<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
(Amendment No. 4)
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[_] Preliminary Proxy Statement
[_] Confidential, for Use of the Commission Only (as permitted by Rule 14a-
6(e)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to (S) 240.14a-11(c) or (S) 240.14a-12
GREENBRIAR CORPORATION
(Name of Registrant As Specified in Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[_] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), 14a-6(i)(2) or
Item 22(a)(2) of Schedule 14A.
[_] $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and
0-11.
1) Title of each class of securities to which transaction applies:
2) Aggregate number of securities to which transaction applies:
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
4) Proposed maximum aggregate value of transaction:
5) Total fee paid:
[X] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
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2) Form, Schedule or Registration Statement No.:
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3) Filing Party:
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4) Date Filed:
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<PAGE>
GREENBRIAR CORPORATION
4265 KELLWAY CIRCLE
ADDISON, TEXAS 75244
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD SEPTEMBER 16, 1996
Dear Stockholders of Greenbriar Corporation:
You are cordially invited to attend a Special Meeting of Stockholders of
Greenbriar Corporation (the "Company") to be held at 10:00 a.m., local time on
September 16, 1996, at 4265 Kellway Circle, Addison, Texas 75244, to consider
and vote upon Proposals (the "Proposals") to approve (i) the right to convert
all outstanding shares of Series D Preferred Stock into Common Stock and (ii)
the right to convert all outstanding shares of Series E Preferred Stock into
Common Stock (the Series D and Series E Preferred Stock are sometimes referred
to herein as the "Conversion Shares"). In the aggregate, 1,962,458 shares of
Common Stock of the Company will be issued upon conversion of the Series D and
Series E Preferred Stock.
The accompanying Proxy Statement forms a part of this Notice. You are not
being asked to approve anything at the Special Meeting other than the Proposals.
In connection with a recent acquisition of Wedgwood Retirement Inns, Inc.
("Wedgwood"), the Company and Wedgwood originally desired to issue only Common
Stock in exchange for the Wedgwood interests. However, pursuant to rules of the
American Stock Exchange (the "Exchange"), Stockholder approval could have been
required as a prerequisite to listing additional shares issued in connection
with an acquisition in which a director or officer has a 5% or greater interest
or where the potential increase of Common Stock would result in an increase in
outstanding common shares of 20% or more. Both conditions would have required
approval of the issuance of the Common Stock; however, the parties desired to
conduct the acquisition rapidly in order to take advantage of the opportunities
available in the assisted living industry following their consolidation. In
order to defer the need for Stockholder approval and proceed with an early
closing of the acquisition, and because such approval would ultimately be
assured due to the level of ownership of the Company's Common Stock by its
management, the parties structured the acquisition to be made in exchange for
the Series E Preferred Stock that could be issued without Stockholder approval
and become convertible only after receipt of such approval. See "Approval of
Conversion Shares" in the accompanying Proxy Statement for additional detail
including a discussion of the effect of such approvals.
Only Stockholders of record at the close of business on August 19, 1996 who
own Common Stock or Series B or Series C Preferred Stock will be entitled to
vote at the Special Meeting or any adjournments thereof. The affirmative vote of
the holders of more than 50% of the outstanding shares of Common Stock and
Series B and C Preferred Stock of the Company, voting as one class (these being
the only securities of the Company entitled to vote at the Special Meeting),
present and voting at the Special Meeting on such date is necessary to approve
the Proposals. Although the holders of the Series D and Series E Preferred
Shares are entitled to voting rights in general, the Designations of Rights and
Preferences covering the Series D and E Preferred Stock contain a provision
required by the American Stock Exchange denying the right of the holders to vote
on the Proposals at the Special Meeting.
All holders of Common Stock and Series B and C Preferred Stock, whether or
not they expect to attend the Special Meeting in person, are requested to
complete, sign, date and return the enclosed form of proxy in the accompanying
envelope (which requires no additional postage if mailed in the United States).
Your proxy will be revocable, either in writing or by voting in person at the
Special Meeting, at any time prior to its exercise.
WHETHER OR NOT YOU EXPECT TO ATTEND THE SPECIAL MEETING IN PERSON, PLEASE
COMPLETE, DATE AND SIGN THE ENCLOSED PROXY CARD AND RETURN IT WITHOUT DELAY IN
THE ENCLOSED ENVELOPE. ANY HOLDER OF COMMON STOCK OR SERIES B OR SERIES C
PREFERRED STOCK ATTENDING THE MEETING MAY VOTE IN PERSON EVEN IF A PROXY HAS
BEEN RETURNED.
By Order of the Board of Directors
James R. Gilley, President
August 26, 1996
<PAGE>
GREENBRIAR CORPORATION
4265 KELLWAY CIRCLE
ADDISON, TEXAS 75244
PROXY STATEMENT
FOR
SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD SEPTEMBER 16, 1996
This Proxy Statement (the "Proxy Statement") and the accompanying proxy
card is being mailed on or about August 26, 1996 and is being furnished to the
holders of Common Stock, par value $.01 per share ("Common Stock"), and Series B
and Series C Preferred Stock, par value $0.10 per share ("Series B and C
Preferred Stock") (collectively, the "Stockholders"), of Greenbriar Corporation,
a Nevada corporation ("Greenbriar" or the "Company"), in connection with the
solicitation of proxies by the Board of Directors of the Company from the
Stockholders for use at a special meeting of Stockholders of the Company (the
"Special Meeting"). At the Special Meeting, the Stockholders of the Company will
be asked to consider and vote upon two Proposals (the "Proposals"): (i) to
approve the right to convert all 1,949,950 outstanding shares of Series E
Preferred Stock into 1,624,958 shares of Common Stock of the Company ("Proposal
I") and (ii) to approve the right to convert all 675,000 outstanding shares of
Series D Preferred Stock into 337,500 shares of Common Stock of the Company
("Proposal II"). The shares of Series D and E Preferred Stock which will become
convertible following Stockholder approval are sometimes referred to herein as
the "Conversion Shares". See "Description of Capital Stock" and Exhibits B and
C, the Designations of Rights and Preferences governing the Series D and E
Preferred Stock. Neither Nevada law nor the Company's Articles of Incorporation
or Bylaws require Stockholder approval of the Proposals.
In connection with the recent acquisition of Wedgwood Retirement Inns, Inc.
("Wedgwood"), the Company and Wedgwood originally desired to issue only Common
Stock in exchange for the Wedgwood interests. However, the rules of the
American Stock Exchange (the "Exchange") require prior Stockholder approval as a
prerequisite to listing additional shares issued in connection with an
acquisition in which a director or officer has a 5% or greater interest or when
the potential increase of Common Stock is 20% or greater. Both conditions would
have required approval of the issuance of the Common Stock; however, the parties
desired to conduct the acquisition rapidly in order to take advantage of the
opportunities available in the assisted living industry following their
consolidation. In order to defer the need for Stockholder approval and proceed
with an early closing of the acquisition, and because such approval would
ultimately be assured due to the level of ownership of the Company's Common
Stock by its management, the parties structured the acquisition to be made in
exchange for the Series E Preferred Stock that could be issued without
Stockholder approval and become convertible only after receipt of such approval.
See "Approval of Conversion Shares" for additional detail including a discussion
of the effect of such approvals. Such effects include the possibility that,
under Nevada law, Stockholders voting in favor of the Proposals may be deemed to
have waived their rights to challenge such transactions, while Stockholders
voting against the Proposals or abstaining from voting will continue to retain
those rights. Any such challenge could include allegations that the controlling
Stockholders of the Company who engaged in insider transactions violated a
fiduciary duty or duty of fairness to the Company or the other Stockholders in
the valuation and terms of the issuance of the shares, and Stockholders voting
in favor of these Proposals could also waive their right to bring these claims.
A positive Stockholder vote may also have the effect of protecting such
controlling Stockholders from such claims on the theory that the Stockholders
have ratified the actions in accordance with Nevada law and the Company's
bylaws. It should also be noted that under Nevada law Stockholders do not have
dissenters' rights resulting from either of the Proposals, nor do they have
preemptive rights to acquire any of the Conversion Shares.
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The transactions by which the Company acquired Wedgwood in exchange for
Series E Preferred Stock and the shopping center property from James R. Gilley
and his affiliates in exchange for Series D Preferred Stock are not being
submitted for Stockholder approval, and a vote in favor of the Proposals to
approve conversion of the Preferred Stock should have no effect on a
Stockholder's right to bring claims based on the issuance of the Conversion
Shares.
AVAILABLE INFORMATION
Greenbriar is subject to the informational reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information can be inspected and copied at the public
reference facilities of the Commission, 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549, and copies of such materials are available for
inspection and reproduction at the public reference facilities of the Commission
at its New York regional office, 75 Park Place, New York, New York 10007, and at
its Chicago regional office, Northwestern Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Copies of such materials also can
be obtained by mail from the Public Reference Section of the Commission, 450
Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. In addition,
material filed by the Company can be inspected at the offices of the Exchange,
86 Trinity Place, New York, New York 10006-1881.
VOTING AND PROXY INFORMATION
The Board of Directors of the Company has fixed the close of business on
August 19, 1996, as the record date (the "Record Date") for determining the
holders of Common Stock and Series B and Series C Preferred Stock entitled to
receive notice of and to vote at the Special Meeting. At the close of business
on the Record Date, there were outstanding 3,547,284 shares of Common Stock,
3,096 shares of Series B Preferred Stock and 10,000 shares of Series C Preferred
Stock, the only outstanding securities of the Company entitled to vote at the
Special Meeting. The 675,000 shares of Series D Preferred Stock and 1,949,950
shares of Series E Preferred Stock, although normally entitled to vote on all
matters to come before a vote of the Stockholders, are precluded by the
Designations of Rights and Preferences (the "Designations") governing the Series
D and E Preferred Stock from voting on either of the Proposals at the Special
Meeting to add the right to convert such shares into the Common Stock. These
provisions in the Designations were required by the American Stock Exchange in
order to avoid giving the holders of the Series D and E Preferred Stock the
right to vote on the conversion of their own shares and to restrict the vote to
the Stockholders who could have voted on the issuance of the shares if they
originally contained the conversion right. However, the owners of the Series D
and E Preferred Stock who also own shares of Common Stock and Series B and C
Preferred Stock will be allowed to vote their shares of Common Stock and Series
B and C Preferred Stock at the Special Meeting. See "Description of Capital
Stock" and Exhibits B and C, the Designations of Rights and Preferences
governing the Series D and E Preferred Stock. On the record date the Common
Stock, Series B and Series C Preferred Stock were held by approximately 3,900,
17 and 1 Stockholders of record, respectively. All share numbers in this Proxy
Statement have been adjusted to reflect the one-for-five reverse split of the
Common Stock on December 1, 1995. Stockholders still holding certificates
representing pre-split shares should contact the Company's transfer agent,
American Stock Transfer Trust Company, at 40 Wall Street, New York, New York
10005, to obtain a Letter of Transmittal for the exchange of their shares.
For each share held on the Record Date, a holder of Common Stock or Series
B or Series C Preferred Stock is entitled to one vote on all matters properly
brought before the Stockholders at the Special Meeting. Such votes may be cast
in person or by proxy. Abstentions may be specified as to the approval of either
of the Proposals. Under the rules of the Exchange, brokers holding shares for
customers have authority to vote on
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<PAGE>
certain matters when they have not received instructions from the beneficial
owners, and do not have such authority as to certain other matters (so-called
"broker non-votes"). The Exchange rules prohibit member firms of the Exchange
from voting on the Proposals without specific instructions from beneficial
owners. The affirmative vote, either in person or by proxy, of the holders of
more than 50% of the shares of Common Stock and Series B and Series C Preferred
Stock outstanding as of the Record Date, voting as one class, is necessary to
approve each of the Proposals. Accordingly, if a Stockholder abstains from
voting certain shares on the approval of either of the Proposals, it will have
the effect of a negative vote, but if a broker indicates that it does not have
authority to vote certain shares, those shares will not be considered as shares
present and entitled to vote with respect to the approval of the Proposals and
therefore will have no effect on the outcome of the vote.
On the Record Date, 1,210,000 shares of Common Stock, representing
approximately 34% of shares entitled to vote at the Special Meeting, were
held, through a wholly owned corporation, by James R. Gilley, President and
Chief Executive Officer of the Company. An additional 667,000 shares
(approximately 19% of shares entitled to vote) were held of record by Mr.
Gilley, Mr. Gilley's spouse and adult children, as individuals, and a further
530,000 shares (15%) are held by Mr. and Mrs. Gilley and such adult children as
trustees for various family trusts. All such persons have indicated they will
vote their shares, comprising a total of more than 67% of shares outstanding,
for the approval of the Proposals, which will insure such approval by the
Stockholders.
All shares of Common Stock and Series B and Series C Preferred Stock that
are represented at the Special Meeting by properly executed proxies received by
the Company prior to or at the Special Meeting and not revoked will be voted at
the Special Meeting in accordance with the instructions indicated in such
proxies. Unless instructions to the contrary are specified in the proxy, each
such proxy will be voted FOR each of the Proposals to approve the right to
convert the Conversion Shares.
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before it is voted. Proxies may be revoked by (i) filing
with the Secretary of the Company, before the vote is taken at the Special
Meeting, a written notice of revocation bearing a date later than the date of
the proxy, (ii) duly executing and delivering a subsequent proxy relating to the
same shares, or (iii) attending the Special Meeting and voting in person
(although attendance at the Special Meeting will not in and of itself constitute
a revocation of a proxy). Any written notice of revocation should be sent to:
Corporate Secretary, Greenbriar Corporation, 4265 Kellway Circle, Addison,
Texas 75244.
APPROVAL OF CONVERSION SHARES
Neither Nevada law nor the Company's Articles of Incorporation or Bylaws
require Stockholder approval of the Proposals to add the right to convert Series
D and E Preferred Stock into Common Stock. However, the rules of the Exchange
require prior Stockholder approval as a prerequisite to listing additional
shares issued in connection with an acquisition of which a director or officer
has a 5% or greater interest or where the potential increase of Common Stock is
20% or more. Both conditions are raised in the conversion of the Series D and E
Preferred Stock, and consequently the Stockholders are being asked to approve
the Proposals at the Special Meeting.
3
<PAGE>
THE WEDGWOOD ACQUISITION AND THE SERIES E PREFERRED STOCK
Until 1994, the Company's business was the acquisition, operation and sale
of retirement, nursing and other health care facilities, as well as commercial
real estate, and the manufacture and sale or lease of mobility assistance
equipment, which it conducted under the name "Medical Resource Companies of
America." During 1994 the Company began a series of steps to focus its business
on the development, management and ownership of assisted living facilities. The
Company's historical businesses during the past five years have been ownership
and operation of skilled nursing and retirement centers, real estate investments
and manufacture and leasing of electric convenience vehicles and wheelchairs.
The nursing and retirement centers and convenience vehicle businesses have been
sold, and the real estate investments are being liquidated. Revenues and
earnings in years prior to 1996 are attributed to these prior businesses. During
1994, the Company began independently to develop its assisted living business,
began construction of its first assisted living facility in July 1995, and
opened such facility to residents on May 30, 1996. By July 1, 1996, the Company
(not including the properties of Wedgwood) had three additional assisted living
facilities under construction and nine under development. In order to increase
the Company's presence in the assisted living industry, the Company acquired
Wedgwood in March 1996. Wedgwood and its principals owned various interests in
15 predecessor entities, each of which owned, leased or managed at least one
assisted or independent living facility. As a result of the Wedgwood
Acquisition, the Company now owns these entities and owns, leases or manages
their facilities. All entities are owned 100% by the Company except for one
facility owned 40% by minority owners and two entities owned 51% by Victor L.
Lund. The Company has an option to purchase Mr. Lund's interests for $10,000.
The consideration for the Wedgwood Acquisition was 1,949,950 shares of
Series E Preferred Stock, having an issue price and liquidation value of
$18,552,000, and $220,000 in cash and notes to the sellers (the "Sellers"), who
consisted of 20 persons, all of whom were previously unrelated to the Company.
Such purchase price was determined through arms' length negotiations. The
Sellers include the following persons who owned either 5% or more of Wedgwood or
who were officers or directors of Wedgwood.
<TABLE>
<CAPTION>
Number of
Shares of Percentage Current
Series E of Series E Relationship to
Seller Preferred Stock Preferred Stock the Company
- -------------------- --------------- --------------- ------------------------
<S> <C> <C> <C>
Victor L. Lund 1,457,953 75.8% Director
Adult Children of
Victor L. Lund 78,828 4.0% None
Paul W. Dendy 19,360 1.0% Executive Vice President
and Director
Mark W. Hall 84,442 4.4% Executive Vice President
and Director
Teresa L. Waldroff 24,920 1.3% Vice President-Operations
of Wedgwood
--------- -----
1,665,503 86.5%
</TABLE>
It was the original intention of the parties to issue Common Stock of the
Company in exchange for the Wedgwood properties. However, the parties mutually
desired to conduct the acquisition rapidly in order to take advantage of the
opportunities available in the assisted living industry following their
consolidation. Wedgwood urgently needed access to capital in order to pursue
its plans for the acquisition and construction of assisted living facilities,
and the Company desired to accelerate its entry into the assisted living market
to keep pace with a rapidly consolidating and growing industry. Because the
Stockholder vote required to approve the
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issuance of Common Stock would have delayed the acquisition by an unreasonable
interval in the judgment of management of both Companies, and because such
approval was assured because of the level of ownership of the Company's Common
Stock by its management, the parties structured the acquisition to be made in
exchange for Series E Preferred Stock that could be issued without Stockholder
approval and becomes convertible only following Stockholder approval of such
right.
As an additional inducement for Victor L. Lund to enter into the
acquisition with Greenbriar, Greenbriar assumed or agreed to indemnify him
against indebtedness incurred in connection with the acquisition and development
of the properties of Wedgwood including, approximately $43,200,000 for which he
had issued his personal guarantees.
In connection with the Wedgwood Acquisition, the Company entered into a
Construction Management Agreement with Victor L. Lund pursuant to which Mr. Lund
agreed to serve, for three years following closing of the Wedgwood Acquisition,
as a construction manager to oversee construction for the Company of up to 20
assisted living facilities, including those that provide Alzheimer's care,
during the term of the agreement. Mr. Lund will receive monthly fees based on
the percentage of completion of each facility with a total fee of $150,000 for
each facility successfully completed, less any profits or distributions paid to
Mr. Lund from any partnership or limited liability company in which Mr. Lund and
the Company both own equity interests. Mr. Lund is responsible for paying the
costs of any construction supervisors or similar on site personnel employed by
him to satisfy his oversight duties to the Company. Mr. Lund owns a 51% equity
interest and the Company owns a 49% equity interest in two limited partnerships.
The Company has also entered into employment agreements with Mr. Dendy for three
years and Mr. Hall and Ms. Waldroff for one year.
Proposal I requires Stockholder approval because under the rules of the
Exchange the effect of authorizing the conversion right is an additional listing
with the Exchange of shares issuable in connection with an acquisition that will
represent more than 20% of shares of Common Stock previously outstanding.
Certain financial information of the Company and Wedgwood, on an historical
and pro forma basis, is included elsewhere in this Proxy Statement.
