certain statements included in this Management's Discussion and Analysis are forward looking statements that predict the future development of the Company. The realization of these predictions will be subject to a number of variable contingencies and there is no assurance that they will occur or be realized in the time frame proposed. The risks associated with the potential actualization of the Company's plans include: contractor delays, the availability and cost of financing, availability of managerial oversight and regulatory approvals, to name a few.
ITEM 7A:
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - -------------------------------------------------------------------
The Company is subject to market risk from exposure to changes in interest rates based on its financing, investing, and cash management activities. The Company utilizes a balanced mix of debt maturities along with both fixed-rate and variable-rate debt to manage its exposures to changes in interest rates. (See Management's Discussion and Analysis - Liquidity and Capital Resources appearing elsewhere in this Form 10-K.) If market interest rates average 1% (100 basis points) more in 1999 than they did in 1998, the Company's interest expense would increase and income before income taxes would decrease by approximately $400,000. The Company does not expect changes in interest rates to have a material effect on income or cash flows in fiscal 1999, although there can be no assurances that interest rates will not significantly change.
The Company is also exposed to risks from changes in the market price of its common stock. As discussed above, the amount of the Cash Payment to the holders of the Series F and G preferred stock fluctuates with the market price of the Company's common stock. An increase in the market price of $1 per share will decrease the amount of the Cash Payment by $1,257,000. A decrease of $1 per share will increase the amount of the Cash Payment by $1,257,000.
ITEM 8:
ITEM 8: FINANCIAL STATEMENTS - ----------------------------
The financial statements required by this Item begin at page hereof.
ITEM 9:
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE - ------------------------------------------------------------------------ None.
PART III
ITEMS 10-13:
The information required by Items 9, 10, 11 and 12 is incorporated by reference into this Form 10-K from the Company's definitive Proxy Statement for its Annual Meeting of Stockholders to be held June 4, 1999, which definitive Proxy Statement will be filed with the Securities and Exchange Commission on or before April 30, 1999.
PART IV
ITEM 14:
ITEM 14: EXHIBITS AND REPORTS ON FORM 8-K - ------------------------------------------
(a) The following exhibits required to be filed by Item 601 of Regulation S-B are filed as part of this Annual Report on Form 10-KSB:
Exhibit Number Description of Exhibit -------------- -------------------------------------------------------- 2.1.1 Stock Purchase Agreement between Villa Residential Care Homes, Inc., William A. Shirley, Jr. and Greenbriar Corporation ("Registrant") (filed as Exhibit 2.1.1 to Registrant's Form 8-K Current Report on January 13, 1998 and incorporated herein by this reference). 2.1.2 Exchange Agreement between Villa Residential Care Homes-Corpus Christi South, L.P. and Greenbriar Corporation ("Registrant") (filed as Exhibit 2.1.2 to Registrant's Form 8-K Current Report on January 13, 1998 and incorporated herein by this reference). 2.1.3 Exchange Agreement between Villa Residential Care Homes-Granbury, L.P. and Greenbriar Corporation ("Registrant") (filed as Exhibit 2.1.3 to Registrant's Form 8-K Current Report on January 13, 1998 and incorporated herein by this reference). 2.1.4 Exchange Agreement between Villa Residential Care Homes-Oak Park, L.P. and Greenbriar Corporation ("Registrant") (filed as Exhibit 2.1.4 to Registrant's Form 8-K Current Report on January 13, 1998 and incorporated herein by this reference). 2.1.5 Exchange Agreement between Villa Residential Care Homes-Fort Worth East, L.P. and Greenbriar Corporation ("Registrant") (filed as Exhibit 2.1.5 to Registrant's Form 8-K Current Report on January 13, 1998 and incorporated herein by this reference). 2.1.6 Exchange Agreement between William A. Shirley, Jr., Lucy M. Brody and C. Kent Harrington and Greenbriar Corporation ("Registrant") (filed as Exhibit 2.1.6 to Registrant's Form 8-K Current Report on January 13, 1998 and incorporated herein by this reference). 2.2.1 Stock Purchase Agreement between Lone Star Opportunity Fund, L.P. and Greenbriar Corporation ("Registrant") filed as Exhibit 2.2.1 of Registrant's Form 10-KSB for the year ended December 31, 1997. 2.2.4 Form of Registration Rights Agreement between Registrant and Lone Star Opportunity Fund, L.P. as regards 1,400,000 shares of Registrant's Series F Senior Convertible Preferred Stock and 800,000 shares of Registrant's Series G Senior Non-Voting Preferred Stock filed as Exhibit 2.2.4 of Registrant's Form 10-KSB for the year ended December 31, 1997. 2.2.5 Agreement between Lone Star Opportunity Fund, L.P. and Registrant regarding certain minimum values of Registrant's stock filed as Exhibit 2.2.5 of Registrant's Form 10-KSB for the year ended December 31, 1997. 2.2.6 Agreement on Form of Promissory Note between Registrant and Lone Star Opportunity Fund, L.P filed as Exhibit 2.2.6 of Registrant's Form 10-KSB for the year ended December 31, 1997. 2.2.7 Form of Promissory Note agreed to by Registrant and Lone Star Opportunity Fund, L.P. filed as Exhibit 2.2.7 of Registrant's Form 10-KSB for the year ended December 31, 1997. 3.1 Articles of Incorporation of Medical Resource Companies of America ("Registrant") (filed as Exhibit 3.1 to Registrant's Form S-4 Registration Statement, Registration No. 33-55968, and incorporated herein by this reference). 3.1.1 Restated Articles of Incorporation of Greenbriar Corporation. 3.2 Bylaws of Registrant (filed as Exhibit 3.2 to Registrant's Form S-4 Registration Statement, Registration No. 33-55968, and incorporated herein by this reference).