Acquisition of Shopping Center and the Series D Preferred Stock
It was important to the Sellers that the Wedgwood Acquisition not result in
taxable gain to them. Because Wedgwood was formed from the consolidation of 16
separate legal entities, the only structure that was deemed suitable to achieve
a tax free transaction was a contribution to a controlled corporation under
Section 351 of the Internal Revenue Code of 1986. The Sellers would not have
been in control of the Company following the Wedgwood acquisition, and it was
necessary to have additional assets contributed to the Company by others in
exchange for equity securities such that the Sellers together with the others
contributing assets would together control more than 80% of the voting power of
the Company following the transaction.
In order to satisfy these objectives, a material part of the Wedgwood
acquisition included the contribution of a shopping center property in Winston-
Salem, North Carolina to the Company in exchange for additional shares of voting
stock. Such shopping center was owned by James R. Gilley and certain of his
affiliates and family members. The following table reflects the number and
percentage of shares of Series D preferred Stock issued to each of them in
exchange for their respective interests in the contributed shopping center as
well as the number of shares of Common Stock into which such shares of Series D
Preferred Stock are convertible:
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<TABLE>
<CAPTION>
Number of Shares of Common
Shares of Percentage Stock Into Which
Series D of Series D Series D Preferred
Seller Preferred Stock Preferred Stock Stock is Convertible
------ --------------- --------------- --------------------
<S> <C> <C> <C>
JRG Investment Co., Inc.(1) 355,927 52.7% 177,963
Sylvia M. Gilley(2) 157,613 23.3% 78,806
The April Trust(3) 117,653 17.5% 58,827
W. Michael Gilley(4) 37,057 5.5% 18,529
James R. Gilley 6,750 1.0% 3,375
------- ----- -------
675,000 100.0% 337,500
</TABLE>
_________________
(1) Nevada corporation wholly owned by James R. Gilley.
(2) Spouse of James R. Gilley.
(3) Grantor trust for benefit of James R. and Sylvia M. Gilley.
(4) Adult son of James R. and Sylvia M. Gilley.
The shopping center was valued at $3,375,000 based on an independent
appraisal prepared by the firm of Pinnacle Consulting Group, Inc., Dallas,
Texas, a copy of which (without exhibits) is attached hereto as Exhibit A.
Shares of Series D Preferred Stock were issued at an issue price and liquidation
value of $5.00 per share, and will become convertible at a rate of two shares of
Series D Preferred Stock for one share of Common Stock or an equivalent Common
Stock conversion rate of $10.00 per share. The $10.00 equivalent per share
conversion rate is approximately the same equivalent per share conversion rate
attributed to the Series E Preferred Stock, which was determined through arms'
length negotiations.
James R. Gilley was faced with certain conflicts of interest in determining
to accept the Series D Preferred Stock in exchange for the shopping center. The
exchange, including the equivalent per share conversion rate, issue and
liquidation price, and voting rights attributed to the Series D Preferred Stock
as a part of the tax planning for the Wedgwood Acquisition, was approved by the
Conflicts of Interest Committee of the Board of Directors and by the full Board
of Directors, with Mr. Gilley and W. Michael Gilley abstaining. See "Description
of Capital Stock - Terms of Series D Preferred Stock".
Acquisition of the shopping center has been recorded on the financial
statements of the Company at approximately $2.3 million, which is the cost of
such property to the holders of Series D Preferred Stock. The net profit from
the operation of the shopping center will be sufficient to cover the dividends
payable on the Series D Preferred Stock. As of July 15, 1996, the Company has
determined to market the property for sale.
Proposal II requires Stockholder approval because under the rules of the
Exchange the effect of authorizing the conversion right is an additional listing
with the Exchange of shares issuable to insiders in connection with an
acquisition that will represent more than 5% of shares of Common Stock
outstanding.
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Proposals to Approve Conversion Shares
The Company is submitting the two Proposals to the Stockholders for
approval. Proposal I will be the right of the holders of the Series E Preferred
Stock to convert their shares into shares of Common Stock pursuant to the terms
of the Designation of the Series E Preferred Stock. Proposal II will be the
right of the holders of Series D Preferred Stock to convert their shares into
shares of Common Stock pursuant to the terms of the Designation of the Series D
Preferred Stock. Stockholders may vote for or against or abstain from voting on
either or both Proposals.
In considering their vote on the Proposals, Stockholders should give
special consideration to the following matters:
Effect on Outstanding Voting Shares. Prior to conversion of the Series D
and E Preferred Stock, there are a total of 6,185,766 shares having voting
rights, of which 3,547,284 shares (57.3%) are Common Stock, 675,000 shares
(10.9%) are Series D Preferred Stock, and 1,949,950 shares (31.5%) are Series E
Preferred Stock. Following full conversion of the Series D and E Preferred
Stock, there will be 5,523,274 shares having voting rights, and the voting
percentage of the current holders of Common Stock will increase to 64.9%, while
the voting percentage of the Common Stock issued in respect to the converted
Series D and E Preferred Stock will decrease to 6.1% and 29.4%, respectively.
Assured Approval of Proposals. Mr. Gilley has committed to the Sellers that
he and his family members would vote their shares to approve both of the
Proposals. If they were precluded from doing so or failed to honor their
commitment, the Company would likely face litigation from such Sellers which
might include attempts to rescind the Wedgwood acquisition.
Conflicts of Interest. In addition to the conflicts described under "-
Acquisition of Shopping Center and the Series D Preferred Stock," management
owning shares of Series D and E Preferred stock face conflicts of interest in
their recommendation of approval of the Proposals, in that they will benefit
from the ability to convert their Preferred Stock into Common Stock.
Optional Conversion. The conversion rights contained in the Series D and E
Preferred Stock are optional. The holders of the Series E Preferred Stock have
indicated their intention to convert their shares into Common Stock immediately
following approval by the Stockholders and have executed a power of attorney for
Mr. Paul Dendy to exercise their conversion rights. Holders of Series D
Preferred Stock may not under the terms of the Designation convert their shares
until March 15, 1997, and then may choose to defer such conversion while
collecting dividends on the Series D Preferred Stock. If so, such holders would
continue to have 675,000 votes instead of 337,500 votes after conversion.
Waiver of Rights. Stockholders should be aware that under Nevada law, any
Stockholders voting in favor of the Proposals may be deemed to have waived their
rights to challenge transactions contemplated by the Proposals, while
Stockholders voting against the Proposals or abstaining from voting will
continue to retain those rights. Any such challenge could include allegations
that the controlling Stockholders of the Company engaged in insider transactions
and thereby violated a fiduciary duty or duty of fairness to the Company or the
other Stockholders in the valuation and terms of the issuance of the shares, and
Stockholders voting in favor of these Proposals could also waive their right to
bring these claims. If a majority of the unaffiliated Stockholders approve the
Proposals, the controlling Stockholders may be protected from such claims on the
theory that the Stockholders have ratified the actions in accordance with Nevada
law and the Company's bylaws. It should also be noted that under Nevada law
Stockholders do not have dissenters' rights resulting from either of the
Proposals, nor do they have preemptive rights to acquire any of the Conversion
Shares. The transactions by
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<PAGE>
which the Company acquired Wedgwood in exchange for Series E Preferred Stock and
the shopping center property from James R. Gilley and his affiliates in exchange
for Series D Preferred Stock are not being submitted for Stockholder approval,
and a vote in favor of the Proposals to approve conversion of the Preferred
Stock should have no effect on a Stockholder's right to bring claims based on
the issuance of the Preferred Stock.
Recommendation of the Board of Directors of Greenbriar
At a meeting on February 9, 1996, the Board of Directors of Greenbriar
approved the Wedgwood acquisition and, subject to receipt of an appraisal, the
acquisition of the shopping center property from Mr. Gilley and his affiliates
in exchange for the Series D and E Preferred Stock and determined that such
actions are in the best interests of Greenbriar and its Stockholders and
recommended that the Stockholders approve and adopt both of the Proposals to
allow convertibility of the Series D and E Preferred Stock into Common Stock.
In reaching its conclusion to approve the acquisitions and the Proposals,
the Board of Directors considered the following factors and weighed the positive
and negative attributes discussed below:
(1) The most positive feature of the acquisition was its effect on the
Company's growth strategy. Greenbriar began during 1994 to shift its focus from
its historical businesses into the assisted living industry and by early 1996
had disposed of all of its businesses other than the ownership of certain
investment real properties and its developmental efforts in assisted living. The
acquisition of Wedgwood would immediately add 16 operating facilities and a
seasoned team of management for such facilities, thereby establishing the
Company as a competitor in the assisted living business. The Board of Directors
discussed the Wedgwood acquisition and reviewed its structure, documentation and
terms with legal counsel representing Greenbriar in the transaction. The Board
considered the purchase price of Preferred Stock that would eventually be
converted into Common Stock and the employment and contracting obligations to
Wedgwood management. The Board of Directors concluded that these terms were in
the Company's and the Stockholders' best interests. Such acquisition was
believed to be compatible with the Company's strategy of growing its assisted
living business through a combination of acquisitions and internal development.
Management believed it was crucial to complete a sizable acquisition to become
an immediate presence in the assisted living industry, and the Wedgwood
acquisition was seen as a positive benefit to the Company in meeting its growth
objectives. The industry is in a rapid phase of growth and consolidation, and
several assisted living companies completed or initiated initial public
offerings in 1995 and 1996, some of which became public after completing a
series of consolidating acquisitions. The need to quickly take advantage of
available opportunities led the Board of Directors to the issuance of the Series
D and E Preferred Stock in order to timely conclude the transaction, and to
follow the acquisition with a Stockholder vote to approve the conversion of the
Series D and E Preferred Stock into Common Stock.
(2) The Board considered the attractive prices for the Common Stock of
Companies in the assisted living industry, which the market perceived as a
growth industry due to the opportunities for consolidation and the increase in
the base of residents in an aging population. Management believed that the
Company could benefit from these trends and create a positive benefit for the
Stockholders by becoming immediately established in the industry through an
acquisition. The Company's Common Stock closed on the Exchange at $10.75 on
December 4, 1995, the day before the Company announced its intent to acquire
Wedgwood. On March 18, 1996, when the Company announced the closing of the
Wedgwood acquisition, the stock price closed at $16.38.
(3) The Board of Directors analyzed the Wedgwood acquisition on the
assumption that the only consideration being issued by the Company would be
Common Stock. The decision to issue Series E Preferred Stock pending receipt of
Stockholder approval was not the preferred method of acquiring the Company, but
8
<PAGE>
was viewed as a means of concluding the acquisition quickly. Because Stockholder
approval of such issuance was assured, the Board concluded that it was in the
best interest of the Stockholders and Company to defer approval of the
conversion feature to enable issuance of the Common Stock. Although such step
added to the complexity of the transaction, the Sellers of Wedgwood approved the
sale only on this basis, and would not have sold Wedgwood in exchange for the
Series E Preferred Stock unless approval of the issuance of the Common Stock
upon conversion following approval of the Company's Stockholders was assured.
(4) The Board of Directors reviewed the issuance of the Series D Preferred
Stock to James R. Gilley and his affiliates in exchange for the shopping center
property. The Board determined to approve such issuance and the Proposal with
respect to the conversion thereof, based primarily on the inability to structure
the Wedgwood acquisition to be tax free to the Wedgwood sellers without a
contemporaneous contribution of significant assets to the Company by a seller
who, considered together with the sellers of Wedgwood, would control more than
80% of the voting stock of the Company after the contributions. No one was
available who could satisfy this need other than the Gilley parties, who were
already significant owners of the Company's voting stock. The requirement to
take this step was viewed as a negative feature of the transaction because it
created an insider transaction and added an asset to manage outside of the
Company's core business. The Company would not have entered into the transaction
to acquire the shopping center otherwise than because of the need to enable a
tax free transaction to the Wedgwood Sellers, which was an important feature of
the acquisition to such Sellers. To minimize the adverse effect of the conflicts
of interest inherent in the shopping center transaction, the Conflict of
Interest Committee of the Board of Directors considered and approved the
transaction. As part of its consideration, such committee obtained an
independent appraisal of the shopping center (attached hereto as Exhibit A).
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of Greenbriar consists of 100,000,000 shares
of Common Stock and 10,000,000 shares of Preferred Stock, par value $.10 per
share (the "Authorized Preferred Stock"). The authorized Preferred Stock may be
designated in series, and five series of Preferred Stock have been designated,
four of which are outstanding.
Common Stock.
The holders of Common Stock have no preemptive, conversion or redemption
rights. The outstanding shares of Common Stock are fully paid and nonassessable.
The holders of Common Stock are entitled to receive such dividends as may be
declared from time to time by the Board of Directors out of funds legally
available therefor. The Company has not paid cash dividends on the Common Stock
during the last two fiscal years, and the Board of Directors currently intends
to retain earnings for further development of its business and not to pay cash
dividends on the Common Stock in the foreseeable future. No dividends can be
paid on the Common Stock while dividends are in arrears on any Series of
Preferred Stock. The Company is not currently in arrears on any dividends
payable on the Preferred Stock. The holders of Common Stock are entitled to one
vote per share on all matters submitted to a vote of Stockholders and do not
possess cumulative voting rights. The registrar and transfer agent for the
Common Stock is American Stock Transfer and Trust Company, New York, New York.
9
<PAGE>
Terms of Series D Preferred Stock.
The Board of Directors has approved the designation of the Series D
Preferred Stock consisting of 675,000 shares and having the rights and
preferences summarized below. The Series D Preferred Stock is a separate series
of Preferred Stock within the 10,000,000 shares of authorized Preferred Stock of
the Company. Following is a brief summary of certain provisions of the Series D
Preferred Stock. A full statement of the rights and preferences of the Series D
Preferred Stock is set forth in Attached Exhibit B.
Dividends. Series D Preferred Stock bear dividends at the rate of 9.5% per
annum on the Issue Price (defined below) thereof, payable quarterly. At the
election of the Board, dividends may be accumulated and will be payable in cash
when and as declared by the Board. No dividends may be paid or declared (other
than a dividend payable in Common Stock), and no distribution (of other
securities or any other property) may be made, on Common Stock or any other
class or series of stock ranking junior to the Series D Preferred Stock while
any dividends on Series D Preferred Stock remains accumulated and unpaid. No
Common Stock or any other class or series of stock ranking junior to the Series
D Preferred Stock may be redeemed or purchased by the Company while any
dividends on Series D Preferred Stock remains accumulated and unpaid.
Liquidation Rights. In the event of any liquidation, dissolution or winding
up of the Company, the holder of each share of Series D Preferred Stock then
outstanding will be entitled to be paid, along with and pari passu with the
holders of Series A, B, C and E Preferred Stock an amount in cash equal to $5.00
(the "Issue Price") for each share of such Series D Preferred Stock, together
with any accumulated and unpaid dividends thereon, before any distribution or
payment on Common Stock. Thereafter, the holders of Common Stock then
outstanding will together be entitled to receive ratably all the remaining
assets of the Company.
Redemption. Provided there are no accumulated and unpaid dividends on
Series D Preferred Stock, the Series D Preferred Stock may be redeemed at the
Issue Price at any time by the Company upon written notice to the record holders
thereof.
Conversion. The Designation of Rights and Preferences governing the Series
D Preferred Stock provides that following approval at the Special Meeting, each
two shares of Series D Preferred Stock will be convertible, at the option of the
holder thereof at any time commencing one year following the date of issuance
thereof, into one share of Common Stock. Such initial conversion rate will be
subject to certain anti-dilution adjustments from time to time for stock splits,
stock dividends, reclassifications and similar items affecting the number of
outstanding shares of Common Stock so as to fairly and equitably preserve as
reasonably as possible the original conversion rights of the Series D Preferred
Stock. The 675,000 shares of D Preferred Stock will initially be convertible
into 337,500 shares of Common Stock.
Voting Rights. Holders of Series D Preferred Stock have the right to vote
together with the holders of Common Stock, and not as a separate class (except
as hereafter described), on any matters to come before the vote of Stockholders,
and each share of Series D Preferred Stock is entitled to one vote, or an
aggregate of 675,000 votes, whereas if the Series D Preferred Stock is converted
at the initial conversion rate into 337,500 shares of Common Stock, the former
holders of Series D Preferred Stock will have an aggregate of only 337,500
votes. In addition, holders of Series D Preferred Stock, voting as a separate
class by majority vote, must approve any amendment to the Designation of Rights
and Preferences of Series D Preferred Stock, to (i) increase or decrease the
number of authorized shares of Series D Preferred Stock, (ii) increase or
decrease the Issue Price, (iii) effect an exchange, reclassification or
cancellation of all or part of the shares of Series D Preferred Stock, (iv)
effect an exchange, or create a right of exchange, of all or any part of the
shares of another class into shares of Series D Preferred Stock, (v) change the
designations, preferences, limitations, or relative rights of the Series D
Preferred Stock, (vi) change the shares of Series D Preferred Stock into the
10
<PAGE>
shares of another class, or (viii) cancel or otherwise affect accumulated but
undeclared dividends on the Series D Preferred Stock. Holders of Series D
Preferred Stock do not have the right to vote at the Special Meeting for
approval of the Proposal, but will be asked to consent to the action of the
Stockholders at the Special Meeting, if approved.
Preemptive Rights. Except with respect to the anti-dilution rights
referenced above under "Conversion", no holder of Series D Preferred Stock will
be entitled as a matter of right to subscribe or receive additional shares of
any class of stock of the Company, whether now or hereafter authorized, or any
bonds, debentures or other securities convertible into such stock.
Ownership by Officers and Directors. 100% of the Series D Preferred Stock
is held by James R. Gilley and certain family members and affiliates of James R.
Gilley. See "Principal Stockholders and Security Ownership of Management Before
and After Conversion."
Terms of Series E Preferred Stock.
Greenbriar's Board of Directors has approved the designation of the Series
E Preferred Stock consisting of 1,949,950 shares and having the rights and
preferences summarized below. The Series E Preferred Stock is a separate series
of preferred stock within the 10,000,000 shares of authorized Preferred Stock of
the Company. Following is a brief summary of certain provisions of the Series E
Preferred Stock. A full statement of the rights and preferences of the Series E
Preferred Stock is set forth in Attached Exhibit C.
Dividends. Series E Preferred Stock will bear no dividend except that a 12%
cumulative dividend shall commence 27 months following the date of issue if the
conversion right is not approved. No dividends may be paid or declared (other
than a dividend payable in Common Stock), and no distribution (of other
securities or any other property) may be made, on Common Stock or any other
class or series of stock ranking junior to the Series E Preferred Stock while
any dividends on Series E Preferred Stock remains accumulated and unpaid. No
Common Stock or any other class or series of stock ranking junior to the Series
E Preferred Stock may be redeemed or purchased by the Company while any
dividends on Series E Preferred Stock remain accumulated and unpaid.
Liquidation Rights. In the event of any liquidation, dissolution or winding
up of the Company, the holder of each share of Series E Preferred Stock then
outstanding will be entitled to be paid, along with and pari passu with the
holders of Series A, B, C and D Preferred Stock an amount in cash equal to
$9.514 (the "Issue Price") for each share of such Series E Preferred Stock,
together with any accumulated and unpaid dividends thereon, before any
distribution or payment on Common Stock. Thereafter, the holders of Common Stock
then outstanding will together be entitled to receive ratably all the remaining
assets of the Company.
Redemption. Provided there are no accumulated and unpaid dividends on
Series E Preferred Stock, the Series E Preferred Stock may be redeemed at the
Issue Price at any time by the Company upon written notice to the record holders
thereof on the Company's books.
Conversion. The Designation of Rights and Preferences governing the Series
E Preferred Stock provides that following approval of the Stockholders at the
Special Meeting, each 1.2 shares of Series E Preferred Stock will be
convertible, at the option of the holder thereof, into one share of Common
Stock. If so converted, the 1,949,950 shares of Series E Preferred Stock will
convert into 1,624,958 shares of Common Stock.
Voting Rights. Holders of Series E Preferred Stock have the right to vote
together with the holders of Common Stock, and not as a separate class (except
as hereafter described), on any matter to come before the vote of Stockholders,
and each share of Series E Preferred Stock is entitled to one vote, or an
aggregate of
11
<PAGE>
1,949,950 votes. However, if the Series E Preferred Stock is converted into
1,624,958 shares of Common Stock, the former holders of Series E Preferred Stock
will hold an aggregate of only 1,624,958 votes. In addition, Holders of Series E
Preferred Stock, voting as a separate class by majority vote, must approve any
amendment to the Designation of Rights and Preferences of Series E Preferred
Stock to (i) increase or decrease the number of authorized shares of Series E
Preferred Stock, (ii) increase or decrease the Issue Price, (iii) effect an
exchange, reclassification or cancellation of all or part of the shares of
Series E Preferred Stock, (iv) effect an exchange, or create a right of
exchange, of all or any part of the shares of another class into shares of
Series E Preferred Stock, (v) change the designations, preferences, limitations,
or relative rights of the Series E Preferred Stock, (vi) change the shares of
Series E Preferred Stock into the shares of another class, or (viii) cancel or
otherwise affect accumulated but undeclared dividends on the Series E Preferred
Stock. Holders of Series E Preferred Stock do not have the right to vote at the
Special Meeting, but will be asked to consent to the action of the Stockholders
at the Special Meeting, if approved.
Preemptive Rights. Except with respect to the anti-dilution rights
referenced above under "Conversion", no holder of Series E Preferred Stock will
be entitled as a matter of right to subscribe or receive additional shares of
any class of stock of the Company, whether now or hereafter authorized, or any
bonds, debentures or other securities convertible into such stock.
Ownership of Directors and Officers. See "Principal Stockholders and
Security Ownership of Management Before and After Conversion."
PRINCIPAL STOCKHOLDERS AND SECURITY OWNERSHIP
OF MANAGEMENT BEFORE AND AFTER CONVERSION
Securities Ownership of Certain Beneficial Owners
The following table sets forth as of June 30, 1996, certain information
with respect to all Stockholders known by the Company to own beneficially more
than 5% of the outstanding Common Stock and Series C, D and E Preferred Stock
(which are the only outstanding classes of voting securities of the Company,
except for Series B Preferred Stock), as well as information with respect to the
Company's Common Stock and Series C, D and E Preferred Stock owned beneficially
by each director, which includes James R. Gilley, Gene S. Bertcher, Robert L.
Griffis and W. Michael Gilley, constituting all executive officers whose
compensation from the Company in 1995 exceeded $100,000, and by all directors
and executive officers as a group. Unless otherwise indicated, each of such
Stockholders has sole voting and investment power with respect to the shares
beneficially owned. The number of shares of Series B Preferred Stock outstanding
and convertible into Common Stock is immaterial and no information has been
provided below regarding Series B Preferred Stock ownership. All shares of
Common Stock have been adjusted for the 1 for 5 reverse split effected in
December 1995.
<TABLE>
<CAPTION>
Preferred Stock Common Stock
------------------------- -----------------------------------------------------------
Number of Shares--
Number Percent Number Percent Assuming Full Percent
Name and Address of of of of Conversion of Preferred of
of Beneficial Owner Shares Series Shares Class Stock by Holders Class
- ---------------------------------- ---------- ------- -------- ------ ----------------------- --------
<S> <C> <C> <C> <C> <C> <C>
Series D Preferred Stock(2)
---------------------------
James R. Gilley 637,943(4) 94.5% 2,346,000(5) 62.4% 2,664,971 46.7%
4265 Kellway Circle
Addison, TX 75244
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
Preferred Stock Common Stock
------------------------- -----------------------------------------------------------
Number of Shares --
Number Percent Number Percent Assuming Full Percent
Name and Address of of of of Conversion of Preferred of
of Beneficial Owner Shares Series Shares Class Stock by Holders Class
- ---------------------------------- ---------- ------- -------- ------ ----------------------- --------
<S> <C> <C> <C> <C> <C> <C>
Sylvia M. Gilley 637,943(4) 94.5% 2,346,000(5) 62.4% 2,664,971 46.7%
13711 Creekside Place
Dallas, TX 75248
W. Michael Gilley 37,057(6) 5.5% 261,000(6) 7.3% 279,528 5.1%
4265 Kellway Circle
Addison, TX 74244
Series E Preferred Stock(3)
---------------------------
Victor L. Lund 1,457,953 75.8% - - 1,214,961 22.1%
816 N.E. 87th Ave.
Vancouver, WA 98664
Paul W. Dendy 19,360 1.0% 10,000(10) 0.3% 26,133 0.5%
816 N.E. 87th Ave.
Vancouver, WA 98664
Mark W. Hall 84,442 4.4% 10,000(10) 0.3% 80,368 1.5%
816 N.E. 87th Ave.
Vancouver, WA 98664
Gene S. Bertcher - - 80,000(7) 2.2% 80,000 1.5%
4265 Kellway Circle
Addison, TX 75244
Robert L. Griffis - - 30,000(8) 0.9% 30,000 0.5%
4265 Kellway Circle
Addison, TX 75244
Michael E. McMurray - - - - - -
5330 Merrick Rd.
Massapequa, NY 11758
Matthew G. Gallins - - 24,000(9) 0.7% 24,000 0.4%
715 Stadium Drive
Winston-Salem, NC 27101
Paul G. Chrysson - - - - - -
1045 Burke Street
Winston-Salem, NC 27101
Richards D. Barger - - 200 - 200 -
945 San Marino Ave.
San Marino, CA 91108
Steven R. Hague - - - - - -
1650 Bank One Tower
221 W. Sixth Street
Austin, TX 78701
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
Preferred Stock Common Stock
------------------------- -----------------------------------------------------------
Number of Shares --
Number Percent Number Percent Assuming Full Percent
Name and Address of of of of Conversion of Preferred of
of Beneficial Owner Shares Series Shares Class Stock by Holders Class
- ---------------------------------- ---------- ------- -------- ------ ----------------------- --------
<S> <C> <C> <C> <C> <C> <C>
Don C. Benton - - - - - -
9200 Inwood Road
Dallas, TX 75220
Series C Preferred Stock
------------------------
Cove Capital Corporation 10,000(1) 100.0% - - 66,667 1.2%
245 East 54th Street
New York, NY 10022
Series C, D and E Preferred Stock
All executive officers 517,387(2) 76.6% 2,581,200 68.6% 4,308,690 75.5%
and directors as a group 1,586,675(3) 82.5%
(13 persons)
</TABLE>
____________________
(1) Represents Series C Preferred Stock which votes with Common Stock and
Series B, D and E Preferred Stock as one class. Series C Preferred Stock
is convertible into Common Stock at a rate of 6.67 shares of Common Stock
for each share of Series C Preferred Stock.
(2) Represents Series D Preferred Stock which votes with Common Stock and
Series B, C and E Preferred Stock as one class. Series D Preferred Stock
is convertible into Common Stock, beginning March 15, 1997, provided
holders of Common Stock and Series B and C Preferred Stock approve the
convertibility feature by a majority vote at the Special Meeting, at a rate
of one share of Common Stock for two shares of Series D Preferred Stock.
(3) Represents Series E Preferred Stock which votes with Common Stock and
Series B, C and D Preferred Stock as one class. If holders of a majority
of the outstanding Common Stock and Series B and C Preferred Stock approved
the conversion feature for the Series E Preferred Stock at the Special
Meeting, it will be convertible at a rate of one share of Common Stock for
1.2 shares of Series E Preferred Stock.
(4) Consists of 355,927 shares owned by JRG Investments Co., Inc., a
corporation wholly owned by James R. Gilley ("JRG"), 157,613 shares owned
by Sylvia M. Gilley, 117,653 shares owned by a grantor trust for the
benefit of Mr. and Mrs. Gilley and 6,750 shares owned by James R. Gilley.
Sylvia M. Gilley is the spouse of James R. Gilley. Other than shares owned
by the trust, JRG and Mrs. Gilley disclaim any beneficial ownership in the
shares owed by each other.
(5) Consists of 1,210,000 shares of Common Stock owned by JRG, 400,000 shares
of Common Stock by a grantor trust for the benefit of James R. and Sylvia
M. Gilley, options to James R. Gilley to purchase 200,000 shares of Common
Stock at $10.75 per share, exercisable through December 1, 2000, and
536,000 shares of Common Stock owned of record by Mrs. Gilley. Other than
shares owned by the grantor trust, Mrs. Gilley disclaims any beneficial
ownership of the shares owned by Mr. Gilley and JRG. Mr. Gilley and JRG
disclaim beneficial ownership of the shares owned by Mrs. Gilley. Mr.
Gilley and JRG have pledged 1,166,363 shares of Common Stock, and Mr.
Gilley has pledged all of his shares in JRG, to MS Holding Corp., a
nonaffiliated entity, as collateral for repayment of a $5,700,000
promissory note payable by JRG to MS Holding Corp. The note requires
payment of annual interest only until May 23, 1997, when the principal
balance and all accrued interest is due and payable. Failure to repay such
note when due could have an effect on the control of the Company. Of the
shares of Common Stock owned by the grantor trust, 200,000 shares were
acquired by the trust from the Company in November 1993 in consideration of
a $2,250,000 partial recourse promissory note executed by the grantor trust
and Mr. Gilley (as co-maker). This note bears interest at an annual rate
of 5.5% until November 2003, when the entire principal balance and all
accrued
14
<PAGE>
interest is due. The note is collateralized by the 200,000 shares purchased
by the grantor trust, and the grantor trust and Mr. Gilley (as co-maker)
have personal recourse only for the first 20% of the principal balance.
(6) W. Michael Gilley is the adult son of James R. Gilley and Sylvia M. Gilley.
Consists of 101,000 shares of Common Stock and 37,057 shares of Series D
Preferred Stock owned of record, and 130,000 shares of Common Stock owned
by five trusts for which Mr. Gilley acts as co-trustee for the benefit of
the children and grandchildren of James R. and Sylvia M. Gilley. Of the
101,000 shares of Common Stock, 46,000 shares were issued for promissory
notes of $237,500, for which 30,000 shares are currently pledged as
collateral.
(7) Consists of 60,000 shares of Common Stock issued for promissory notes of
$92,500, for which 13,000 shares are currently pledged as collateral, and
options to purchase 20,000 shares of Common Stock for $11.25 per share
vesting over nine years, of which 2,000 shares vested immediately and the
remainder vest over a nine year period beginning January 1, 1994.
(8) In November 1992, Mr. Griffis obtained a loan from the Company for $75,000
which was used to exercise options to purchase 30,000 shares of the
Company's Common Stock. The loan is collateralized by the shares purchased
by Mr. Griffis.
(9) Consists of 20,000 shares of Common Stock owned by a trust for which Mr.
Gallins acts as co-trustee for the benefit of one of the grandchildren of
James R. and Sylvia M. Gilley and 4,000 shares of Common Stock owned by
Matthew G. Gallins LLC.
(10) Represents options to purchase 10,000 shares of Common Stock each, one-
third of which vest on each of March 15, 1997, 1998 and 1999.
EXECUTIVE COMPENSATION
The following tables set forth the compensation paid by the Company for
services rendered during the fiscal years ended December 31, 1995, 1994 and 1993
to the Chief Executive Officer of the Company and to the other executive
officers of the Company whose total annual salary in 1995 exceeded $100,000, the
number of options granted to any of such persons during 1995, and the value of
the unexercised options held by any of such persons on December 31, 1995.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation-Number
Name and Compensation- of Shares of Common All Other
Principal Position Year Salary Stock Underlying Options Compensation(1)
- ------------------ ----- -------------- ------------------------ ---------------
<S> <C> <C> <C> <C>
James R. Gilley, 1995 $460,000 200,000 $7,500
President and Chief 1994 460,000 - 6,500
Executive Officer 1993 460,000 - 4,500
Gene S. Bertcher, 1995 172,500 - 6,500
Executive Vice 1994 150,000 20,000 6,500
President and Chief 1993 150,000 - 4,500
Financial Officer
W. Michael Gilley, 1995 143,750 - 6,500
Executive Vice 1994 - - -
President 1993 - - -
Robert L. Griffis, 1995 115,000 - 6,500
Senior Vice President 1994 100,000 - 6,500
1993 100,000 - 4,500
</TABLE>
15
<PAGE>
_________________
(1) Constitutes directors' fees paid by the Company to the named individuals.
Option/SAR Grants Table
(Option/SAR Grants in Last Fiscal Year)
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed Annual
Number of Rates of Stock Price
Securities Percent of Exercise Appreciation For Option Term
Underlying Total Options Granted to or Base Expiration -----------------------------
Name Options Granted Employees in Fiscal Year Price Per Share Date 5% ($) 10% ($)
- ------------------ --------------- ------------------------ --------------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
James R. Gilley 200,000 95.2% $ 10.75 5/24/01 $ 2,032,000 $3,146,013
Gene S. Bertcher 20,000 - $ 11.25 12/31/01 207,405 340,955
</TABLE>
Aggregated Option/SAR
Exercises in Last Fiscal
Year and FY-End Option/SAR Values
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised Options/ In-the-Money Options/
SARs at 1995 FY-End SARs at 1995 FY-End
Shares Acquired Value ------------------------------- -----------------------------
Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ---------------------------- ----------- -------------- ------------ ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
James R. Gilley - - 200,000 - $1,150,000 -
Gene S. Bertcher - - 8,000 12,000 $ 42,000 $105,000
W. Michael Gilley - - - - - -
Robert L. Griffis - - - - - -
</TABLE>
Compensation of Directors
The Company pays each director a fee of $2,500 per year, plus a meeting fee
of $1,000 for each Board and Committee meeting attended.
16
<PAGE>
Stock Option Plan
The Stock Option Committee administers the Company's 1992 Stock Option
Plan, as amended (the "Plan"), which provides for grants of incentive and non-
qualified stock options to the Company's executive officers, as well as its
directors and other key employees. Under the Plan, options are granted to
provide incentives to participants to promote long-term performance of the
Company and specifically, to retain and motivate senior management in achieving
a sustained increase in shareholder value. Currently, the Plan has no pre-set
formula or criteria for determining the number of options that may be granted.
The Stock Option Committee reviews and evaluates the overall compensation
package of the executive officers and determines the awards based on the overall
performance of the Company and the individual performance of the executive
officers. The Company currently has reserved 217,500 shares of Common Stock for
issuance under the Plan, of which 77,500 shares are covered by outstanding
options as of July 1, 1996.
Employment Agreements
Effective upon closing of the Wedgwood Acquisition, the Company entered
into Employment Agreements with Paul W. Dendy, Mark W. Hall and Teresa L.
Waldroff, of whom Messrs. Dendy and Hall are Executive Vice Presidents and
directors of the Company. Such agreements are for a term of three years to Mr.
Dendy and one year for Ms. Waldroff and Mr. Hall, respectively, following the
closing of the Wedgwood Acquisition, provide for an annual salary of $125,000,
subject to annual review in the case of Mr. Dendy, and customary benefits and
provide that each such employee be granted options to purchase 10,000 shares of
Common Stock at an exercise price per share of $11.42, which was equal to the
average closing sale price for the Common Stock on the American Stock Exchange
on the three days before and three days after execution of the definitive
agreement for the Wedgwood Acquisition on January 30, 1996.
17
<PAGE>
MARKET PRICE
The Company's Common Stock is listed on the American Stock Exchange and
traded under the symbol "GBR".
As of the Record Date, there were approximately 3,900 stockholders of record of
the Common Stock. The following table sets forth the high and low sales prices
on the American Stock Exchange for the periods indicated.
<TABLE>
<CAPTION>
Price Range of
Common Stock
------------------
High Low
-------- -------
<S> <C> <C>
Fiscal Year Ended December 31, 1994:
First Quarter $ 16 1/2 $9 1/16
Second Quarter 11 1/4 8 1/8
Third Quarter 10 5/8 5 5/16
Fourth Quarter 7 13/16 4 3/8
Fiscal Year Ended December 31, 1995:
First Quarter 8 3/4 5
Second Quarter 10 15/16 5 5/16
Third Quarter 13 7/16 9 1/16
Fourth Quarter 13 7/16 7 3/16
Fiscal Year Ended December 31, 1996:
First Quarter 16 3/4 9 7/16
Second Quarter 17 5/8 14
Third Quarter(1) 17 3/8 15 5/8
</TABLE>
__________________________
(1) Through August 19, 1996.
The above prices have been adjusted to reflect a one for five reverse split
of the Common Stock that occurred on December 1, 1995.
PROXY SOLICITATION
Proxies are being solicited from the Company's Stockholders by and on
behalf of the Board of Directors of the Company. The cost of solicitation of
proxies will be paid by the Company. In addition to solicitation by use of the
mails, proxies may be solicited by directors, officers, and employees of the
Company in person or by telephone, telegram, or other means of communication.
Such directors, officers, and employees will not be additionally compensated for
such services but may be reimbursed for out-of-pocket expenses incurred by them
in connection with such solicitation. Arrangements will also be made with
custodians, nominees, and fiduciaries for the forwarding of proxy solicitation
materials to beneficial owners of Common Stock held of record by such persons.
18
<PAGE>
OTHER MATTERS
The Board of Directors does not intend to bring any other matters before
the Special Meeting and has not been informed that any other matters are to be
presented to the Special Meeting by others. In the event that other matters
properly come before the Special Meeting or any adjournments thereof it is
intended that the persons named in the accompanying proxy and acting thereunder
will vote in accordance with their best judgement.
DEADLINE FOR SUBMISSION
OF PROPOSALS TO BE PRESENTED
AT THE 1997 ANNUAL MEETING OF STOCKHOLDERS
Any Stockholder who intends to present a Proposal at the 1997 Annual
Meeting of Stockholders must file such Proposal with the Company by January 3,
1997 for possible inclusion in the Company's proxy statement and form of proxy
relating to the meeting.
FORWARD LOOKING STATEMENTS
Certain statements included in the Managements' Discussion and Analysis of
Financial Condition and Results of Operations are forward looking statements
that predict the future development of the Company. The realization of these
predictions will be subject to a number of variable contingencies, and there is
no assurance that they will occur in the time frame proposed. The risks
associated with the potential actualization of the Company's plans include:
contractor delays, the availability and cost of financing, availability of
managerial oversight and regulatory approvals, to name a few.
FINANCIAL INFORMATION
The consolidated financial statements of the Company and Wedgwood as of
December 31, 1994 and 1995 and for each of the three years in the three year
period ended December 31, 1995, included in this Proxy Statement, have been
audited by Grant Thornton LLP, independent certified public accountants, as
stated in their report thereon. The unaudited consolidated financial statements
of the Company and Wedgwood as of June 30, 1995 and 1996 and for the six
months ended June 30, 1995 and 1996, have not been audited, but in the opinion
of management contain all accruals and adjustments necessary to present fairly
such financial information as of such dates and for such periods. Results for
the six months ended June 30, 1996 are not necessarily indicative of results
that can be expected for the full year.