Exhibit Number Description of Exhibit -------------- -------------------------------------------------------- 3.2.1 Amendment to Section 3.1 of the Bylaws of Registrant adopted upon approval of the Merger (filed as Exhibit 3.2.1 to Registrant's Form S-4 Registration Statement, Registration No. 33-55968, and incorporated herein by this reference). 3.3 Certificate of Decrease in Authorized and Issued Shares. 4.1 Certificate of Designations, Preferences and Rights of Preferred Stock dated October 7, 1992 relating to Registrant's Series A Preferred Stock (filed as Exhibit 4.1 to Registrant's Form S-4 Registration Statement, Registration No. 33-55968, and incorporated herein by this reference). 4.1.2 Certificate of Designations, Preferences and Rights of Preferred Stock dated May 7, 1993, relating to Registrant's Series B Preferred Stock (filed as Exhibit 4.1.2 to Registrant's Form S-3 Registration Statement, Registration No. 33-64840, and incorporated herein by this reference. 4.1.3 Certificate of Designations, Preferences and Rights of Preferred Stock dated August 18, 1993, relating to Registrants' Series C Preferred Stock (filed as Exhibit 4.1.3 to Registrant's Form 10-KSB for the year ended December 31, 1993). 4.1.3.1 Amendment to Certificate of Designations, Preferences and Rights of Preferred Stock dated August 18, 1993, relating to Registrants' Series C Preferred Stock. 4.1.4 Certificate of Designations, Preferences and Rights of Preferred Stock dated March 15, 1996, relating to Registrants' Series D Preferred Stock. 4.1.5 Certificate of Designations, Preferences and Rights of Preferred Stock dated March 15, 1996, relating to Registrants' Series E Preferred Stock. 4.1.6 Certificate of Voting Powers, Designations, Preferences and Rights of Registrant's Series F Senior Convertible Preferred Stock dated December 31, 1997, filed as Exhibit 2.2.2 of Registrant's Form 10-KSB for the year ended December 31, 1997. 4.1.7 Certificate of Voting Powers, Designations, Preferences and Rights of Registrant's Series G Senior Non-Voting Convertible Preferred Stock dated December 31, 1997, filed as Exhibit 2.2.3 of Registrant's Form 10-KSB for the year ended December 31, 1997. 4.3.2 Registration Rights Agreement dated April 27, 1990 between Registrant's predecessor and International Health Products, Inc. (assumed by Registrant), which has been assigned to JRG Investments, Inc., relating to 4,150,000 shares (830,000 post December 1995 shares) of Registrant's Common Stock, the benefits of which were further assigned to Professional Investors Insurance, Inc. as to 600,000 shares (120,000 post December 1995 shares) in November 1992 (filed on June 5, 1990, as an Exhibit to the Registrant's predecessor's Current Report on Form 8-K and incorporated herein by reference). 4.3.3 Form of Assignment of Registration Rights Agreement dated September 30, 1992 between JRG Investments, Inc. and Professional Investors Insurance, Inc. relating to 600,000 shares (120,000 post December 1995 shares) of Registrant's Common Stock (filed as Exhibit 4.3.3 to Registrant's Form S-4 Registration Statement, Registration No. 33-55968, and incorporated herein by this reference). 4.4 Form of Registration Rights Agreement dated December 1, 1991 between Registrant and W. Michael Gilley (filed as Exhibit 4.4 to Registrant's Form S-4 Registration Statement, Registration No. 33-55968, and incorporated herein by this reference). 4.9.3 Registration Rights Agreement dated December 30, 1996 between Registrant and Floyd B. Rhoades. 10.3.2 Form of $62,500 Promissory Note dated December 27, 1991 payable to Registrant by Gene S. Bertcher representing the purchase price for 250,000 shares (50,000 post December 1995 shares) of Registrant's Common Stock (filed as Exhibit 10.3.2 to Registrant's Form S-4 Registration Statement, Registration No. 33-55968, and incorporated herein by this reference).