By Order of the Board of Directors
James R. Gilley,
President and Chief Executive Officer
19
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
GREENBRIAR CORPORATION SELECTED HISTORICAL FINANCIAL DATA............ F-3
GREENBRIAR CORPORATION MANAGEMENTS' DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS............................................ F-5
WEDGWOOD RETIREMENT INNS, INC.
SELECTED HISTORICAL FINANCIAL DATA................................... F-11
WEDGWOOD RETIREMENT INNS, INC.'S MANAGEMENTS'
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.................................. F-12
PRO FORMA CONDENSED COMBINED STATEMENTS
OF OPERATIONS........................................................ F-15
Pro Forma Condensed Combined Statement of Operations for year ended
December 31, 1995.................................................... F-16
Pro Forma Condensed Combined Statement of Operations for six months
ended June 30, 1996.................................................. F-17
Notes to Pro Forma Condensed Combined Statements of Operations....... F-18
Pro Forma Management's Discussion and Analysis of Pro Forma
Condensed Combined Statements of Operations.......................... F-18
GREENBRIAR CORPORATION
Report of Independent Certified Public Accountants................... F-20
Consolidated Balance Sheets as of December 31, 1994
December 31, 1995 and June 30, 1996 (unaudited)...................... F-21
Consolidated Statements of Earnings for the years
ended December 31, 1993, 1994 and 1995, and for
the six months ended June 30, 1995 and 1996 (unaudited).............. F-23
Consolidated Statements of Stockholders' Equity for
the years ended December 31, 1993, 1994 and 1995,
and the six months ended June 30, 1996 (unaudited)................... F-24
Consolidated Statements of Cash Flows for the years
ended December 31, 1993, 1994 and 1995, and the
six months ended June 30, 1995 and 1996 (unaudited).................. F-25
Notes to Consolidated Financial Statements........................... F-27
WEDGWOOD RETIREMENT INNS, INC.
Report of Independent Certified Public Accountants................... F-40
Combined Balance Sheets as of December 31, 1994
December 31, 1995 and March 31, 1996 (unaudited)..................... F-41
</TABLE>
F-1
<PAGE>
<TABLE>
<S> <C>
Combined Statements of Operations for the years
ended December 31, 1993, 1994 and 1995, and for
the three months ended March 31, 1995 and 1996 (unaudited).... F-43
Combined Statements of Stockholders', Members',
Partners' and Owners' Deficit for the years
ended December 31, 1993, 1994 and 1995, and
the three months ended March 31, 1996 (unaudited)............. F-44
Combined Statements of Cash Flows for the years
ended December 31, 1993, 1994 and 1995,
and the three months ended March 31, 1996..................... F-45
Notes to Combined Financial Statements........................ F-46
</TABLE>
F-2
<PAGE>
GREENBRIAR CORPORATION
SELECTED HISTORICAL FINANCIAL DATA
The following table sets forth selected historical consolidated financial
data for the Company. The selected historical consolidated data of the Company
as of December 31, 1991, 1992, 1993, 1994 and 1995, and for each of the five
years in the period ended December 31, 1995, were derived from the historical
consolidated financial statements of the Company, which have been audited by
Grant Thornton LLP, independent auditors, whose report with respect thereto is
included elsewhere in this Proxy Statement. The selected historical consolidated
financial data of the Company as of and for the six-month periods ended June 30,
1995 and 1996, were derived from unaudited consolidated financial statements of
the Company. In the opinion of management, the unaudited consolidated financial
statements reflect all adjustments (consisting of normal recurring adjustments)
necessary for a fair presentation of the financial position and results of
operations for the unaudited periods. The results of operations for the interim
periods are not necessarily indicative of results that may be expected for the
full year.
F-3
<PAGE>
<TABLE>
<CAPTION>
For the Six Months
For the Year Ended December 31, Ended June 30,
------------------------------------------------------- -----------------------------
1991 1992 1993 1994 1995 1995 1996
-------- -------- -------- --------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Earnings Data
Revenue:
Assisted living facilities $ - $ 1,050 $ 510 $ 7,939 $ 557 $ 555 $4,319
Other 511 - - - - - 47
-------- ------- ------- ------- ------- ------- ------
Total revenues 511 1,050 510 7,939 557 555 4,366
-------- ------- ------- ------- ------- ------- ------
Operating expenses:
Assisted living facilities - 533 279 5,059 322 276 2,706
Lease expense - - - - - - 454
Facility depreciation and
amortization - - - - - 42 405
Corporate, general and
administrative 741 1,104 2,263 3,502 2,688 1,300 1,519
-------- ------- ------- ------- ------- ------- ------
741 1,637 2,542 8,561 3,010 1,618 5,084
-------- ------- ------- ------- ------- ------- ------
Operating loss (230) (587) (2,032) (622) (2,453) (1,063) (718)
Other income (expense)
Interest and dividend income 37 1,854 1,237 208 1,176 568 468
Interest expense (116) (640) - (2,221) (101) (98) (798)
Gain on sale of assets 345 8,333 2,450 2,803 6,950 5,804 32
Minority interest in earnings
of partnership - - - - - - (37)
Other (29) 49 140 - 239 9 453
-------- ------- ------- ------- ------- ------- ------
237 9,596 3,827 790 8,264 6,283 118
-------- ------- ------- ------- ------- ------- ------
Earnings (loss) from
continuing operations
before income tax 7 9,009 1,795 168 5,811 5,220 (600)
Income tax expense (benefit) - 1,440 53 (201) 94 1,775 (229)
-------- ------- ------- ------- ------- ------- ------
Earnings (loss) from
continuing operations 7 7,569 1,742 369 5,717 3,445 (371)
Discontinued operations (net) (1,003) (516) (237) 1,419 80 12 696
-------- ------- ------- ------- ------- ------- ------
Net earnings (loss) $ (996) $ 7,053 $ 1,505 $ 1,788 $ 5,797 $ 3,457 $ 325
Preferred stock dividend
requirement - (182) (213) (327) (225) (128) (148)
-------- ------- ------- ------- ------- ------- ------
Net earnings (loss)
allocable to common stockholders $ (996) $ 6,871 $ 1,292 $ 1,461 $ 5,572 $ 3,329 $ 177
======== ======= ======= ======= ======= ======= ======
Earnings (loss) per share
Continuing operations $ .03 $ 3.56 $ .46 $ .01 $ 1.55 $ .90 $ (.15)
Net earnings $ (4.13) $ 3.31 $ .39 $ .40 $ 1.57 $ .90 $ .05
Weighted average common
shares outstanding 241 2,074 3,296 3,679 3,539 3,679 3,460
<CAPTION>
At December 31, At June 30
--------------------------------------------------- ----------
1991 1992 1993 1994 1995 1996
-------- -------- ------- -------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data
Cash and cash equivalents $ 130 $ 1,197 $ 1,083 $ 8,311 $ 7,199 $ 2,928
Working capital (deficit) (612) 4,684 2,416 10,138 10,015 4,107
Total assets 20,990 23,469 74,962 44,964 29,772 89,761
Long-term obligations,
including current portion 477 11,449 44,056 1,489 909 38,632
Stockholders' equity 2,952 7,904 20,549 22,144 24,895 41,223
</TABLE>
Note - Operating results for the six months ended June 30, 1996 reflect the
acquisition of Wedgwood in March 1996. See Note O of notes to consolidated
financial statements.
F-4
<PAGE>
GREENBRIAR CORPORATION'S
MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
During 1994, the Company began to focus its business on the development,
construction, management and ownership of assisted living properties. In
addition to its assisted living operations, the Company's historical businesses
during the past five years have included ownership and operation of skilled
nursing centers, real estate investments, and manufacture and leasing of
electric convenience vehicles and wheelchairs. The nursing centers and
convenience vehicle businesses have been sold, and the real estate investments
are being liquidated. Also, in 1994 and 1995, the company sold its existing
assisted living/retirement facilities. Revenues and earnings in years prior to
1996 are attributed to these prior businesses. During 1994, the Company began
independently to develop its assisted living business, began construction on its
first assisted living facility in July 1995, and opened such facility to
residents on May 30, 1996. By August 1, 1996, the Company had seven assisted
living facilities under construction (i.e., construction activities have
commenced and are ongoing) and was developing eleven additional assisted living
facilities (i.e., the site is under control and development activities such as
site permitting, preparation of surveys, architectural plans and negotiation of
construction contracts have commenced). In order to increase the Company's
presence in the assisted living industry, the Company acquired Wedgwood in March
1996.
Liquidity and Capital Resources
At June 30, 1996, the Company had working capital of $4,107,000. During the
first quarter of 1996, the Company sold American Mobility Group, Inc. ("AMI"),
which was a continuation of the Company's program of selling its non-strategic
assets and using the proceeds to invest in existing operations. The sale of AMI
is not expected to have a material impact on the Company's liquidity. In March
1996, the Company acquired Wedgwood. As of June 30, 1996, the Company had assets
of $89,761,000, liabilities of $48,538,000 and stockholders' equity of
$41,223,000. The Company has sufficient liquidity and capital recovery to meet
its current obligations.
Net cash used for operating activities during the six months ended June 30,
1996 was $1,422,000 principally constituting general and administrative expenses
and interest expense in excess of income from real estate operations and
interest income. This is a level consistent with that of operations of the prior
year.
Net cash used in investing activities during the six months ended June 30,
1996 was $4,746,000 resulting primarily from the investment in the development
and construction activities of assisted living facilities.
Net cash provided by financing activities during the six months ended June
30, 1996 was $1,897,000 resulting principally from the proceeds from leases
which were used by the Company to finance the development and construction of
assisted living facilities.
During the past five years, the Company has met its needs for liquidity and
capital resources primarily from the disposition of assets acquired for
investment, and, to a lesser extent, from cash flow from operated businesses.
The assets acquired and sold have included real estate properties acquired in
the merger in 1993 with EquiVest, Inc. ("EquiVest"), six skilled nursing
facilities, two retirement centers, AMI, and an eating disorder facility.
As of June 30, 1996, the Company owned three retail centers located in
Georgia and one shopping center located in North Carolina. The three retail
centers are currently under contract for sale and the Company anticipates the
sale will occur in the fourth quarter of 1996. The Company is seeking a buyer
for the North Carolina property. The
F-5
<PAGE>
Company anticipates that the properties will be sold for an amount which at
least equals the book value of $5,432,000.
The Company has financed the construction of its assisted living facility
in Denison, Texas with approximately $3,200,000 of its own cash, and is now in
the process of financing the facility.
Since January 1, 1994, these sources of cash from investment activities
included approximately $18,200,000 received in January 1995 from the sale of The
Fountainview retirement facility in West Palm Beach, Florida; approximately
$26,600,000 in net proceeds after 1993 from the sale of the properties acquired
in the merger with EquiVest; and approximately $6,900,000 in proceeds from the
sale of the Rivermont retirement facility in December 1994.
Net cash used in financing activities since January 1, 1994 have consisted
primarily of repayments of mortgage indebtedness as real estate investments were
sold totaling approximately $50,000,000, payments of preferred dividends
totaling approximately $300,000, and repurchases of common stock totaling
approximately $2,000,000, offset by additional borrowings of approximately
$10,200,000 for real estate investments and working capital.
The Company will utilize additional financing to develop additional
assisted living facilities currently under construction and development. Seven
facilities were under construction as of August 1, 1996. The Company is
responsible for arranging financing for six of them and a development partner is
responsible for arranging financing for the seventh. The six facilities for
which the Company is arranging financing are subject to fixed cost construction
contracts and other arrangements estimated to cost approximately $25,421,000 and
are estimated to be substantially completed by June 30, 1997. The Company has
eleven facilities under development which are estimated to cost approximately
$41,918,000. Of the resulting total of $67,339,000 of development and
construction costs that the Company is responsible for financing, the Company
has financing committed for five specific facilities costing $21,530,000. The
remaining development and construction costs of approximately $48,370,000 are
expected to be financed from available sources as described below in the amount
of $60,000,000 or from other sources the Company is seeking.
The Company is actively negotiating to acquire twenty additional sites for
the development of both assisted living and Alzheimer's facilities. There can be
no assurance that any or all of these sites will be acquired and developed.
As of August 1, 1996, the Company has loans in place or has received
commitments for future financing, subject, in the case of the commitments, to
final documentation, as follows:
(i) Health Care REIT, Inc. has issued a commitment to provide $60
million of sales/leaseback financing over three years to acquire and pay
100% of the construction costs of assisted living facilities to be leased
to the Company. The term of the leases will range from 11 years to 14 years
plus two five year renewal options, with lease payments based upon the
interest rate on U.S. Treasury notes plus 3.75%, subject to inflation
adjustments not to exceed .25% per year. A 1% commitment fee is required.
The Company will have the option to purchase each facility at the end of
the term for its original cost plus 50% of the increase in its fair market
value. As additional security to the lessor, the Company will provide a
letter of credit for 5% of the amount financed, a first lien on personal
property and receivables of the facility, and subordination of management
fees and rentals from subtenants.
(ii) In 1995 Health Care REIT, Inc. provided mortgage loan commitments
for two facilities totaling $16,891,000. Of that amount, $4,536,000 was
used to refinance one of the facilities (Camelot) and $5,625,000 is being
used to construct another facility (Villa de la Rosa) which will open in
the fourth quarter of 1996. The balance includes $5,160,000 to fund
construction of the Camelot Assisted Living facility scheduled to begin
construction in the third quarter of 1996 and $645,000 to fund certain
improvements to the existing Camelot facility that is currently under
construction, along with $925,000 for the construction of a second Villa de
la Rosa, which is not presently scheduled for development and is not
included in the
F-6
<PAGE>
development and construction total. The construction loans convert to term
loans upon completion of construction. The term loans mature in seven to
ten years, initially bear interest at a rate of 4.5% over the corresponding
U.S. Treasury Note rate and are secured by the facilities, an assignment of
leases, rents and management contract, letters of credit, and an assignment
of the facilities licenses and permits.
(iii) Commitments from First National Bank & Trust Co. of McAlester,
Oklahoma of $5.2 million to provide mortgage financing for the two assisted
living facilities under construction in Muskogee, Oklahoma and Sherman,
Texas. Such loans require a 2% commitment fee and are payable in 10 years
(but callable at the discretion of the bank in 5 years) based on a 20 year
amortization, with interest at prime plus 2% (subject to a minimum interest
rate of 8.70% and a maximum interest rate of 12.75%).
(iv) In 1995 Investors Real Estate Trust ("IRET") issued a
commitment to provide 100% of the construction costs up to $2,810,000 for
the Sweetwater Springs, Georgia facility that is presently under
construction. Upon completion the facility will be leased to the Company
for a term of 15 years. In 1996 the commitment was increased by $1,540,000
to a maximum of $4,350,000 in order to provide for the construction of a
second phase of the facility, consisting of 16 Alzheimer's special care
units. The monthly lease payments will be based on the funded amount and on
annual interest rates of 11.0% for the first five years, 12.65% for the
next five years and 14.55% for the last five years of the lease. The
Company has an option to purchase the facility at fair market value during
the first nine months of the fourteenth year of the lease. The lease is
secured by the facility.
In addition to development and construction financing Comerica Bank-Texas
has issued a commitment to provide $1,600,000 to finance buses and other
vehicles to transport residents of the Company's facilities. Each vehicle will
be financed at 90% of cost, and the loan for each vehicle will be amortized over
48 months. The interest rate will be prime plus one percent.
Furthermore, the Company has announced its plans to file a registration
statement for an offering of up to 5,750,000 shares of Common Stock in a firm
commitment underwriting. Such filing is expected to occur before the date of the
Stockholders' meeting, and the public offering to occur in September or October
1996. The offering will be made only by means of a prospectus.
The Company believes it has adequate resources to complete its facilities
currently under construction and development and currently plans to use the
balance of such committed sources and its net working capital in excess of
operating needs for future development of assisted living facilities.
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.
THREE AND SIX MONTHS ENDED JUNE 30, 1996 AS COMPARED TO THREE AND SIX MONTHS
ENDED JUNE 30, 1995
Revenues and Operating Expenses from Assisted Living Operations. Effective
March 31, 1996, the Company acquired Wedgwood which operates 16 assisted living
facilities in six states, with a capacity for 1,276 residents (including 111
residents who have purchased units from the Company), consisting of 15
facilities owned by the Company or in which it has ownership or leasehold
interest and one facility managed for a third party. The revenue and related
operating expenses from the assisted living operations reflect the operations
during the second quarter of those 15 facilities as well as one facility which
opened in June 1996.
F-7
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended June 30, 1996
(Amounts in Thousands)
Stabilized Start-up
Residences Residences
(1) (2) Total
----------- ---------- ------
<S> <C> <C> <C>
Assisted living facility income $3,646 $ 673 $4,319
Assisted living facility operation 2,093 613 2,706
------ ----- ------
Gross operating income 1,553 60 1,613
Lease expense 392 62 454
Facility depreciation and amortization 294 111 405
------ ----- ------
Income (loss) from facility operations $ 867 $(113) $ 754
====== ===== ======
</TABLE>
(1) Stabilized residence are those residences that have been operating for one
year or have achieved stabilized occupancy of 95%.
(2) Start-up residence are those residences that have not been operating for
one year and have not achieved a stabilized occupancy of 95% or more.
(3) The Company had 11 stabilized and 5 start-up residences.
Corporate General and Administrative Expenses. Corporate general and
administrative expenses were $807,000 and $1,519,000 for the three and six
months ended June 30, 1996. Expenses for the comparable period in 1995 were
$611,000 and $1,300,000, respectively. The increases were due primarily to the
acquisition of Wedgwood.
Interest Expense. Interest expense for the three and six months ended June
30, 1996 was $798,000 as compared to $3,000 and $98,000, respectively, for the
comparable periods in 1995. The increase in interest expense represents the
interest incurred on the mortgage debt and financing obligations on the Wedgwood
properties.
Gain on Sale of Assets. Gain on sales of assets during the three and six
month periods ended June 30, 1995 were $655,000 and $5,804,000, respectively.
These gains were from the sale of The Fountainview in January 1995 ($5,149,000)
and sale of an economic interest in a legal claim in June 1995 ($655,000).
Discontinued Operations. Earnings from discontinued operations include
both AMI, which was sold in February 1996, and the real estate operations that
are for sale. AMI had losses of $29,000 and $132,000 for the three and six
months ended June 30, 1995, respectively. The real estate operations had
earnings of $78,000 and $116,000 for the three and six months ended June 30,
1996, respectively, and earnings of $107,000 and $144,000, respectively, for the
comparable periods in 1995. The sale in the first quarter of 1996 of AMI
resulted in a gain on sale, net of tax, of $580,000.
F-8
<PAGE>
FISCAL 1995 AS COMPARED TO FISCAL 1994
Revenues. The Company reported revenue from operations of $557,000 and net
earnings of $5,797,000 or $1.57 per share for the year ended December 31, 1995
compared to revenue from operations of $7,939,000 and net earnings of $1,788,000
or $.40 per share for the year ended December 31, 1994.
Gain on Sale of Assets. Gain on sales of assets for the year ended
December 31, 1995 was $6,950,000. This compares to $2,803,000 for the year ended
December 31, 1994. Absent recognition of these gains, the Company would have had
losses before income taxes in both 1995 and 1994.
In January 1995 the Company sold what was then its remaining retirement and
assisted living facility, The Fountainview, at a gain of $5,149,000. The
Company determined to sell it because of the increased competition in West Palm
Beach and to the refinancing required as a result of the pending maturity of
existing financing. During 1994 the Company owned both The Fountainview and
Rivermont Retirement Center, which was sold in December 1994. The assisted
living revenues and expenses for 1994 reflect the operations for both The
Fountainview and Rivermont for the entire year. The assisted living revenue and
expenses for 1995 reflect the operations of The Fountainview for one month.
In June 1995 the Company sold its economic interest in a legal claim with
respect to Wespac Investors Trust III. The sales price was $1,085,000 and the
Company recorded a gain of $654,000. Separately, the Company acquired 49% of
the outstanding Common Stock of Wespac Investors Trust III in a private
transaction. The Company immediately sold its economic interest in that stock
at no gain or loss.
As part of a larger transaction that occurred in 1992 the Company received
the rights to the interest on certain escrow funds in the year 2028. At the time
of the transaction, for accounting purposes, the Company placed no value on that
right. In August 1995 the Company sold its rights to the future interest for
$1,140,000 in cash.
General and Administrative Expense. General and administrative expenses
were $2,688,000 in 1995 as compared to $3,502,000 in 1994. The most significant
reason for this decrease was the sale of The Fountainview in January 1995.
Interest Income. Interest income was $1,176,000 in 1995 as compared to
$208,000 in 1994. Interest expense was $101,000 in 1995 as compared to
$2,221,000 in 1994. As the Company sells assets, it increases the cash it has
available for investments. The increase in interest income reflects the interest
received on those investments. The decrease in interest expense was caused
principally by two factors. First, when the Company sold its assets it was also
relieved of the obligation to pay interest on liabilities associated with those
assets. Second, the Company used certain of its available cash to pay down
corporate debt which further reduced interest expense in 1995.
Deferred Taxes: At December 31, 1995, the Company had a deferred tax asset
of $2,150,000. The asset is expected to be recovered within two to three years
from earnings from current operations as well as gains from sales of assets.
FISCAL 1994 AS COMPARED TO FISCAL 1993
Revenues. The Company reported total revenues from operations of
$7,939,000 and net earnings of $1,788,000 or $.40 per share for the year ended
December 31, 1994 compared to total revenues from continuing operations of
$510,000 and net income of $1,505,000 or $.39 per share for 1993.
F-9
<PAGE>
Assisted Living Facilities. During all of 1994, the Company owned and
operated two assisted living/retirement facilities: The Fountainview in West
Palm Beach, Florida and Rivermont Retirement Center in Norman, Oklahoma. For
these two facilities, combined 1994 operating revenues were $7,939,000 and
combined operating expenses were $5,059,000. Based upon the Company's business
plan during 1993, these assets were classified as assets held for sale and there
are, therefore, no comparative figures for 1993. During 1993, CareAmerica, Inc.,
a subsidiary of the Company, managed certain properties for third parties. This
effort concluded during 1993. CareAmerica is no longer managing properties for
others.
Gain on Sales of Assets. Gain on sales of assets for the year ended
December 31, 1994, was $2,803,000 compared to $2,450,000 for 1993. The gains in
1994 include 1,720,000 from the sale of the Rivermont Retirement facility and
recognition of a $1,070,000 deferred gain which resulted from cash received
relating to sales of properties in 1991 that were accounted for by the
installment method. Absent recognition of these gains, the Company would have
had losses before income taxes in both 1994 and 1993.
General and Administrative Expenses. General and administrative expenses
increased from $2,263,000 in 1993 to $3,502,000 in 1994. This increase was due
to the consolidation of Fountainview and Rivermont. During 1993 these
investments were classified as assets held for sale.
Interest Income and Expense. Interest income decreased from $1,237,000 in
1993 to $208,000 in 1994. On March 31, 1993, the Company sold an $8.7 million
mortgage bearing interest at 10%. The reduction in interest income is a result
of the Company no longer receiving interest from that mortgage. Further, the
Company holds a $6.7 million receivable from Southern Care Corporation. The
Company is in litigation with Southern Care Corporation in which, among other
things, Southern Care is challenging the enforceability of the note. As a
result, the Company has ceased accruing income with respect to the note until
such time as the litigation is resolved. See Item 3. "Legal Proceedings."
Interest expense increased by $2,221,000 in 1994. The increase is due to the
consolidation of Rivermont and Fountainview in 1994.
Deferred Taxes. As of December 31, 1994 the Company had a deferred tax
asset of $2,185,000. This asset is expected to be recovered within two to three
years from earnings from current operations as well as gains from the sales of
certain of the Company's assets.
EFFECT OF INFLATION
The Company's principal sources of revenues are from resident fees from
Company-owned or leased assisted living facilities and management fees from
facilities operated by the Company for third parties. The operation of the
facilities are affected by rental rates which are highly dependent upon market
conditions and the competitive environment in the areas where the facilities are
located. Compensation to employees is the principal cost element relative to the
operations of the facilities. Although the Company has not historically
experienced any adverse effects of inflation on salaries or other operating
expenses, there can be no assurance that such trends will continue or that
should inflationary pressures arise that the Company will be able to offset such
costs by increasing rental rates or management fees.
F-10
<PAGE>
WEDGWOOD RETIREMENT INNS, INC.
SELECTED HISTORICAL FINANCIAL DATA
The following table sets forth selected historical financial data for
Wedgwood. The selected historical combined data as of December 31, 1994 and
1995, and for each of the three years in the period ended December 31, 1995,
were derived from the financial statements of Wedgwood, which have been audited
by Grant Thornton LLP, independent auditors, whose report with respect thereto
is included elsewhere in this Prospectus. The selected historical financial data
of Wedgwood for the three month periods ended March 31, 1995 and 1996, were
derived from unaudited financial statements of Wedgwood. In the opinion of
management, the unaudited combined financial statements reflect all adjustments
(consisting of normal recurring adjustments) necessary for a fair presentation
of the financial position and results of operations for the unaudited periods.
The results of operations for interim periods are not necessarily indicative of
results that may be expected for the full year.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
FOR THE YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------- --------------------
1993 1994 1995 1995 1996
-------- -------- ------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Revenues:
Assisted living facilities $10,184 $12,018 $14,940 $3,493 $4,262
Operating expenses:
Assisted living facilities 7,542 8,585 10,916 2,431 3,182
Depreciation and amortization 911 1,216 1,374 275 488
General and administrative 605 738 959 210 322
------- ------- ------- ------ ------
Total operating expenses 9,058 10,539 13,249 2,916 3,992
------- ------- ------- ------ ------
Operating income 1,126 1,479 1,691 577 270
Other income (expenses)
Interest income 26 74 160 20 13
Interest expense (1,092) (2,191) (2,843) (654) (845)
Other 70 77 74 3 28
------- ------- ------- ------ ------
Net earnings (loss) $ 130 $ (561) $ (898) $ (54) $ (534)
======= ======= ======= ====== ======
<CAPTION>
At December 31,
1994 1995
-------- --------
<S> <C> <C>
BALANCE SHEET DATA
Cash and cash equivalents $ 657 $ 885
Working capital (deficit) (1,727) (1,993)
Total assets 28,318 36,078
Long-term debt, including current portion 19,068 25,913
Stockholders' equity (deficit) (3,265) (3,689)
</TABLE>
F-11
<PAGE>
WEDGWOOD RETIREMENT INNS, INC.'S
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Prior to the Wedgwood's consolidation with 15 affiliated partnerships,
corporations, limited liability companies and proprietorships (the "Predecessor
Entities") in March 1996 (the "Consolidation"), Wedgwood's historical operating
activities focused on the development and management of facilities on behalf of
the Predecessor Entities and third parties. Historically, Wedgwood used a
series of proprietorships, limited partnerships and limited liability companies
to finance the development and construction of facilities in which it retained
certain minority and majority interests. Prior to the Consolidation, except for
the financial statements contained in this Prospectus, Wedgwood did not produce
combined or consolidated financial statements of the separate entities.
Typically, such entities incurred losses in their early years as a result of
vacancies during lease-up and depreciation expenses. Over time, some of the
entities achieved profitability as depreciation expense typically decreased
while operating revenues and profits increased. Since its inception, Wedgwood
often has experienced net losses resulting primarily from the expenses incurred
to establish the infrastructure necessary to support its development program and
due to the start-up losses associated with individual facilities.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1996 as Compared to Three Months Ended March 31,
1995
Revenues. Total revenues increased to $4,262,000 in 1996 from $3,493,000 in
1995, an increase of $769,000, or 22%. This increase was attributable to a 9%
increase in occupancy of existing facilities and in the opening of five
facilities during 1995. These five facilities accounted for $526,000, or 68%, of
the revenue increase. Occupancy increases along with inflationary increases in
rents charged to residents accounted for $243,000, or 32%, of the increase in
revenue.
Facility Operating Expenses. Facility operating expenses increased to
$3,182,000 in 1996 from $2,431,000 in 1995, an increase of $751,000, or 31%,
reflecting the expenses associated with the operation of the newly opened
facilities.
General and Administrative Expenses. General and administrative expenses
increased to $322,000 in 1996 from $210,000 in 1995, an increase of $112,000, or
53%. The increase was primarily the result of additional payroll and associated
costs attributable to the expansion in the number of management and support
personnel.
Depreciation and Amortization. Depreciation and amortization increased to
$488,000 in 1996 from $275,000 in 1995, an increase of $213,000, or 77%. The
increase is attributable to the additional facilities mentioned above.
Interest Expense, Net. Interest expense, net, increased to $845,000 in 1996
from $654,000 in 1995, an increase of $191,000 or 30%. This reflects an increase
in debt during the period of $7,798,000.
Net Loss. Net loss was $534,000 in 1996 compared to net loss of $54,000 in
1995. The loss was primarily attributable to an increase in operating expenses
as a result of facilities in lease-up.
F-12
<PAGE>
FISCAL 1995 AS COMPARED TO FISCAL 1994
Revenues. Total revenues increased to $14,940,000 in 1995 from $12,018,000
in 1994, an increase of $2,922,000, or 24%. This increase was primarily
attributable to two acquisitions in late 1994 that were in operation for the
entire 1995 period, and revenue increases from one facility in lease-up. The
revenue increase from the acquired facilities amounted to $1,375,000 and
$478,000 of revenues was from the facility in lease-up. A facility expanded in
May of 1994 experienced a revenue increase of $321,000 from 1994 to 1995 and
five new facilities opened in 1995, accounting for $578,000 of the increase from
1994. These nine facilities accounted for $2,752,000 of the increase. The
balance of the increase is due to overall census/rate gains.
Facility Operating Expenses. Facility operating expenses increased to
$10,916,000 in 1995 from $8,585,000 in 1994, an increase of $2,331,000, or 27%,
reflecting the expenses associated with the operation of the acquired and
expanded facilities previously described.
General and Administrative Expense. General and administrative expenses
increased to $959,000 in 1995 from $738,000 in 1994, an increase of $221,000, or
30%. The increase was primarily the result of additional payroll and associated
costs attributable to the expansion in the number of management and support
personnel.
Depreciation and Amortization. Depreciation and amortization increased to
$1,374,000 in 1995 from $1,216,000 in 1994, an increase of $158,000, or 13%. The
increase was attributable to the depreciation related to property and equipment
acquired during 1995 and late 1994.
Interest Expense, Net. Interest expense, net, was $2,843,000 in 1995 as
compared to $2,191,000 in 1994, an increase of $652,000, or 30%. The increase
was attributable to an increase in total debt incurred by the Company during the
period of $7,798,000, plus debt related to facilities acquired in late 1994.
Net loss. The net loss in 1995 was $898,000 as compared to $561,000 in
1994, an increase of $337,000. The net loss increase was primarily attributable
to an increase in operating expenses and interest expense as a result of
acquisitions and expansion of facilities.
FISCAL 1994 AS COMPARED TO FISCAL 1993
Revenues. Total revenues increased to $12,018,000 in 1994 from $10,184,000
in 1993, an increase of $1,834,000, or 18%. This increase was partly
attributable to acquisitions of three facilities during 1994, which accounted
for $871,000, or 47.5% of the increase, expansion of another facility during the
year which experienced a revenue increase of $362,000 and continued lease-up of
a fifth facility which gained $450,000 in revenue compared to the prior year.
Together these five facilities accounted for $1,683,000 of the revenue increase,
or 16.5%. The balance of the revenue increase, amounting to $151,000, or 1.5%,
was primarily due to net occupancy gains or losses and inflationary increases in
rents charged to residents at existing facilities.
Facility Operating Expenses. Facility operating expenses increased to
$8,585,000, in 1994 from $7,542,000 in 1993, an increase of $1,043,000, or 14%,
reflecting the expenses associated with the operation of the acquired and
expanded facilities previously described, partially offset by the greater
efficiencies of the facility in lease-up and at other facilities.
General and Administrative Expenses. General and administrative expenses
increased to $738,000 in 1994 from $605,000 in 1993, an increase of $133,000,
or 22%. The increase was primarily the result of additional payroll and
associated costs relating to the expansion in the number of management and
support personnel to facilitate Wedgwood's growing operations.
Depreciation and Amortization. Depreciation and amortization increased to
$1,216,000 in 1994 from $911,000 in 1993, an increase of $305,000, or 33%. Of
this amount, $185,000, or 20%, related to the acquired and expanded
F-13
<PAGE>
facilities mentioned above. The balance of the increase related primarily to
capital improvements at existing facilities.
Interest Expense, Net. Interest expense, net, increased to $2,191,000 in
1994 from $1,092,000 in 1993, an increase of $1,099,000, or 101%. Of the
increase, $286,000 is attributable to newly acquired facilities, $130,000 to the
expanded facilities and $575,000 to refinancings/expansion of two facilities,
with the balance due primarily to interest rate changes. The refinancings added
$3,644,000 debt.
Net loss. Net loss was $561,000 in 1994 compared to net earnings of
$130,000 in 1993. The loss was primarily attributable to the increase in
interest expense associated with refinancings, acquisitions and expansion of
facilities.
LIQUIDITY AND CAPITAL RESOURCES
Wedgwood has historically financed its operations with internally generated
funds, short and medium-term borrowings, and capital contributions from
Wedgwood's majority owner or, to a lesser extent, outside investors. In December
1994, Wedgwood obtained a loan commitment from Health Care REIT for
approximately $10,341,000 to finance the development, construction and permanent
financing for the Camelot Retirement Community.
At December 31, 1995, Wedgwood's working capital deficit was $1,993,000 as
compared to $1,727,000 at December 31, 1994. The increase in the working capital
deficit was due primarily to an increase in current maturities of long-term
obligations. Net cash provided by operating activities totaled $746,000,
$807,000 and $735,000 for the years ended December 31, 1993, 1994 and 1995,
respectively. These amounts represent primarily the excess of depreciation and
amortization over net losses for the periods, and changes in accounts receivable
and payable. Net cash used in investing activities totaled $992,000, $7,354,000
and $10,228,000 for the years ended December 31, 1993, 1994 and 1995,
respectively. Most of these expenditures were for purchases of property and
equipment, although $1,131,000 and $1,462,000 in 1994 and 1995, respectively,
were for purchases of securities used as collateral on letters of credit
supporting various long-term leasing obligations. Net cash provided by financing
activities totaled $269,000, $6,619,000 and $9,721,000 for the years ended
December 31, 1993, 1994, and 1995, respectively. Net cash provided by financing
activities primarily represents proceeds from short-term and long-term debt.
Equity contributions, net of equity distributions, totaled $698,000 for the
three years ended December 31, 1995.
EFFECT OF INFLATION
Wedgwood's principal source of revenues are from resident fees from
Wedgwood-owned or leased assisted living facilities and management fees from
facilities operated by Wedgwood for third parties. The operation of the
facilities are affected by rental rates which are highly dependent upon market
conditions and the competitive environment in the areas where the facilities are
located. Compensation to employees is the principal cost element relative to the
operations of the facilities. Although Wedgwood 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 Wedgwood will be able to offset such costs by increasing
rental rates or management fees.
F-14
<PAGE>
PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
(Unaudited)
The following unaudited pro forma condensed combined financial information
has been prepared by the Company based on the audited financial statements and
the related notes thereto of the Company and Wedgwood for the year ended
December 31, 1995 and the unaudited financial statements of the Company for the
six months ended June 30, 1996, and Wedgwood for the three months ended March
31, 1996, included elsewhere in this Prospectus, and give effect to the Wedgwood
Acquisition as though it occurred January 1, 1995, and reflect the assumptions
and adjustments described in the accompanying notes. The Wedgwood Acquisition
has been accounted for using the purchase method of accounting. The results of
operations of Wedgwood are reflected in the historical statement of operations
of the Company beginning April 1, 1996. The following unaudited pro forma
condensed combined financial information is not necessarily indicative of the
actual results that would have been achieved if the Wedgwood Acquisition had
actually been completed as of the dates indicated, or which may be realized in
the future. The pro forma statement of operations for the year ended December
31, 1995 also gives effect to the disposition of The Fountainview (January
1995). The unaudited pro forma condensed combined financial information should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations - The Company," "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Wedgwood" and the
financial statements of the Company and Wedgwood and the related notes thereto
included elsewhere in this Prospectus. See "Index to Consolidated Financial
Statements."
F-15
<PAGE>
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Less operations
of The Pro Forma
Company Fountainview(4) Subtotal Wedgwood Adjustments Combined
------- ---------------- -------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
REVENUES
Assisted living facilities $ 557 $ (557) $ - $14,940 $ - $14,940
Expenses
Assisted living facilities 322 (322) - 10,916 - 10,916
Facility depreciation and
amortization - - - 1,374 (95)(1) 1,279
General and administrative 2,688 (38) 2,650 959 - 3,609
------- ------- ------- ------- ----- -------
3,010 (360) 2,650 13,249 (95) 15,804
------- ------- ------- ------- ----- -------
Operating profit (loss) (2,453) (197) (2,650) 1,691 95 (864)
Other income (expense)
Interest and dividend income 1,176 - 1,176 160 - 1,336
Interest expense (101) 73 (28) (2,843) - (2,871)
Gain on sales of assets 6,950 (5,149) 1,801 - - 1,801
Other 239 - 239 94 - 333
------- ------- ------- ------- ----- -------
8,264 (5,076) 3,188 (2,589) - 599
------- ------- ------- ------- ----- -------
Earnings (loss) from
continuing operations
before income taxes 5,811 (5,273) 538 (898) 95 (265)
Income tax expense 94 - 94 - (195)(3) (101)
------- ------- ------- ------- ----- -------
Earnings (loss) from
continuing operations 5,717 (5,273) 444 (898) 290 (164)
Preferred dividend requirement (225) - (225) - (320)(2) (545)
------- ------- ------- ------- ----- -------
Earnings (loss) from
continuing operations
allocable to common
shareholders $ 5,492 $(5,273) $ 219 $ (898) $ (30) $ (709)
======= ======= ======= ======= ===== =======
Earnings per share
Continuing operations $ 1.55 $ (0.20)
Weighted average number of
common and equivalent
shares outstanding 3,539 3,539
</TABLE>
See accompanying explanatory notes.