Exhibit Number Description of Exhibit -------------- -------------------------------------------------------- 10.3.3 Form of Renewal of Promissory Note dated October 14, 1992 extending the maturity date of the Promissory Note referenced in Exhibit 10.3.2 (filed as Exhibit 10.3.3 to Registrant's Form S-4 Registration Statement, Registration No. 33-55968, and incorporated herein by this reference). 10.3.4 Form of Security Agreement - Pledge (Nonrecourse) between Gene S. Bertcher and Registrant securing the Promissory Note referenced in Exhibit 13.3.2. (Filed as Exhibit 10.3.4 to Registrant's Form S-4 Registration Statement, Registration No. 33-55968, and incorporated herein by this reference). 10.4.2 Form of $75,000 Promissory Note dated October 12, 1992 payable to Registrant by Robert L. Griffis representing the purchase price for 150,000 shares (30,000 post December 1995 shares) of Registrant's Common Stock (filed as Exhibit 10.4.2 to Registrant's Form S-4 Registration Statement, Registration No. 33-55968, and incorporated herein by this reference). 10.4.3 Form of Security Agreement - Pledge (Nonrecourse) between Registrant and Robert L. Griffis securing the Promissory Note referenced in Exhibit 10.4.2 (filed as Exhibit 10.4.3 to Registrant's Form S-4 Registration Statement, Registration No. 33-55968, and incorporated herein by this reference). 10.6.1 Form of Stock Option to purchase 100,000 shares (20,000 post December 1995 shares) of Registrant's Common Stock issued to Oscar Smith on October 1, 1992 (filed as Exhibit 10.6.1 to Registrant's Form S-4 Registration Statement, Registration No. 33-55968, and incorporated herein by this reference). 10.6.2 Form of $50,000 Promissory Note dated October 1, 1992 payable to Registrant by Oscar Smith representing the purchase price for 100,000 shares (20,000 post December 1995 shares) of Registrant's Common Stock (filed as Exhibit 10.6.2 to Registrant's Form S-4 Registration Statement, Registration No. 33-55968, and incorporated herein by this reference). 10.6.3 Form of Security Agreement - Pledge (Nonrecourse) between Registrant and Oscar Smith securing the Promissory Note referenced in Exhibit 10.6.2 (filed as Exhibit 10.6.3 to Registrant's Form S-4 Registration Statement, Registration No. 33-55968, and incorporated herein by this reference). 10.7.1 Form of Stock Option to purchase 80,000 shares (16,000 post December 1995 shares) of Registrant's Common Stock issued to Lonnie Yarbrough on October 12, 1992 (filed as Exhibit 10.7.1 to Registrant's Form S-4 Registration Statement, Registration No. 33-55968, and incorporated herein by this reference). 10.7.2 Form of $40,000 Promissory Note dated October 12, 1992 payable to Registrant by Lonnie Yarbrough representing the purchase price for 80,000 shares (16,000 post December 1995 shares) of Registrant's Common Stock (filed as Exhibit 10.7.2 to Registrant's Form S-4 Registration Statement, Registration No. 33-55968, and incorporated herein by this reference). 10.7.3 Form of Security Agreement - Pledge (Nonrecourse) between Registrant and Lonnie Yarbrough securing the Promissory Note referenced in Exhibit 10.7.2 (filed as Exhibit 10.7.3 to Registrant's Form S-4 Registration Statement, Registration No. 33-55968, and incorporated herein by this reference). 10.8.1 Form of Stock Option to purchase 80,000 shares (16,000 post December 1995 shares) of Registrant's Common Stock issued to Dennis McGuire on October 1, 1992 (filed as Exhibit 10.8.1 to Registrant's Form S-4 Registration Statement, Registration No. 33-55968, and incorporated herein by this reference). 10.8.2 Form of $40,000 Promissory Note dated October 1, 1992 payable to Registrant by Dennis McGuire representing the purchase price for 80,000 shares (16,000 post December 1995 shares) of Registrant's Common Stock (filed as Exhibit 10.8.2 to Registrant's Form S-4 Registration Statement, Registration No. 33-55968, and incorporated herein by this reference).
Exhibit Number Description of Exhibit -------------- -------------------------------------------------------- 10.8.3 Form of Security Agreement - Pledge (Nonrecourse) between Registrant and Dennis McGuire securing the Promissory Note referenced in Exhibit 10.8.2 (filed as Exhibit 10.8.3 to Registrant's Form S-4 Registration Statement, Registration No. 33-55968, and incorporated herein by this reference). 10.9.6 Form of $62,500 promissory note dated December 29, 1994, payable to Registrant by L.A. Tuttle representing the purchase price of 50,000 shares (10,000 post December 1995 shares) of Registrant's Common Stock (filed as Exhibit 10.9.6 to Registrant's Form 10-KSB for the year ended December 31, 1994). 10.9.7 Form of Security Agreement-Pledge between Registrant and L.A. Tuttle securing the promissory note reference in Exhibit 10.9.6 (filed as Exhibit 10.9.7 to Registrant's Form 10-KSB for the year ended December 31, 1994). 10.13 Registrant's 1992 Stock Option Plan (filed as Exhibit 10.13 to Registrant's Form S-4 Registration Statement, Registration No. 33-55968, and incorporated herein by this reference). 10.21.1 Extended and Consolidated Promissory Note in the principal amount of $5,700,000 dated effective May 23, 1992 payable by JRG Investment Co., Inc. to M.S. Holding Co. Corp. (filed as Exhibit 10.22.1 to Registrant's Form S-4 Registration Statement, Registration No.33-55968, and incorporated herein by this reference). 10.22.2 Extended and Consolidated Pledge Agreement dated effective May 23, 1992 between JRG Investment Co., Inc. and M.S. Holding Co. Corp. securing the Note referenced in Exhibit 10.22.1 (filed as E xhibit 10.22.2 to Registrant's Form S-4 Registration Statement, Registration No. 33-55968, and incorporated herein by this reference). 