F-16
<PAGE>
PRO FORMA CONDENSED COMBINED
STATEMENT OF OPERATIONS
(UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL
----------------------------- COMPANY
PRO FORMA PRO FORMA
COMPANY WEDGWOOD(5) ADJUSTMENTS COMBINED
------- -------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues
Assisted living facilities $4,366 $4,262 $ - $8,628
Expenses
Assisted living facilities 3,160 3,182 - 6,342
Facility depreciation and amortization 405 488 (95)(1) 798
------ ------ ----- ------
General and administrative 1,519 322 - 1,841
------ ------ ----- ------
5,084 3,992 (95) 8,981
------ ------ ----- ------
Operating profit (loss) (718) 270 95 (353)
Other income (expense)
Interest and dividend income 468 13 - 481
Interest expense (798) (845) - (1,643)
Gain on sales of assets 32 - - 32
Other 416 28 - 444
------ ------ ----- ------
118 (804) - (686)
------ ------ ----- ------
Earnings (loss) from continuing operations
before income taxes (600) (534) 95 (1,039)
Income tax expense (229) - (167)(3) (396)
------ ------ ----- ------
Net earnings (loss) from continuing operations (371) (534) 262 (643)
Preferred stock dividend requirement (148) - (80)(2) (228)
------ ------ ----- ------
Earnings (loss) from continuing operations
allocable to common shareholders $ (519) $ (534) $ 182 $ (871)
------ ------ ----- ------
Loss per share - continuing operations $ (.15) $(0.25)
Weighted average number of common and common
equivalent shares outstanding 3,460 3,460
</TABLE>
See accompanying explanatory notes.
F-17
<PAGE>
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
(UNAUDITED)
A. The pro forma condensed combined financial statements reflect the
acquisition by the Company in March 1996 of substantially all of the assets
and liabilities of a number of companies under common control and managed by
Wedgwood. The total purchase price was approximately $17,223,000, consisting
of preferred stock valued at $16,203,000 and cash and transaction costs
totaling approximately $1,020,000. The preferred stock issued includes
675,000 shares of Series D Preferred Stock which was issued to James R.
Gilley, Chief Executive Officer of the Company, and members of his family.
These shares were valued at the Gilleys' cost in the acquired property of
approximately $2,300,000.
B. The pro forma financial statements reflect the following adjustments:
1. to reflect the difference in depreciation and amortization on Wedgwood
property and equipment and other assets due to change in asset bases and
lives under purchase accounting using lives from 5 to 35 years; Wedgwood
historically had utilized lives of 5 to 28 years.
<TABLE>
<CAPTION>
Depreciation Amortization Total
------------ ------------ -----
<S> <C> <C> <C>
Year ended December 31, 1995
New basis $1,279,000 $ - $1,279,000
Old basis 1,090,000 284,000 1,374,000
$ 189,000 $(284,000) $ (95,000)
Six months ended June 30, 1996
New basis $ 393,000 $ - $ 393,000
Old basis 405,000 83,000 488,000
$ (12,000) $ (83,000) $ (95,000)
</TABLE>
2. to reflect the dividend requirement on the Series D Preferred Stock
issued in the acquisition
3. to adjust income tax expense based upon applying the statutory tax rate
to pre-tax income. If the Wedgwood acquisition had taken place at
January 1, 1995, the deferred tax liabilities arising from the
transaction would have eliminated the need for a change in the deferred
tax asset valuation allowance at that date. Accordingly, there would
have been no change in the valuation allowance during the year ended
December 31, 1995 and, therefore, the effective tax rate would have
approximated 38% rather than the 3% actually experienced. The Company
considers the use of its net operating loss carryforwards as a result of
Wedgwood acquisition to be more likely than not.
4. In January 1995, the Company sold The Fountainview. The pro forma
statement of operations reflects the operations of the Company as
adjusted to reflect this disposition.
5. The statement of operations of Wedgwood covers the three months ended
March 31, 1996. Beginning April 1, 1996, Wedgwood operations are
consolidated with the Company.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF PRO FORMA CONDENSED COMBINED STATEMENTS
OF OPERATIONS
The acquisition of Wedgwood will give the Company an immediate presence in
the assisted living industry and annual revenues exceeding $16 million from its
operating facilities. Combining the statements of earnings of Wedgwood and
Greenbriar does not result in significant pro forma adjustments, due to the lack
of any eliminations of personnel, management, offices or facilities following
the acquisition. All such personnel and infrastructure are believed to be needed
to support the Company's existing assisted living facilities and its future
anticipated growth and development. Such resources will be especially needed as
the Company expands its presence into the South and Southwestern United States
from its West Coast concentration of operations. Wedgwood will continue to
operate its existed assisted living facilities and develop new facilities,
maintaining its offices and staff necessary to manage such operations and
growth.
F-18
<PAGE>
Pro forma operating loss was $864,000 for 1995 and $35,000 for the six
months ended June 30, 1996. Pro forma net loss for the six-month period was
$643,000. The Company expects that operating losses will continue for the near
term resulting from fixed operating costs and general and administration
expenses during a growth phase of constructing and developing new assisted
living facilities. An assisted living facility takes from six to 12 months to
build, and, historically, approximately six to 12 months after licensure to
reach a stabilized occupancy level of 95%.
F-19
<PAGE>
Report of Independent Certified Public Accountants
Board of Directors and Stockholders
Greenbriar Corporation
We have audited the accompanying consolidated balance sheets of Greenbriar
Corporation and subsidiaries as of December 31, 1994 and 1995, and the related
consolidated statements of earnings, changes in stockholders' equity, and cash
flows each of the three years in the period ended December 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Greenbriar
Corporation and subsidiaries as of December 31, 1994 and 1995, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended December 31, 1995, in conformity
with generally accepted accounting principles.
GRANT THORNTON LLP
Dallas, Texas
March 8, 1996 (except for the third paragraph
of Note C, as to which the date is
August 16, 1996)
F-20
<PAGE>
GREENBRIAR CORPORATION
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
December 31,
------------------ June 30,
1994 1995 1996
-------- ------- -----------
(unaudited)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 8,311 $ 7,199 $ 2,928
Accounts receivable - trade, less allowance of
$601 in 1994 1,925 23 948
Deferred income tax benefit 2,185 2,150 -
Real estate operations held for sale, at lower of cost
or market 14,889 - 5,432
Other current assets 1,455 1,536 1,273
------- ------- -------
Total current assets 28,765 10,908 10,581
REAL ESTATE OPERATIONS HELD FOR SALE,
AT LOWER OF COST OR MARKET 3,204 3,190 -
NET ASSETS OF MOBILITY GROUP 3,330 3,371 -
INVESTMENT IN SECURITIES, AT COST 1,678 1,853 4,153
MORTGAGE NOTES RECEIVABLE 6,700 7,368 9,179
PROPERTY AND EQUIPMENT, AT COST
Land 100 322 7,624
Buildings and improvements 767 767 48,484
Equipment and furnishings 192 203 2,013
Construction in progress - 1,576 3,963
------- ------- -------
1,059 2,868 62,084
Less accumulated depreciation 186 252 683
------- ------- -------
873 2,616 61,401
RESTRICTED CASH AND INVESTMENTS - - 3,050
OTHER ASSETS 414 466 1,397
------- ------- -------
$44,964 $29,772 $89,761
======= ======= =======
</TABLE>
F-21
<PAGE>
GREENBRIAR CORPORATION
CONSOLIDATED BALANCE SHEETS - CONTINUED
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
December 31,
------------------ June 30,
1994 1995 1996
-------- ------- -----------
(unaudited)
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Note payable $ 5,008 $ - $ -
Current maturities of long-term debt 379 8 960
Due to affiliates - - 718
Long-term debt collateralized by properties under
contract of sale 8,933 - 905
Accounts payable - trade 1,149 412 1,727
Accrued expenses 1,753 343 1,547
Other current liabilities 1,405 130 617
-------- ------- -------
Total current liabilities 18,627 893 6,474
LONG-TERM DEBT 1,110 901 37,672
DEFERRED INCOME TAXES - - 1,309
DEFERRED GAIN 3,083 3,083 3,083
STOCKHOLDERS' EQUITY
Series A cumulative preferred stock, $.10 par value;
liquidation value of $1,085 in 1994; authorized,
10,000 shares; issued and outstanding, 1,085
shares in 1994 108 - -
Series B cumulative convertible preferred stock,
$.10 par value; liquidation value of $1,351, $1,330
and $353, respectively; authorized, 100 shares;
issued and outstanding, 14 shares in 1994 and 1995
and 4 shares in 1996 1 1 1
Series C cumulative convertible preferred stock,
$.10 par value; liquidation value of $2,000;
authorized, issued and outstanding, 20 shares 2 2 2
Series D cumulative preferred stock, $.10 par value;
liquidation value of $3,375; authorized,
issued and outstanding, 675 shares in 1996 - - 68
Series E cumulative preferred stock, $.10 par value;
liquidation value of $18,552; authorized,
issued and outstanding, 1,950 shares in 1996 - - 195
Common stock, $.01 par value; authorized, 20,000
shares; issued and outstanding, 3,708, 3,452 and
3,478, respectively 185 35 35
Additional paid-in capital 36,442 33,957 49,846
Accumulated deficit (12,156) (6,584) (6,408)
-------- ------- -------
24,582 27,411 43,739
Less stock purchase notes receivable (including
$2,438 from related parties) (2,438) (2,516) (2,516)
-------- ------- -------
22,144 24,895 41,223
-------- ------- -------
$ 44,964 $29,772 $89,761
======== ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-22
<PAGE>
GREENBRIAR CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
(Amounts in thousands, except share data)
<TABLE>
<CAPTION>
Six months
Year ended December 31, ended June 30,
----------------------------- ---------------
1993 1994 1995 1995 1996
------- ------- ------- ------- ------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenue
Assisted living facility income $ 510 $ 7,939 $ 557 $ 555 $4,319
Other - - - - 47
------- ------- ------- ------- ------
510 7,939 557 555 4,366
Operating expenses
Assisted living facility operations 279 5,059 322 276 2,706
Lease expense - - - - 454
Facility depreciation and amortization - - - 42 405
Corporate, general and administrative 2,263 3,502 2,688 1,300 1,519
------- ------- ------- ------- ------
2,542 8,561 3,010 1,618 5,084
------- ------- ------- ------- ------
Operating loss (2,032) (622) (2,453) (1,063) (718)
Other income (expense)
Interest and dividend income 1,237 208 1,176 568 468
Interest expense - (2,221) (101) (98) (798)
Gain on sales of assets 2,450 2,803 6,950 5,804 32
Minority interest in earnings of
consolidated partnership - - - - (37)
Other 140 - 239 9 453
------- ------- ------- ------- ------
3,827 790 8,264 6,283 118
------- ------- ------- ------- ------
Earnings (loss) from continuing
operations before income taxes 1,795 168 5,811 5,220 (600)
Income tax expense (benefit) 53 (201) 94 1,775 (229)
------- ------- ------- ------- ------
Earnings from continuing
operations 1,742 369 5,717 3,445 (371)
Discontinued operations
Earnings (loss) from operations, net of
income taxes (237) 241 19 12 116
Gain on disposal, net of income taxes - 1,178 61 - 580
------- ------- ------- ------- ------
NET EARNINGS 1,505 1,788 5,797 3,457 325
Preferred stock dividend requirement (213) (327) (225) (128) (148)
------- ------- ------- ------- ------
Earnings allocable to common stockholders $ 1,292 $ 1,461 $ 5,572 $ 3,329 $ 177
======= ======= ======= ======= ======
Earnings (loss) per share
Continuing operations $.46 $.01 $1.55 $0.90 $(0.15)
Net earnings $.39 $.40 $1.57 $0.90 $0.05
Weighted average number of common and
equivalent shares outstanding 3,296 3,679 3,539 3,679 3,460
</TABLE>
The accompanying notes are an integral part of these statements.
F-23
<PAGE>
GREENBRIAR CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Amounts in thousands)
<TABLE>
<CAPTION>
Stock
Preferred stock Common stock Additional purchase
---------------- ------------------ paid in Accumulated notes Treasury Total
Shares Amount Shares Amount capital deficit receivable stock equity
------ ------ ------ ------ ----------- ---------- ---------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1993 944 $ 94 13,398 $ 133 $21,801 $(14,118) $ - $(6) $ 7,904
Issuance of shares -
purchased companies 13 1 3,703 37 10,020 - - - 10,058
Sale of shares - - 1,294 13 4,188 - (2,250) - 1,951
Dividends on preferred
stock, including imputed
dividends of $37 118 12 - - 123 (179) - - (44)
Losses since date of
acquisition of subsidiaries
previously carried at cost
(Note B) - - - - - (824) - - (824)
Purchase of treasury stock - - - - - - - (1) (1)
Net earnings - - - - - 1,505 - - 1,505
------ ----- ------- ----- ------- -------- ------- --- -------
Balance at December 31, 1993 1,075 107 18,395 183 36,132 (13,616) (2,250) (7) 20,549
Issuance of shares - - 147 2 179 - (188) 7 -
Dividends on preferred stock,
including imputed dividends
of $42 44 4 - - 131 (328) - - (193)
Net earnings - - - - - 1,788 - - 1,788
------ ----- ------- ----- ------- -------- ------- --- -------
Balance at December 31, 1994 1,119 111 18,542 185 36,442 (12,156) (2,438) - 22,144
Issuance of shares - - 116 1 77 - (78) - -
Conversion of preferred
stock (1) - 19 - - - - - -
Conversion of subordinated
debt - - 67 1 199 - - - 200
Purchase of common stock - - (1,226) (12) (1,998) - - - (2,010)
Purchase of preferred stock (1,085) (108) - - (976) - - - (1,084)
Dividends on preferred stock 1 - - - 73 (225) - - (152)
One-for-five reverse stock
split - - (14,066) (140) 140 - - - -
Net earnings - - - - - 5,797 - - 5,797
------ ----- ------- ----- ------- -------- ------- --- -------
Balances at December 31, 1995 34 3 3,452 35 33,957 (6,584) (2,516) - 24,895
Net earnings - - - - - 325 - - 325
Conversion of preferred stock (11) - 38 - - - - - -
Purchase of common stock - - (12) - (120) - - - (120)
Dividends on preferred stock 1 - - - 69 (149) - - (80)
Issuance of preferred stock
- purchased company 2,625 263 - - 15,940 - - - 16,203
------ ----- ------- ----- ------- -------- ------- --- -------
Balances at June 30, 1996
(unaudited) 2,649 $ 266 3,478 $ 35 $49,846 $ (6,408) $(2,516) $ - $41,223
====== ===== ======= ===== ======= ======== ======= === =======
</TABLE>
The accompanying notes are an integral part of this statement.
F-24
<PAGE>
GREENBRIAR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
<TABLE>
<CAPTION>
Six months
Year ended December 31, ended June 30,
----------------------------- ------------------
1993 1994 1995 1995 1996
------- ------- ------- ------- -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities
Net earnings $ 1,505 $ 1,788 $ 5,797 $ 3,457 $ 325
Adjustments to reconcile net earnings to net
cash used in operating activities
Discontinued operations 237 (1,419) 80 (12) (696)
Depreciation and amortization 533 1,306 182 76 431
Gain on sales of assets (2,520) (4,633) (7,043) (5,804) (32)
Recognition of deferred gain - (1,070) - - -
Stock dividends on investment securities - - (175) - -
Changes in operating assets and liabilities
Due from (to) affiliates (58) - - 3 (6)
Accounts receivable (1,348) (72) 1,902 795 (368)
Accrued interest receivable (261) - - - -
Mortgage note receivable (500) - - - -
Refundable income taxes (945) 945 - - -
Assets held for resale 535 - - - -
Deferred income tax benefit 846 369 35 1,781 199
Other current and noncurrent assets (509) (2,381) (9) 634 (848)
Accrued interest payable 56 - - - -
Income taxes payable (1,174) - - - -
Accounts payable and other liabilities 1,249 818 (3,546) (2,246) (237)
------- ------- ------- ------- -------
Total adjustments (3,859) (6,137) (8,574) (4,773) (1,557)
------- ------- ------- ------- -------
Net cash provided by (used in)
operating activities of:
Continuing operations (2,354) (4,349) (2,777) (1,316) (1,232)
Discontinued operations 14 627 227 336 (190)
------- ------- ------- ------- -------
Net cash used in operating activities (2,340) (3,722) (2,550) (980) (1,422)
</TABLE>
The accompanying notes are an integral part of these statements.
F-25
<PAGE>
GREENBRIAR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(Amounts in thousands)
<TABLE>
<CAPTION>
Six months
Year ended December 31, ended June 30,
------------------------------- -------------------
1993 1994 1995 1995 1996
------- -------- -------- -------- -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from investing activities
Proceeds from sales of assets $ 2,539 $ 32,196 $ 21,885 $ 19,361 $ 256
Collections of notes receivable 11,354 - - 1,500 148
Proceeds from sales of discontinued operations - 6,557 - - -
Additions to real estate (334) (462) (54) - -
Purchase of property and equipment (538) (608) (1,809) (43) (5,427)
Net cash effect of (sale) purchase of subsidiary - (273) - - 739
Additions to notes receivable (544) - (668) (5,478) (459)
Investing activities of discontinued operations - (344) (348) (374) (3)
Preacquisition loan to acquired company (4,023) - - - -
Distributions from limited partnership 105 - - - -
Acquisition of companies, net of cash acquired 11 - - - -
------- -------- -------- -------- -------
Net cash provided by (used in)
investing activities 8,570 37,066 19,006 15,714 (4,746)
Cash flows from financing activities
Proceeds from borrowings
Affiliates 625 1,000 - - -
Other 840 10,156 - - 2,257
Payments on debt
Affiliates (50) (1,625) - - -
Other (9,664) (35,434) (14,321) (14,157) (156)
Dividends on preferred stock (44) (193) (152) (92) (80)
Sale (purchase) of common and preferred stock 1,950 - (3,095) (2,386) (122)
Purchase of treasury stock (1) - - - -
Other - - - - (2)
------- -------- -------- -------- -------
Net cash provided by (used in)
financing activities (6,344) (26,096) (17,568) (16,635) 1,897
------- -------- -------- -------- -------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (114) 7,248 (1,112) (1,901) (4,271)
Cash and cash equivalents at beginning of period 1,197 1,063 8,311 8,311 7,199
------- -------- -------- -------- -------
Cash and cash equivalents at end of period $ 1,063 $ 8,311 $ 7,199 $ 6,410 $ 2,928
======= ======== ======== ======== =======
</TABLE>
See Note D for supplemental disclosure of cash flows and noncash investing and
financing transactions.
The accompanying notes are an integral part of these statements.
F-26
<PAGE>
GREENBRIAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
- --------------------
As discussed in Note C, Greenbriar Corporation (formerly Medical Resource
Companies of America) has disposed of substantially all of its nonassisted-
living operating assets. Its business will consist of development and operation
of assisted living facilities which provide housing, hospitality and personal
and healthcare services to elderly individuals. At December 31, 1995, the
Company had one facility under construction and sites under contract for four
facilities. In March 1996, the Company acquired a business that operates 16
facilities. See Note P.
A summary of the significant accounting policies applied in the preparation of
the accompanying consolidated financial statements follows.
Principles of Consolidation
- ---------------------------
The consolidated financial statements include the accounts of Greenbriar
Corporation and its majority-owned subsidiaries (collectively, the Company). All
significant intercompany transactions and accounts have been eliminated.
Depreciation
- ------------
Depreciation is provided for in amounts sufficient to relate the cost of
property, plant and equipment to operations over their estimated service lives.
Depreciation is computed by the straight-line method.