10.22.3 Pledge Agreement dated as of May 23, 1992 between James R. Gilley and M.S. Holding Co. Corp. (filed as Exhibit 10.22.3 to Registrant's Form S-4 Registration Statement, Registration No. 33-55968, and incorporated herein by this reference). 10.22.4 Irrevocable Proxy from James R. Gilley to M.S. Holding Co. Corp. relating to shares of capital stock of JRG Investment Co., Inc. (filed as Exhibit 10.22.4 to Registrant's Form S-4 Registration Statement, Registration No. 33-55968, and incorporated herein by this reference). 10.22.5 Blank Assignment and Power of Attorney signed by JRG Investment Co., Inc. relating to 482,000 (96,400 post December 1995 shares) shares of Registrant's Common Stock (filed as Exhibit 10.22.5 to Registrant's Form S-4 Registration Statement, Registration No. 33-55968, and incorporated herein by this reference). 10.22.6 Blank Assignment and Power of Attorney signed by JRG Investment Co., Inc. relating to 1,268,000 shares (236,600 post December 1995 shares) of Registrant's Common Stock (filed as Exhibit 10.22.6 to Registrant's Form S-4 Registration Statement, Registration No. 33-55968, and incorporated herein by this reference). 10.22.7 Three Blank Assignments and Powers of Attorney signed by JRG Investment Co., Inc., each relating to 600,000 shares (120,000 post December 1995 shares) of Registrant's Common Stock (filed as Exhibit 10.22.7 to Registrant's Form S-4 Registration Statement, Registration No. 33-55968, and incorporated herein by this reference). 10.22.8 Blank Assignment and Power of Attorney signed by JRG Investment Co., Inc. relating to 2,281,818 shares of Registrant's Common Stock (filed as Exhibit 10.22.8 to Registrant's Form S-4 Registration Statement, Registration No. 33-55968, and incorporated herein by this reference). 10.22.9 Blank Assignment and Power of Attorney signed by JRG Investment Co., Inc. relating to 905,557 shares of Registrant's Series A Preferred Stock (filed as Exhibit 10.22.9 to Registrant's Form S-4 Registration Statement, Registration No. 33-55968, and incorporated herein by this reference).
10.36 Stock Option Agreement dated December 31, 1996 between Registrant and James R. Gilley covering 200,000 shares of Common Stock. 10.37 Employment Agreements dated December 31, 1996 10.38 Stock Purchase Warrant dated December 31, 1996 between registrant and The April Trust 21.1* Subsidiaries of Registrant. 23.1* Consent of Grant Thornton. 27.1* Financial Data Schedule required by Item 601(c) of Regulation S-K. * Filed herewith.
(b) Reports on Form 8-K - none
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934 (the "Act"), the Company has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
GREENBRIAR CORPORATION
March 30, 1999 By: /s/ Gene S. Bertcher --------------------------------- Gene S. Bertcher Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Act of 1934, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
GREENBRIAR CORPORATION
March 30, 1999 By: /s/James R. Gilley ------------------------------------------------------- James R. Gilley, President, Chief Executive Officer and Chairman of the Board of Directors
In accordance with the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
March 30, 1999 /s/ James R. Gilley -------------------- James R. Gilley, President, Chief Executive Officer and Chairman of the Board of Directors March 30, 1999 /s/ Don C. Benton ------------------ Don C. Benton, Director March 30, 1999 /s/ Paul G. Chrysson --------------------- Paul G. Chrysson, Director March 30, 1999 /s/ Matthew G. Gallins ----------------------- Matthew G. Gallins, Director March 30, 1999 /s/ Victor L. Lund ------------------- Victor L. Lund, Director March 30, 1999 /s/ Michael E. McMurray ------------------------ Michael E. McMurray, Director March 30, 1999 /s/ Floyd B. Rhoades --------------------- Floyd B. Rhoades, Director March 30, 1999 /s/ William A. Shirley, Jr. ---------------------------- William A. Shirley, Jr., Director
Report of Independent Certified Public Accountants
Board of Directors and Stockholders Greenbriar Corporation
We have audited the accompanying consolidated balance sheets of Greenbriar Corporation and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of operations, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Greenbriar Corporation and subsidiaries as of December 31, 1998 and 1997, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles.
GRANT THORNTON LLP
Dallas, Texas March 26, 1999
Greenbriar Corporation
CONSOLIDATED BALANCE SHEETS (Amounts in thousands)
December 31,
ASSETS 1998 1997 -------- --------
CURRENT ASSETS Cash and cash equivalents $ 6,024 $ 23 Accounts receivable - trade 448 1,162 Stock subscription receivable -- 22,000 Other current assets 1,851 1,317 -------- --------
Total current assets 8,323 24,502
REAL ESTATE OPERATIONS HELD FOR SALE, at lower of cost or market 1,000 3,097
DEFERRED INCOME TAX BENEFIT 4,750 2,632
INVESTMENT IN SECURITIES, AT COST 2,046 2,025
MORTGAGE NOTE RECEIVABLE, net of deferred gain of $3,083 3,617 3,617
PROPERTY AND EQUIPMENT, AT COST Land and improvements 11,651 12,114 Buildings and improvements 84,097 80,758 Equipment and furnishings 5,996 5,898 Construction in progress -- 4,864 -------- -------- 101,744 103,634 Less accumulated depreciation 7,921 5,486 -------- -------- 93,823 98,148
DEPOSITS 3,422 3,619
LEASE RIGHTS AND OTHER INTANGIBLES 12,511 12,129
OTHER ASSETS 861 1,474 -------- --------
$130,353 $151,243 ======== ========
The accompanying notes are an integral part of these statements.
The accompanying notes are an integral part of these statements.
The accompanying notes are an integral part of this statement.
The accompanying notes are an integral part of this statement.
The accompanying notes are an integral part of these statements.
The accompanying notes are an integral part of these statements.
Greenbriar Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations --------------------
Greenbriar Corporation's business consists of development and operation of assisted living communities located throughout the United States, which provide housing, hospitality and personal and healthcare services to elderly individuals. At December 31, 1998, the Company had 31 communities in operation in 11 states with a total capacity for 2,830 residents.
A summary of the significant accounting policies applied in the preparation of the accompanying consolidated financial statements follows.
Principles of Consolidation ---------------------------
The consolidated financial statements include the accounts of Greenbriar Corporation and its majority-owned subsidiaries (collectively, the Company). All significant intercompany transactions and accounts have been eliminated.
Assisted Living Community Revenue ---------------------------------
Assisted living community revenue is reported at the estimated net realizable value based upon expected amounts to be recovered from residents, third party payors, and others for services rendered. Services provided by certain of the Company's communities are reimbursed under various state assistance plans.
Depreciation ------------
Depreciation is provided for in amounts sufficient to relate the cost of property and equipment to operations over their estimated service lives, ranging from 3 to 40 years. Depreciation is computed by the straight-line method.
Use of Estimates ----------------
In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from those estimates.
Greenbriar Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE A - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Cash Equivalents ----------------
The Company considers all short-term deposits and money market investments with a maturity of less than three months to be cash equivalents.
Impairment of Notes Receivable ------------------------------
A note receivable is identified as impaired when it is probable that interest and principal will not be collected according to the contractual terms of the note agreement. The accrual of interest is discontinued on such notes, and no income is recognized until all past due amounts of principal and interest are recovered in full.
Impairment of Long-Lived Assets -------------------------------
The Company reviews its long-lived assets and certain identifiable intangibles for impairment when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. In reviewing recoverability, the Company estimates the future cash flows expected to result from use of the assets and eventually disposing of them. If the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the asset, an impairment loss is recognized based on the asset's fair value.
Stock Options -------------
The Company has elected to follow Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) and related interpretations in accounting for its employee stock options. Under APB 25, because the exercise price of employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recorded. The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123).
Lease Rights and Other Intangibles ----------------------------------
Lease rights are amortized by the straight-line method over the lives of the related leases. Goodwill is being amortized by the straight-line method over a period of fifteen years. Deferred financing costs are being amortized over the terms of the related borrowings under a method which approximates the interest method.
Earnings (Loss) Per Common Share --------------------------------
Basic earnings (loss) per common share is based on the weighted average number of common shares outstanding. Diluted earnings per share is computed based on the weighted average number of common shares outstanding plus the number of additional common shares that would have been outstanding if dilutive potential common shares had been issued. In 1998, 1997 and 1996, all potential common shares were anti-dilutive.
Greenbriar Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE B - ACQUISITIONS AND DISPOSITIONS
Acquisitions
Wedgwood Retirement Inns, Inc. and Affiliates ---------------------------------------------
In March 1996, the Company acquired substantially all of the assets and liabilities of a number of companies under common control and managed by Wedgwood Retirement Inns, Inc. (Wedgwood). The business of these companies consists of the operation of 15 assisted living and Alzheimer's communities. To structure the Wedgwood acquisition as a tax-free exchange, the Company also acquired a shopping center in North Carolina from James R. Gilley and members of his family (the Gilley Group). Due to the fact that the Gilley Group is a majority stockholder of Greenbriar and owner of the shopping center, the property was recorded at the Gilley Group's historical cost basis of approximately $2,300,000. Consideration given was 675,000 shares of Series D preferred stock. Wedgwood's assets were valued at an aggregate value of approximately $58,000,000 ($54,000,000 of property and equipment) and liabilities assumed were approximately $44,000,000. In exchange, Greenbriar issued 1,949,950 shares of Series E preferred stock, valued at approximately $14,000,000, to the Wedgwood shareholders. In 1996, the stockholders of the Company granted conversion rights to the series E preferred stock and it was converted into approximately 1,600,000 shares of the Company's common stock. The operations of Wedgewood have been reflected in the consolidated financial statements of the Company since April 1, 1996.
Windsor Group LLC and Affiliates --------------------------------
In October 1997, the Company acquired all of the assets and liabilities of Windsor Group LLC (Windsor) and all of the common stock of three companies who were affiliates of Windsor. The business of these companies consists of the operation of three assisted living communities in South Carolina. Consideration given was 130,000 shares of the Company's common stock valued at approximately $2,533,000. Additionally, upon completion of a community under construction, the Company will issue 28,531 additional shares of its common stock. Assets acquired were valued at approximately $12,100,000 and liabilities assumed were approximately $9,567,000. The operations of Windsor and affiliates have been reflected in the consolidated financial statements of the Company since October 1, 1997.
Villa Residential Care Homes, Inc. ----------------------------------
On December 31, 1997, the Company acquired all of the outstanding common stock of Villa Residential Care Homes, Inc. (Villa). Additionally, through a newly created partnership, the Company acquired lease rights and assumed certain liabilities of a number of entities affiliated with Villa. The business of these entities consists of the operation of 12 assisted-living communities throughout Texas. Consideration given was 184,476 shares of the Company's common stock and 10,464,321 units of the partnership valued at approximately $10,394,000. The operating partnership units are convertible after a one-year holding period into 536,990 shares of the Company's common stock. For accounting purposes, the common shares into which the operating units will be converted have been included in outstanding common shares. Assets acquired, which consist primarily of lease rights, were valued at $11,100,000 and liabilities assumed were approximately $706,000.