Profit Recognition on Sales of Real Estate
- ------------------------------------------
Gains on sales of real estate are recognized when the requirements of Statement
of Financial Accounting Standards No. 66, "Accounting for Sales of Real Estate,"
are met. Until the requirements for full profit recognition have been met, a
transaction is accounted for using either the deposit, cost recovery,
installment sale or financing method, whichever is appropriate under the
circumstances.
Use of Estimates
- ----------------
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Cash Equivalents
- ----------------
The Company considers all short-term deposits and money market investment with a
maturity of less than three months to be cash equivalents.
Impairment of Notes Receivable
- ------------------------------
A note receivable is identified as impaired when it is probable that interest
and principal will not be collected according to the contractual terms of the
note agreement. The accrual of interest is discontinued on such notes, and no
income is recognized until all past due amounts of principal and interest are
recovered in full.
F-27
<PAGE>
GREENBRAIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE A - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES - CONTINUED
Impairment of Long-Lived Assets
- -------------------------------
The Company reviews its long-lived assets and certain identifiable intangibles
for impairment when events or changes in circumstances indicate that the
carrying amount of the assets may not be recoverable. In reviewing
recoverability, the Company estimates the future cash flows expected to result
from using the assets and eventually disposing of them. If the sum of the
expected future cash flows (undiscounted and without interest charges) is less
than the carrying amount of the asset, an impairment loss is recognized based on
the asset's fair value.
Stock Options
- -------------
Statement of Financial Accounting Standards No. 123 is effective for 1996 and
establishes financial accounting and reporting standards, based on fair value,
for stock-based compensation plans. However, the statement permits, as an
alternative, the use of existing accounting rules based on intrinsic values for
such plans. The Company has elected to continue use of the intrinsic value
method and will provide the pro forma disclosures prescribed by the statement.
Interim Statements
- ------------------
In the opinion of management, the unaudited interim financial statements as of
June 30, 1996 and for the six-month periods ended June 30, 1995 and 1996
include all adjustments, consisting only of those of a normal recurring nature,
necessary to present fairly the Company's financial position as of June 30,
1996 and the results of its operations and cash flows for the six-month
periods ended June 30, 1995 and 1996. The results of operations for the six
months ended June 30, 1996 are not necessarily indicative of the results to be
expected for the full year.
Reclassifications
- -----------------
Certain reclassifications have been made to the financial statements to classify
revenues and expenses in a manner consistent with the Company's assisted living
operations as presented in the financial statements as of and for the period
ended June 30, 1996.
NOTE B - ACQUISITIONS
Remuda
- ------
In May 1993, the Company acquired 83.5% of the outstanding common stock of
Remuda Ranch Center for Anorexia and Bulimia, Inc. (Remuda) in exchange for
13,000 shares of the Company's Series B convertible preferred stock valued at
$800,000. Remuda provides hospital, residential, day and out-patient treatment
of eating disorders. In 1994, the Company sold its investment in Remuda. See
Note C.
EquiVest
- --------
In March 1993, the Company acquired all of the outstanding capital stock of
EquiVest Inc. (EquiVest), which was merged with and into the Company. EquiVest
was an Atlanta-based real estate investment trust with investments in income-
producing commercial real estate projects. Consideration consisted of 3,703,000
shares of common stock valued at $9,258,000. In August 1996, the Company
discontinued the real estate operations acquired from EquiVest. See Note C.
F-28
<PAGE>
GREENBRAIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE B - ACQUISITIONS - CONTINUED
Nursing Facilities
- ------------------
In February 1993, Altman Nursing, Inc. (Altman), a subsidiary, acquired two
skilled nursing facilities located in Texas. In August 1993, MRC sold 33% of the
common stock of Altman Nursing, Inc. at approximately its cost.
In December 1994, Altman sold both nursing facilities for an aggregate price of
$6,400,000. The operations of Altman were sold in 1995. See Note C.
All of the above acquisitions have been accounted for as purchases and,
accordingly, the consolidated financial statements include their operations from
the date of acquisition.
Retirement Facilities
- ---------------------
In 1991 and 1992, the Company acquired all of the outstanding common stock of
Rivermont Retirement, Inc. (Rivermont) and Fountainview Retirement Center, Inc.
(Fountainview), which own and operate retirement facilities. These companies
were originally acquired with the intent to resell. Accordingly, the Company's
investment had been presented on the balance sheet as an asset held for sale.
In 1993, management concluded that it was in the Company's best interest to
retain ownership of Fountainview and Rivermont. Accordingly, these subsidiaries
were consolidated at December 31, 1993. A charge has been made to retained
earnings in the amount of $824,000 representing the losses of Fountainview and
Rivermont for the period from dates of acquisition through December 31, 1993.
During 1994, management adopted a strategy that included selling both retirement
facilities and reinvesting the proceeds from these sales in a larger number of
smaller retirement facilities in different geographic areas. In December 1994,
the Company entered into contracts of sale of its retirement facilities. The
sale of the Rivermont facility closed in 1994 and resulted in a gain of
$1,732,000. The sale of the Fountainview facility closed in January 1995 and
will result in a gain of approximately $5,100,000 to be recognized in the first
quarter of 1995.
NOTE C - DISCONTINUED OPERATIONS
In 1994, management concluded that operation of skilled medical care facilities,
consisting of nursing homes and eating disorder clinics, was not in the best
interest of the Company. In June 1994, the Company sold its investment in Remuda
Ranch Center for Anorexia and Bulimia, Inc. for shares of the buyer's preferred
stock, which is not marketable, valued at $1,678,000. The sale resulted in a
gain of $804,000. The preferred stock bears a cumulative dividend of 8% and is
convertible into shares of common stock equal to approximately 4.9% of the
outstanding shares at December 31, 1995. Valuation was based on discounted
future cash flows. In December 1994, the Company's subsidiary, Altman Nursing,
Inc., sold its two skilled nursing facilities for an aggregate price of
$6,400,000, which resulted in a gain of $981,000. The aggregate gain of
$1,785,000 has been presented net of applicable income taxes of $607,000
F-29
<PAGE>
GREENBRIAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE C - DISCONTINUED OPERATIONS - CONTINUED
In 1995, management decided to sell the mobility products segment. The segment
was sold in February 1996 for stock and notes valued at approximately
$4,300,000. A gain of approximately $930,000, less applicable income taxes,
will be recorded in the first quarter of 1996.
In August 1996, the Company entered into contracts to sell three of its four
remaining real estate assets. The fourth property, a shopping center, is being
marketed and management expects to complete the sale within a year. Accordingly,
the Company's real estate operations have been reflected as discontinued
operations. Management expects that the proceeds from the sales will be at
least equal to the $5,432,000 carrying value of the real estate assets.
Summarized balance sheet data for the mobility products segment is as follows
(amounts in thousands):
<TABLE>
<CAPTION>
December 31,
----------------
1994 1995
------ ------
<S> <C> <C>
Assets
Current assets
Cash $ 65 $ 220
Inventories 370 363
Other 158 174
------ ------
Total current assets 593 757
Net property, plant and equipment 1,052 989
Other noncurrent assets, primarily goodwill and patent s 1,945 1,811
------ ------
3,590 3,557
Liabilities
Current liabilities 260 186
------ ------
Net assets $3,330 $3,371
====== ======
</TABLE>
The operations of the skilled medical care segment, mobility products segment
and 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):
<TABLE>
<CAPTION>
1993 1994 1995
------ ------ ------
<S> <C> <C> <C>
Revenues $16,396 $17,650 $2,815
======= ======= ======
Income (loss) before income taxes $ (389) $ 362 28
Income tax expense (benefit) (152) 121 9
------- ------- ------
Net income (loss) from operations $ (237) $ 241 $ 19
======= ======= ======
</TABLE>
F-30
<PAGE>
GREENBRIAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE D - CASH FLOW INFORMATION
Supplemental information on cash flows and noncash investing and financing
transactions is as follows (in thousands):
<TABLE>
<CAPTION>
Years ended
December 31,
------------------------------
1993 1994 1995
-------- -------- -------
<S> <C> <C> <C>
Supplemental cash flow information
Interest paid $ 1,522 $ 3,722 $ 211
Income taxes paid 950 27 46
Supplemental data on noncash investing and financing activities
Stock dividend paid on preferred shares 136 93 73
Sale of stock in exchange for notes receivable from
employees and officers 2,250 186 78
Conversion of subordinated debt to common stock - - 200
Businesses acquired
Fair value of assets acquired, exclusive
of deferred income tax benefit $ 37,821 $ - -
Deferred income tax benefit 3,400 - -
Liabilities assumed (26,874) - -
Debt issued (4,300) - -
Stock issued (10,058) - -
-------- ------- -------
Total cash paid (received), net of
cash acquired $ (11) $ - $ -
======== ======= =======
Sale of subsidiary
Securities received $ - $(1,678) $ -
Assets sold - 4,462 -
Liabilities transferred - (3,861) -
Gain on sale - 804 -
-------- ------- -------
Net cash effect of sale of subsidiary $ - $ (273) $ -
======== ======= =======
</TABLE>
F-31
<PAGE>
GREENBRIAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE E - DEBT
Long-term debt is comprised of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
-------------------
1994 1995
-------- --------
<S> <C> <C>
Mortgage note payable to a bank, payable monthly through maturity
in 1996. $ 8,933 $ -
Mortgage notes payable to a corporation bearing interest at 11.52%;
principal and interest payable in monthly installments through
maturity in 2004. 916 909
Note payable to a corporation bearing interest at 5%; principal
and interest payable in monthly installments through
maturity in December 1995. 341 -
Convertible note payable to an individual bearing interest at 6%;
interest due quarterly and principal due at maturity in 1998
(convertible into common stock at $3 per share). 200 -
Other 32 -
------- ----
10,422 909
Less: Current maturities (379) (8)
Debt collateralized by properties under contract of sale (8,933) -
------- ----
$ 1,110 $901
======= ====
</TABLE>
NOTE F - INCOME TAXES
At December 31, 1995, the Company had net operating loss carryforwards of
approximately $7,500,000 which expire between 1999 and 2008. However,
approximately $5,100,000 of these net operating loss carryforwards have
limitations that restrict utilization to approximately $600,000 for any one
year. Also, carryforwards of $1,800,000, which expire between 2006 and 2008,
may only be used to offset future taxable income of the subsidiaries in which
the losses were generated.
F-32
<PAGE>
GREENBRIAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE F - INCOME TAXES - CONTINUED
The following is a summary of the components of income tax expense (benefit)
from continuing operations (in thousands):
<TABLE>
<CAPTION>
Year ended
December 31,
------------------------
1993 1994 1995
------ ------ ------
<S> <C> <C> <C>
Current $(945) $ 160 $151
Deferred 998 (361) (57)
----- ----- ----
$ 53 $(201) $ 94
===== ===== ====
</TABLE>
Deferred tax assets and associated valuation allowances were comprised of the
following (in thousands):
<TABLE>
<CAPTION>
December 31,
----------------
1994 1995
------ ------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 4,650 $ 2,570
Real estate 488 141
Charitable contribution carryforwards - 606
Tax credits 125 220
Accrued expenses 60 103
Other 187 195
------- -------
Total deferred tax assets 5,510 3,835
Valuation allowance (3,325) (1,430)
Deferred tax liabilities:
Investment in securities - (237)
Other - (18)
------- -------
Total deferred tax liabilities - (255)
------- -------
Net deferred tax asset $ 2,185 $ 2,150
======= =======
</TABLE>
Management expects the net deferred tax asset will be recovered within two to
three years from earnings of the Company.
F-33
<PAGE>
GREENBRIAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE F - INCOME TAXES - CONTINUED
Following is a reconciliation of income tax expense from continuing operations
with the amount of tax computed at the statutory rate (in thousands):
<TABLE>
<CAPTION>
Year ended
December 31,
----------------------
1993 1994 1995
------ ------ ------
<S> <C> <C> <C>
Tax at the statutory rate $ 610 $ 57 $ 1,976
Amortization of intangibles 51 113 30
Change in deferred tax asset valuation allowance,
exclusive of reductions for sold company in 1994 (648) (547) (1,895)
Correction of prior period estimates - 138 -
Other 40 38 (17)
----- ----- -------
Tax expense $ 53 $(201) $ 94
===== ===== =======
</TABLE>
Reductions 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.
NOTE G - STOCKHOLDERS' EQUITY
On November 17, 1995, the Board of Directors authorized a one-for-five reverse
stock split effective December 1, 1995. All share and per share data has been
retroactively restated to give effect to the stock split.
The Series A preferred stock had a liquidation value of $1 per share and an
initial dividend rate of 6% that escalated to a maximum rate of 12% in 1994.
For accounting purposes, the preferred stock was deemed issued at a discount.
Such discount was being accreted in a manner that resulted in a constant imputed
dividend rate of 12%. Dividends were payable in cash or additional shares at
the stockholders' option. The Series A preferred stock was redeemed in 1995.
The Series B preferred stock has a liquidation value of $1 per share and is
convertible into common stock over a ten-year period at prices escalating from
$25.00 per share in 1993 to $55.55 per share by 2001. Dividends at a rate of 6%
are payable in cash or preferred shares at the option of the Company. At
December 31, 1995 and 1994, there were cumulative, unpaid dividends of
approximately $73,000.
The Series C preferred stock has a liquidation value of $1 per share and is
convertible into common stock at a price of $15.00 per share. Dividends are
payable in cash at a rate of 6%.
F-34
<PAGE>
GREENBRIAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE G - STOCKHOLDERS' EQUITY - Continued
Information relating to stock option activity during 1994 and 1995 is as
follows:
<TABLE>
<CAPTION>
Year ended
December 31,
--------------------
1994 1995
--------- ---------
<S> <C> <C>
Outstanding at beginning of year 327,500 155,500
Granted - 10,000
Cancelled (30,000) -
Expired - (10,000)
Reacquired (142,000) -
-------- -------
Outstanding at end of year 155,500 155,500
======== =======
</TABLE>
The options are exercisable at various times through 2005 at prices ranging from
$11.25 to $13.20 per share. In 1994, the Company purchased options covering
142,000 shares of common stock from a former employee/director for $178,000.
At December 31, 1995, options to purchase 133,500 shares were exercisable.
NOTE H - EARNINGS PER SHARE
Earnings per share are determined by dividing net earnings, adjusted for
preferred stock dividends, by the weighted average number of common shares
outstanding during the period. Dilutive stock options are included in weighted
average shares outstanding. Fully diluted earnings per share, giving effect to
assumed conversion of convertible preferred stock and notes, are not presented
because the effect of these securities is insignificant.
F-35
<PAGE>
GREENBRIAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE I - SALES OF ASSETS
Gains on the sale of assets result from the following transactions (amounts in
thousands):
<TABLE>
<CAPTION>
1995 Gain
------ ------
<S> <C>
Sale of Fountainview retirement center for cash
of approximately $18,000 $5,149
Sale of economic interest in legal claim
for $1,085 in cash 654
Sale of rights to the interest on escrow funds
for cash of $1,140 1,140
Other 7
------
$6,950
======
<CAPTION>
1994
------
Sale of Rivermont retirement center for cash
of approximately $6,900 $1,720
Recognition of deferred gain on long-term care facilities
sold in 1991 for approximately $15,400 in notes 1,070
Other 13
------
$2,803
======
</TABLE>
The sale of the economic interest in a legal claim resulted from a claim the
Company held against Wespac Investors Trust III ("Wespac") based upon an award
of legal fees following a protracted lawsuit. Wespac subsequently filed for
protection under Chapter 11 of the Bankruptcy Code. The Company then sold its
claim for $1,085,000. The buyer required the acquisition of the interest of an
unrelated 49% Wespac shareholder as a condition precedent to the purchase of the
claim. To facilitate the transaction, the Company acquired the 49% equity
interest from the shareholder and immediately conveyed the interest to such
buyer. The Company recorded a gain on the sale of its claim of $654,000, the
excess of the proceeds of $1,085,000 over the Company's cost of the claim of
$431,000.
At December 31, 1994 and 1995, the balance sheet reflects a deferred gain of
$3,083,000. This gain resulted from the sale in 1991 of four nursing homes in
exchange for notes in the principal amount of $15,400,000. The original gain of
$7,259,000 was deferred and is being accounted for by the installment method.
Sales in previous years by the Company of some of the notes resulted in a
reduction of the deferred gain to $3,083,000.
NOTE J - RELATED PARTY TRANSACTIONS
1993
- ----
The Company sold the Company's Chief Executive Officer, James R. Gilley, 200,000
shares of common stock for a $2,250,000 note, with principal and interest at 5-
1/2% due in November 2003.
1994
- ----
The Company sold to W. Michael Gilley, Executive Vice-President/Director of the
Company, 30,000 shares of common stock for a non interest bearing note of
$187,500; principal is due in December 1999. Additional loans to executives and
directors of $55,000 were made in 1994. Also, a former executive of the Company
was paid commissions of $145,000 relating to the sale of property.
F-36
<PAGE>
GREENBRIAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE J - RELATED PARTY TRANSACTIONS - Continued
Sylvia Gilley, wife of the Company's Chief Executive Officer, James R. Gilley,
made a loan of $1,000,000 to the Company. The loan was repaid during 1994.
1995
- ----
The Company purchased land from Sylvia Gilley for $221,000.
NOTE K - CONTINGENCIES
The Company and a subsidiary, CareAmerica, Inc. (CareAmerica) are defendants in
lawsuits brought by a corporation that purchased nursing homes from the Company
in 1991. The plaintiff alleges mismanagement of the homes during the period that
CareAmerica provided management services, seeks damages in excess of $1,500,000,
seeks cancellation of $6,700,000 of mortgage notes payable to the Company and
secured by the nursing homes, and seeks recovery of interest payments made on
the mortgage notes. The Company has filed a counterclaim for breach of the
management contract and to confirm the indebtedness. The plaintiff terminated
the contract and claimed that the mortgage notes had previously been discharged.
The Company believes that the plaintiff's actions, including payments against
the indebtedness, are inconsistent with the plaintiff's claims that the notes
have been discharged. The Company intends to vigorously contest those lawsuits
and pursue its counterclaims.
The Company is also defendant in several other lawsuits arising in the ordinary
course of business. Management of the Company is of the opinion that these
lawsuits will not have a material effect on the consolidated results of
operations or financial position of the Company.
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, 1995:
Cash and cash equivalents - The carrying amount approximates fair value because
of the short maturity of these instruments.
Investment in securities - The investment in securities consists of 8%
convertible preferred stock of a private company. Fair value, based on estimated
future discounted cash flows, approximates carrying value.
Mortgage notes receivable - The mortgage notes receivable consist primarily of
$6,700,000 of notes with a stated interest rate of 14% due in 2021 from Southern
Care Corp., the plaintiff in the lawsuit discussed in Note K. The obligor has
brought suit to cancel the notes, and as a result, future cash flows are not
predictable. Therefore, it is not practicable to estimate the fair value of the
note.
Long-term debt - The fair value of the Company's long-term debt is estimated
based on market rates for the same or similar issues. At December 31, 1995, the
carrying amount of long-term debt approximates its fair value.
Accounts receivable and payable - The carrying amount approximates fair value
because of their short maturity.