Greenbriar Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE B - ACQUISITIONS AND DISPOSITIONS - Continued
The following table presents pro forma unaudited consolidated results of operations for the year ended December 31, 1997, assuming that the acquisitions of Windsor and Villa and affiliates had taken place at the beginning of 1997 . The pro forma results are not necessarily indicative of the results of operations that would have occurred had the acquisitions been made at the beginning of the periods presented, or of future results of operations of the combined companies (in thousands, except per share data):
Year ended December 31, ------------ Revenue $49,701 Loss from continuing operations $(6,801) Net loss $(6,326) Preferred stock dividend requirement $ (334) Loss from continuing operations allocable to common stockholders $(7,135) Loss allocable to common stockholders $(6,660) Loss per share Continuing operations $(.96) Net loss $(.90)
American Care Communities, Inc. -------------------------------
On December 31, 1996, the Company issued 1,300,000 shares of its common stock in exchange for all of the outstanding common stock of American Care Communities, Inc. (American Care). At the date of acquisition, American Care, owned or leased 15 assisted living communities with approximately 1,350 units, located primarily in North Carolina. The merger has been accounted for as a pooling of interests and accordingly, the Company's consolidated financial statements have been restated to include the operations of American Care for all periods prior to the merger.
In connection with the merger, a shareholder of American Care settled certain of American Care's obligations in exchange for approximately 45,000 shares of the Company's common stock received in the merger. For accounting purposes, this transaction, valued at $600,000, has been reflected as a contribution of capital with a corresponding charge to operations. Additionally, the Company incurred expenses related to the merger of $983,000, expenses related to attempted capital market activities of $774,000 and accrued severance costs related to the closure of the administrative offices of American Care and Wedgwood of $1,079,000. These amounts have been included in the statement of operations as merger and transition expense.
NOTE B - ACQUISITIONS AND DISPOSITIONS - Continued
Separate results of operations for the period prior to the merger with American Care are as follows (in thousands):
Year ended December 31, 1996 ----------------- Revenue Greenbriar $13,523 American Care 16,262 ------- Combined $29,785 ======= Earnings (loss) from continuing operations Greenbriar $(3,483) American Care (2,112) ------- Combined $(5,595) ======= Net earnings (loss) Greenbriar $(2,725) American Care (2,112) ------- Combined $(4,837) ======= Dispositions
In 1998, management decided to reduce the percentage of residents in the Company's communities who were dependent on direct assistance from government agencies for payment of their fees, and to dispose of certain communities that were not profitable. As a result, the Company sold two communities located in North Carolina and Florida for consideration of $6,175,000; assigned the leases on seventeen communities located in North Carolina and Texas to third parties for no consideration, terminated the leases on two communities located in North Carolina and subleased one community located in Oregon to a third party. The aforementioned sales and disposals resulted in an aggregate loss of $2,924,000.
NOTE C - DISCONTINUED OPERATIONS
In 1995, management decided to sell the mobility products segment. The segment was sold in February 1996 for 8% preferred stock, which is not marketable, and notes valued at approximately $4,300,000, based upon fair value as determined by the Board of Directors. A gain of approximately $788,000, less applicable income taxes of $268,000 was recorded in 1996.
In 1996, the Company entered into negotiations to sell its remaining non-assisted living real estate assets. Accordingly, the Company's non-assisted living real estate operations have been reflected as discontinued operations. Management expects that the proceeds from the sales will be at least equal to the carrying value of the real estate assets. In 1997, the Company sold one of its real estate assets and recorded a gain of $491,000, less applicable income taxes of $169,000. In 1998, the company sold one of its real estate assets and recorded a loss of $255,370.
Greenbriar Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE C - DISCONTINUED OPERATIONS - Continued
The operations of the non-assisted living real estate segment have been presented in the accompanying financial statements as discontinued operations.
Summarized operating results of these segments are as follows (in thousands):
Greenbriar Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE E - DEBT - Continued
Aggregate annual principal maturities of long-term debt at December 31, 1998 are as follows (in thousands):
1999 $ 2,278 2000 1,722 2001 3,604 2002 9,003 2003 14,812 Thereafter 29,013 ------
$60,432 =======
Certain of the loan agreements contain various restrictive covenants, which require, among others things, the maintenance of certain financial ratios, as defined.
NOTE F - FINANCING OBLIGATIONS
The Company operates two communities that are financed through sale-leaseback obligations. At the end of the tenth year of the fifteen-year leases, the Company has options to repurchase the communities for the greater of the sales prices or their current replacement costs less depreciation plus land at current fair market values. Accordingly, these transactions have been accounted for as financings, and the Company has recorded the proceeds from the sales as financing obligations, classified the lease payments as interest expense and continues to carry the communities on its books and record depreciation. Payments under the lease agreements are $1,167 for each of the years 1998 through 2001.
NOTE G - OPERATING LEASES
The Company leases certain communities under operating leases which expire through the year 2011 and has various equipment operating leases. The leases provide that the Company pay for property taxes, insurance, and maintenance.
Future minimum payments following December 31, 1998 are as follows (in thousands):
1999 $ 4,894 2000 4,232 2001 4,330 2002 4,304 2003 3,749 Thereafter 22,018 ------
$43,527 =======
Lease expense in 1998 and 1997 was $9,551,525 and $4,663,000, respectively. Certain leases contain rent escalation clauses which are based upon future events or changes in indices.
Greenbriar Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE H - INCOME TAXES
At December 31, 1998, the Company had net operating loss carryforwards of approximately $30,800,000 which expire between 1999 and 2012. However, approximately $6,700,000 of these net operating loss carryforwards have limitations that restrict utilization to approximately $600,000 for any one year. Also, carryforwards of $900,000, which expire between 2006 and 2008, may only be used to offset future taxable income of the subsidiaries in which the losses were generated.
The following is a summary of the components of income tax expense (benefit) from continuing operations (in thousands):
Year ended December 31, 1998 1997 1996 ------- ------- ------- Current $ 222 $ - $ 23 Deferred (2,118) (4,115) (2,423) ------ ------ ------
$(1,896) $(4,115) $(2,400) ====== ====== ======
Deferred tax assets and liabilities were comprised of the following (in thousands):
Greenbriar Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE H - INCOME TAXES - Continued
Following is a reconciliation of income tax expense from continuing operations with the amount of tax computed at the federal statutory rate of 34% (in thousands):
Changes in the deferred tax valuation allowance result from assessments made by the Company each year of its expected future taxable income available to absorb its carryforwards. In the third quarter of 1998, management determined that the Company's operating results were less than what was initially expected in its profitability model. Accordingly, effective July 1, 1999, the Company began providing a valuation allowance for the deferred tax benefits resulting from losses occurring after that date. The Company believes that it is more likely than not that the net deferred tax asset at December 31, 1998 of $4,750,000 will be recovered from future operations. However, this evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
NOTE I - STOCKHOLDERS' EQUITY
Preferred Stock
Preferred stock consists of the following (amounts in thousands, except per share amounts):
Greenbriar Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE I - STOCKHOLDERS' EQUITY - Continued
The Series B preferred stock has a liquidation value of $100 per share and is convertible into common stock over a ten-year period at prices escalating from $25.00 per share in 1993 to $55.55 per share by 2001. Dividends at a rate of 6% are payable in cash or preferred shares at the option of the Company.
The Series D preferred stock has a liquidation value of $5 per share and is convertible into common stock at $10.00 per share. Dividends are payable in cash at a rate of 9.5%.
The Series F voting preferred stock has a liquidation value of $10.00 per share and each share is convertible into .57 shares of common stock. The Series F shareholders have the rights, as a class, to elect one member of the Company's board of directors and to approve or reject certain transactions, including any mergers or spin-offs involving the Company. The holder has the option to convert beginning in January 2000 and must convert by January 2001. Dividends are payable in cash at a rate of 6%.
The Series G preferred stock has a liquidation value of $10.00 per share and each share is convertible into .57 shares of common stock. The holder has the option to convert beginning in January 2000 and must convert by January 2001. Dividends are payable in cash at a rate of 6%.
The Series F and Series G preferred shares were sold to one investor in December 1997 for $22,000,000, less selling and offering costs of $716,000. Payment was received in January 1998. In connection with the sale, the Company entered into an agreement which provides that, on the date of conversion, if the value of the Company's common stock has not increased at an annual rate of at least 14% during the period the preferred shares are outstanding, the Company is required to make a Cash Payment (the Cash Payment) to the preferred stockholders equal to the market price deficiency on the shares received upon conversion.
The 14% guaranteed return is accreted by a charge to accumulated deficit. The amount of the Cash Payment that would be required assuming conversion at each balance sheet date is transferred from stockholders' equity to Preferred Stock Redemption Obligation. At December 31, 1998, a Cash Payment of $21,748,000 would have been due assuming conversion took place.
At December 31, 1998 and since the date of issuance of the Series F and G preferred stock, the Company was not in compliance with one of the financial ratio convenants of the stock purchase agreement. The Company believes this situation stems from a computational mistake that was made at the time this particular ratio test was originally determined.
The Company has brought this mistake to the attention of representatives of the preferred shareholder and anticipates that the ratio will be modified to reflect the original intentions of the parties. The representatives have not indicated to the Company that they consider that a default has occurred, However, an event of default (1) permits the holder to elect a number of persons to the board of directors that will constitute 70% of the board, (2) gives the holder, upon giving the Company written notice of an event of default, the right (Put Right) to require the Company to repurchase, "out of funds legally available therefor," any or all of the preferred stock for an amount equal to the liquidation value ($22,000,000 in the aggregate) plus accumulated but unpaid dividends, plus a premium of 20%, and (3) entitles the holder to additional dividends of $1.20 per share (an aggregate of $660,000 per quarter). Any additional dividends paid pursuant to this provision would reduce the amount of the Cash Payment resulting from the aforementioned 14% guaranteed return.
Greenbriar Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE I - STOCKHOLDERS' EQUITY - Continued
Stock Options -------------
In 1993, the Company established a long-term incentive plan (the 1993 Plan) for the benefit of certain key employees. Under the 1993 Plan, up to 217,500 shares of the Company's common stock are reserved for issuance. Options granted to employees under the 1993 Plan become exercisable over a period as determined by the Company and may be exercised up to a maximum of 10 years from date of grant. In 1997, the Company adopted the 1997 Stock Option Plan, under which up to 500,000 shares of the Company's common stock are reserve for issuance.
The Company has also granted options to officers during 1996, 1997, and 1998 aggregating 1,000,000 shares not covered by either plan. These options were granted at market, were exercisable immediately, and expire 10 years from date of grant.
SFAS 123 requires disclosure of pro forma net earnings (loss) and pro forma net earnings (loss) per share as if the fair value based method had been applied in measuring compensation cost for stock-based awards granted after January 1, 1995. The pro forma amounts are not necessarily representative of the effects of stock-based awards on future pro forma net income (loss) and pro forma net income (loss) per share because those pro forma amounts exclude the pro forma compensation expense related to unvested stock options granted before 1995.
Reported and pro forma net loss and net loss per share amounts are set forth below (in thousands, except per share data):
The fair value of these options was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions: expected volatility of 100 percent for 1998, 37 percent for 1997 and 35 percent for 1996; risk-free interest rates of 5.5 percent for 1998, 5.9 percent for 1997 and 7.0 percent for 1996; no dividend yield; and weighted average expected lives of 7.3 years.
Greenbriar Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE I - STOCKHOLDERS' EQUITY - Continued
Additional information with respect to options outstanding at December 31, 1998, and changes for the three years then ended was as follows:
Weighted average fair value per share of options granted during 1997 was $9.14.
Greenbriar Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE I - STOCKHOLDERS' EQUITY - Continued
Greenbriar Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE J - OTHER INCOME (EXPENSE)
Other income (expenses) consists of the following: (amounts in thousands)
In December 1997, management determined that it was in the best interests of the Company to exchange its note receivable of $2,000,000 for certain of the borrower's trade receivables. Due to the uncertainty as to the value of the trade receivables the Company has fully written off the note and has placed no value on the trade receivables. Further, the Company has preferred stock of the borrower which was carried at $2,300. Due to deteriorating financial condition of the borrower the Company has fully written off its investment.
When the Company acquired Wedgwood certain representations were made by the seller. Subsequent to the acquisition two lawsuits were filed against the Company and the seller. In October 1997, the Company and the seller entered into an agreement whereby the Company would indemnify the seller for any damages resulting from the lawsuits and agreed to assume responsibility for all legal fees associated with the lawsuits. In return, the seller agreed to give the Company 125,000 shares of its common stock. Subsequent to the agreement, both the defendants were awarded a summary judgment and a directed verdict, including legal fees, by the respective courts. The Company has recorded a gain on the transaction of the fair market value of the stock, net of legal fees.
In October 1997, the Company agreed to an early payoff on a loan on three of its communities. The loan, which was refinanced at a lower rate of interest, had a prepayment penalty of $1,300,000.
NOTE K - CONTINGENCIES
The Company is defendant in various lawsuits generally arising in the ordinary course of business. Management of the Company is of the opinion that these lawsuits will not have a material effect on the consolidated results of operations, cash flows or financial position of the Company.
Greenbriar Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE L - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate values at December 31, 1998, and 1997:
Cash and cash equivalents - The carrying amount approximates fair value because of the short maturity of these instruments.
Investment in securities - The investment in securities consists of convertible preferred stock of a private company. Fair value, based on estimated future discounted cash flows, approximates carrying value.
Mortgage note receivable - The mortgage note receivable consists of a $6,700,000 note with a stated interest rate of 14% due in 2021 from Southern Care Corp. Although the note is in default due to non-payment of interest, management believes the value of the underlying collateral is adequate to recover the carrying value.
Long-term debt - The fair value of the Company's long-term debt is estimated based on market rates for the same or similar issues. The carrying value of long-term debt approximates its fair value.
Accounts receivable and payable - trade and note payable - affiliate - The carrying amount approximates fair value because of their short maturity.
NOTE M - NOTES RECEIVABLE
Stock Purchase Notes --------------------
All stock purchase notes are collateralized by common stock of the Company and are presented in the balance sheet as a deduction from stockholders' equity.
In December 31, 1998, the Company exchanged its operating lease rights on eight assisted living communities for options to purchase five assisted living communities (the Option Communities) currently being leased and operated by the Company. The purchase price under the options is the lessor's acquisition cost, and the options are exercisable from December 1998 through December 2001.
The lease agreements on the Option Communities have implicit interest rates of approximately 12%. The Company believes that financing of assisted living communities can be obtained at this time at interest rates substantially less than 12%.
For financial statement purposes, the capitalized costs related to the eight leases exchanged of $5,157,000 were allocated to the Option Communities as Lease Buyout Options. No gain or loss was recorded. Upon exercise of the purchase options, these costs will be amortized over the term of the related debt.
Greenbriar Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE O - FOURTH QUARTER ADJUSTMENTS
During the fourth quarter of 1998, the Company wrote down property by approximately $560,000.
During the fourth quarter of 1997, the Company wrote off a note receivable and an investment in securities in the aggregate amount of $4,100,000. See Note J.
During the fourth quarter of 1996, the Company wrote off certain offering costs of approximately $670,000 and notes receivable of approximately $400,000. Additionally, the Company made other adjustments reducing earnings by approximately $200,000.