F-37
<PAGE>
GREENBRIAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE M - NOTES RECEIVABLE
Stock Purchase Notes
- --------------------
<TABLE>
<CAPTION>
December 31,
-----------------
1994 1995
------- ------
(in thousands)
<S> <C> <C>
Related party
Note from James R. Gilley, chief executive officer, principal
and interest at 5-1/2%, due November 2003 $2,250 $2,250
Note from W. Michael Gilley, executive vice-president/director,
noninterest-bearing and due in December 1999 188 188
Other employees - 78
------ ------
$2,438 $2,516
====== ======
</TABLE>
All stock purchase notes are collateralized by common stock of the company and
are presented in the balance sheet as a deduction from stockholders' equity.
Mortgage Notes
- --------------
<TABLE>
<CAPTION>
December 31,
-----------------
1994 1995
-------- ------
<S> <C> <C>
Notes receivable from a corporation, collateralized by a third
lien on real property, interest at 14% due annually, principal
due in 2021 $6,700 $6,700
Other notes - 668
------ ------
$6,700 $7,368
====== ======
</TABLE>
In connection with certain litigation in which the Company is defendant (see
Note K), the maker of the $6,700.000 note stopped making the interest payments
required under the note. As a result, the Company ceased recording the accrual
of interest income. Had the Company been accruing interest on this note, the
amount recognized would have been approximately $900,000 in 1995. No interest
income was recognized on this note in 1995.
Based on the value of the underlying collateral at December 31, 1995, no
impairment reserve is required for this note.
F-38
<PAGE>
GREENBRIAR CORPORATIION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE N - FOURTH QUARTER ADJUSTMENTS
During the fourth quarter of 1995, the Company made an adjustment to reduce the
deferred tax valuation allowance by $1,895,000.
During the fourth quarter of 1994, the Company wrote off goodwill related to a
1992 acquisition of approximately $150,00, made other adjustments reducing
earnings by approximately $175,000 and reduced the deferred tax valuation
allowance by approximately $550,000. The goodwill write off resulted from the
decision to discontinue the sale of mobility products to third parties.
The adjustments to the deferred tax valuation allowance resulted from
assessments made by the Company of its expected future taxable income available
to absorb its net operating loss carryfowards.
NOTE O - ACQUISITION OF WEDGWOOD RETIREMENT INNS, INC. AND AFFILIATES
In March 1996, the Company acquired substantially all of the assets and
liabilities of a number of companies under common control and managed by
Wedgwood Retirement Inns, Inc. The business of these companies consists of the
operation of 16 assisted living, congregate and Alzheimer's facilities. To
structure the Wedgwood acquisition as a tax-free exchange, the Company also
acquired a shopping center in North Carolina from James R. Gilley and members of
his family (the Gilley Group). Due to the fact that the Gilley Group is a
majority shareholder of Greenbriar and owner of the shopping center, the
property was recorded at the Gilley Group's historical cost basis of
approximately $2,300,000. Consideration given was 675,000 shares of Series D
preferred stock. Wedgwood's assets were valued at approximately $58,000,000
($54,000,000 of property and equipment) and liabilities assumed were
approximately $44,000,000. In exchange, Greenbriar issued 1,949,950 shares of
Series E preferred stock, valued at approximately $14,000,000, to the Wedgwood
shareholders. The Series D and E preferred stock is convertible, upon approval
of the common stockholders, into 1,962,458 shares of common stock. The
operations of Wedgwood will be reflected in the consolidated financial
statements of the Company beginning April 1, 1996.
The following table presents pro forma unaudited consolidated results of
operations for the six-month periods ended June 30, 1995 and 1996, assuming
that the acquisition had taken place on January 1, 1995. The pro forma results
are not necessarily indicative of the results of operations that would have
occurred had the acquisition been made on January 1, 1995, or of future results
of operations of the combines companies (in thousands):
<TABLE>
<CAPTION>
Six months ended
June 30,
------------------
1995 1996
------- -------
<S> <C> <C>
Revenue $7,589 $8,628
Earnings (loss) from continuing operations 3,052 (643)
Net earnings 3,064 53
Preferred stock dividend requirement (288) (228)
Earnings (loss) from continuing
operations allocable to common
stockholders 2,764 (871)
Net earnings (loss) allocable to
common stockholders 2,776 (175)
Earnings (loss) per share
Continuing operations 0.52 (0.25)
Net earnings 0.52 (0.04)
</TABLE>
F-39
<PAGE>
Report of Independent Certified Public Accountants
--------------------------------------------------
Stockholders, Members, Partners and Owners
Wedgwood Retirement Inns
We have audited the accompanying combined balance sheets of Wedgwood Retirement
Inns as of December 31, 1994 and 1995, and the related combined statements of
operations, stockholders', members', partners' and owners' deficit, and cash
flows for each of the three years in the period ended December 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that 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 combined financial position of Wedgwood Retirement
Inns as of December 31, 1994 and 1995, and the combined results of their
operations and their combined cash flows for each of the three years in the
period ended December 31, 1995, in conformity with generally accepted accounting
principles.
GRANT THORNTON LLP
Portland, Oregon
March 21, 1996
F-40
<PAGE>
WEDGWOOD RETIREMENT INNS
COMBINED BALANCE SHEETS
(Amounts in thousands)
<TABLE>
<CAPTION>
December 31,
--------------------- March 31,
1994 1995 1996
--------- -------- -----------
(unaudited)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 657 $ 885 $ 735
Accounts receivable
Trade 104 147 283
Employees and owners 2 - -
Other 66 305 85
Supplies 47 62 56
Prepaid expenses 139 113 136
------- ------- -------
Total current assets 1,015 1,512 1,295
PROPERTY AND EQUIPMENT
Buildings and improvements 21,933 29,764 30,250
Furniture, fixtures and equipment 2,339 3,127 3,019
Vehicles 274 333 347
Construction-in-progress 1,222 352 1,598
Land 3,073 3,346 2,964
Less accumulated depreciation and amortization (6,698) (7,797) (8,165)
------- ------- -------
22,143 29,125 30,013
RESTRICTED ASSETS
Mortgage escrow deposits 126 204 326
Reserve for capital improvements 116 782 757
Certificate of deposit - 400 -
Held-to-maturity securities 1,131 1,460 1,859
------- ------- -------
1,373 2,846 2,942
OTHER ASSETS
Property held for sale 2,543 798 862
Organization and start-up costs, net 72 211 108
Financing costs, net 1,034 1,572 1,588
Other 138 14 -
------- ------- -------
3,787 2,595 2,558
------- ------- -------
$28,318 $36,078 $36,808
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-41
<PAGE>
WEDGWOOD RETIREMENT INNS
COMBINED BALANCE SHEETS - CONTINUED
(Amounts in thousands)
<TABLE>
<CAPTION>
December 31,
--------------------- March 31,
1994 1995 1996
------- ------- -----------
(unaudited)
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS', MEMBERS',
PARTNERS' AND OWNERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 504 $ 948 $ 885
Accrued expenses 783 671 914
Deferred revenues and tenant deposits 309 369 487
Current maturities of long-term obligations 1,146 1,517 1,567
------- ------- -------
2,742 3,505 3,853
LONG-TERM OBLIGATIONS, less current maturities 17,922 24,396 24,988
DEFERRED REVENUE 72 66 -
FINANCING OBLIGATIONS 10,847 11,800 11,908
STOCKHOLDERS', MEMBERS', PARTNERS' AND
OWNERS' DEFICIT (3,265) (3,689) (3,941)
------- ------- -------
$28,318 $36,078 $36,808
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-42
<PAGE>
WEDGWOOD RETIREMENT INNS
COMBINED STATEMENTS OF OPERATIONS
(Amounts in thousands)
Year ended December 31,
<TABLE>
<CAPTION>
Three months ended
Year ended December 31, March 31,
------------------------------ ----------------
1993 1994 1995 1995 1996
-------- ------- ------- ------ ------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenues
Residential rental $10,184 $12,018 $14,940 $3,493 $4,262
Operating expenses
Residential operating expenses 7,542 8,585 10,916 2,431 3,182
Depreciation and amortization 911 1,216 1,374 275 488
General and administrative 605 738 959 210 322
------- ------- ------- ------ ------
9,058 10,539 13,249 2,916 3,992
------- ------- ------- ------ ------
Operating income 1,126 1,479 1,691 577 270
Other income (expense)
Interest income 26 74 160 20 13
Interest expense (1,092) (2,191) (2,843) (654) (845)
Other 70 77 94 3 28
------- ------- ------- ------ ------
NET EARNINGS (LOSS) $ 130 $ (561) $ (898) $ (54) $ (534)
======= ======= ======= ====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
F-43
<PAGE>
WEDGWOOD RETIREMENT INNS
COMBINED STATEMENT OF STOCKHOLDERS', MEMBERS', PARTNERS'
AND OWNERS' DEFICIT
(Amounts in thousands)
<TABLE>
<S> <C>
Balance at January 1, 1993 $(3,373)
Equity contributed 357
Equity distributed (597)
Net earnings 130
-------
Balance at December 31, 1993 (3,483)
Equity contributed 1,358
Equity distributed (579)
Net loss (561)
-------
Balance at December 31, 1994 (3,265)
Equity contributed 1,945
Equity distributed (1,471)
Net loss (898)
-------
Balance at December 31, 1995 (3,689)
Equity contributed 500
Equity distributed (218)
Net loss (534)
-------
Balance at March 31, 1996 - unaudited $(3,941)
=======
</TABLE>
The accompanying notes are an integral part of these statements.
F-44
<PAGE>
WEDGWOOD RETIREMENT INNS
COMBINED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
<TABLE>
<CAPTION>
Year ended December 31, March 31,
----------------------------- -----------------
1993 1994 1995 1995 1996
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities
Net income (loss) $ 130 $ (561) $ (898) (54) (534)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities
Depreciation and amortization 927 1,230 1,214 230 476
Write-off of deferred financing costs - 60 179 45 12
Amortization of discount on
held-to-maturity securities - - (22) (4) -
Change in assets and liabilities
Mortgage escrow deposits (69) 66 (78) (133) (68)
Accounts receivable (120) 324 (282) 16 84
Supplies (1) (14) (16) (5) 6
Prepaid expenses and other assets 15 (136) (117) 58 (23)
Accounts payable and accrued expenses (129) (398) 619 312 181
Deferred revenues and tenant deposits (7) 236 136 (31) 52
------ ------- -------- ------- -------
Net cash provided by operating activities 746 807 735 434 186
------ ------- -------- ------- -------
Cash flows from investing activities
Reserves for capital improvements (15) (16) (666) (4) (28)
Business acquisitions - (1,794) - -
Purchases of property and equipment (977) (4,413) (8,870) (1,741) (1,322)
Purchase of securities - (1,131) (1,462) (40) -
Proceeds from sale of land - - 1 - -
Purchase of restricted certificate of deposit - - (40) - -
Proceeds from sale of securities - - 1,155 - 1
------ ------- -------- ------- -------
Net cash used in investing activities (992) (7,354) (10,228) (1,785) (1,349)
------ ------- -------- ------- -------
Cash flows from financing activities
Proceeds from long-term debt 1,144 14,614 14,547 1,848 863
Principal payments on debt (554) (7,119) (5,241) (406) (112)
Payments for financing costs (81) (653) (746) (73) (20)
Equity contributed 357 356 1,945 234 500
Equity distributed (597) (579) (784) (162) (218)
------ ------- -------- ------- -------
Net cash provided by financing activities 269 6,619 9,721 1,441 1,013
------ ------- -------- ------- -------
NET INCREASE (DECREASE) IN CASH 23 72 228 90 (150)
Cash at beginning of period 562 585 657 657 885
------ ------- -------- ------- -------
Cash at end of period $ 585 $ 657 $ 885 $ 747 $ 735
====== ======= ======== ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-45
<PAGE>
WEDGWOOD RETIREMENT INNS
NOTES TO COMBINED FINANCIAL STATEMENTS
(Amounts in thousands of dollars)
NOTE A - BASIS OF PRESENTATION
The accompanying combined financial statements include the historical assets,
liabilities and operations associated with the entities listed below. The
combined entities are collectively referred to as Wedgwood Retirement Inns (the
Company). All such entities have ownership and management interests in common
with either Wedgwood Retirement Inns, Inc. (WRII) or with the controlling
principals of WRII.
Information relative to the entities included in the combined financial
statements at December 31, 1994 and 1995 and for each of the three years in the
period then ended is as follows:
<TABLE>
<CAPTION>
Common
Entity Control Legal Form
- ----------------------------------------------------------- -------- ------------------------------
<S> <C> <C>
Crown Pointe Development - Corona 60.00% Partnership
Hermiston Assisted Living, Inc. (Meadowbrook) 100.00 S Corporation
King City Retirement Corporation
(dba Pacific Pointe Retirement Inn) 90.00 S Corporation
Liberty Acquired Brain Injury Habilitation
Services, Inc. (Liberty) 25.00 S Corporation
Lincolnshire Partners (Lincolnshire) 40.50 Partnership
Neawanna by the Sea (Neawanna) 58.88 Limited Partnership
Retirement Housing Associates (dba Villa Del Rey-Merced) 50.00 Partnership
Villa Del Rey-Visalia Division of Retirement Housing
Associates
The Terrace Retirement, Inc. 50.00 S Corporation
Villa Del Rey-Napa 100.00 Proprietorship
Villa Del Rey-Roswell, Limited Partnership
(VDR-Roswell) 72.12 Limited Partnership
Camelot Retirement Community (Camelot) Division of VDR-Roswell
Oak Harbor (dba Summerhill) Division of VDR-Roswell
The Village at Forest Glen (VFG) * Division of VDR-Roswell
Wedgwood Retirement Inns, Inc. 82.50 S Corporation
</TABLE>
*Transferred to partners on January 1, 1995.
The following additional entities are included as of and for the year ended
December 31, 1995:
<TABLE>
<CAPTION>
Common
Entity Control Legal Form
- ----------------------------------------------------------- -------- ------------------------------
<S> <C> <C>
Lewiston Group LLC (dba Wedgwood Terrace) 82.00% Limited Liability Company
Rose Garden Estates, LLC 92.00 Limited Liability Company
Roswell Retirement, Ltd. Co. (dba Villa De La Rosa) 82.00 Limited Liability Company
Roswell Villa Partners (dba Villa Del Sol) 50.00 Partnership
Sweetwater Springs Group, LLC 82.00 Limited Liability Company
</TABLE>
F-46
<PAGE>
WEDGWOOD RETIREMENT INNS
NOTES TO COMBINED FINANCIAL STATEMENTS - CONTINUED
(Amounts in thousands of dollars)
NOTE B - SUMMARY OF ACCOUNTING POLICIES
A summary of the significant accounting policies applied in the preparation of
the accompanying combined financial statements follows.
1. Line of Business
----------------
The Company is involved in operating, managing and owning assisted living,
congregate and Alzheimer's facilities (residences). The principal source of
revenues is residential rental.
2. Cash
----
For purposes of the combined statements of cash flows, the Company considers
cash to include currency on hand and demand deposits.
3. Concentration of Risk
---------------------
The Company's financial instruments that were exposed to concentrations of
credit risk consist primarily of cash. The Company places its funds with high
credit quality financial institutions and, at times, such funds may be in excess
of the FDIC limit.
4. Property and Equipment
----------------------
Depreciation and amortization are provided for in amounts sufficient to relate
the cost of depreciable assets to operations over their estimated service lives.
Leasehold improvements are amortized over the lives of the respective leases or
the service lives of the improvements, whichever is shorter. Accelerated
depreciation is used for substantially all property and equipment. Useful lives
are as follows:
<TABLE>
<S> <C>
Buildings and improvements 5 to 28 years
Furniture fixtures and equipment 5 to 7 years
Vehicles 5 years
</TABLE>
Property and equipment includes interest costs incurred during the construction
period, as well as development fees and other costs directly related to the
development and construction of the residences. Maintenance and repairs are
charged to income as incurred and significant renewals and betterments are
capitalized. Deductions are made for retirements resulting from the renewals or
betterments. The property is recorded at the lower of historical cost or net
realizable value.
5. Intangible Assets
-----------------
Costs incurred in connection with the organization of the individual combined
entities have been capitalized and are being amortized over five years on a
straight-line basis.
Loan costs incurred in connection with obtaining permanent financing of Company
owned residences have been capitalized and are amortized over the term of the
financing.
F-47
<PAGE>
WEDGWOOD RETIREMENT INNS
NOTES TO COMBINED FINANCIAL STATEMENTS - CONTINUED
(Amounts in thousands of dollars)
NOTE B - SUMMARY OF ACCOUNTING POLICIES - Continued
Costs incurred in connection with preopening marketing, employee recruitment and
training, and other start-up expenditures necessary to prepare the residences
for rent have been capitalized. These prerental costs are amortized over 12
months beginning when the residences are available for occupancy.
6. Income Taxes
------------
Income taxes on the net earnings are payable personally by the stockholders,
members, partners and owners and accordingly are not reflected in these
financial statements.
7. Purchase of Withdrawing Partner's Interest
------------------------------------------
When a withdrawing partner is paid or credited more than book value to retire or
sell the partner's equity interest, the partnership treats the transaction as a
purchase and revalues, up to market value, partnership assets.
8. Marketable Securities
---------------------
Effective January 1, 1994, the Company implemented Statement of Financial
Accounting Standards No. 115, Accounting for Certain Investments in Debt and
Equity Securities. Following the provisions of that statement, the Company has
classified its investments in marketable securities as held-to-maturity
securities. There was no effect on the Company's income due to the
implementation of the statement.
9. Fair Value of Financial Instruments
-----------------------------------
At December 31, 1995, the estimated fair value of each class of the Company's
financial instruments either approximated carrying values or were not material.
10. Accounting 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, the disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
11. Impairment of Long-Lived Assets
-------------------------------
The Company reviews its long-lived assets and certain identifiable intangibles
for impairment when events or changes in circumstances indicate that the
carrying amount of the assets may not be recoverable. In reviewing
recoverability, the Company estimates the future cash flows expected to result
from using the assets and eventually disposing of them. If the sum of the
expected future cash flows (undiscounted and without interest charges) is less
than the carrying amount of the asset, an impairment loss is recognized based on
the asset's fair value.
F-48
<PAGE>
WEDGWOOD RETIREMENT INNS
NOTES TO COMBINED FINANCIAL STATEMENTS - CONTINUED
(Amounts in thousands of dollars)
NOTE B - SUMMARY OF ACCOUNTING POLICIES - CONTINUED
12. Interim Statements
------------------
In the opinion of management, the unaudited interim financial statements as of
March 31, 1996 and for the three-month periods ended March 31, 1995 and 1996
include all adjustments, consisting only of those of a normal recurring nature,
necessary to present fairly the Company's financial position as of March 31,
1996 and the results of its operations and cash flows for the three-month
periods ended March 31, 1995 and 1995. The results of operations for the three
months ended March 31, 1996 are not necessarily indicative of the results to be
expected for the full year.
NOTE C - SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Year ended December 31,
------------------------
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Supplemental cash flow information
Interest paid $ 675 $ 2,167 $2,758
Supplemental data on noncash investing
and financing activities
Businesses acquired
Fair value of assets acquired $ - $ 9,184 $ -
Liabilities assumed - (470) -
Seller debt financing - (5,220) -
----- ------- ------
Total cash and nonseller financing $ - $ 3,494 $ -
===== ======= ======
Equity contributed $ - $(1,002) $ -
Property and equipment acquired - 1,002 -
Debt issued (150) - -
Other 150 - -
</TABLE>
On January 1, 1995 the operations of The Village at Forest Glen were transferred
to the individual partners as follows:
<TABLE>
<S> <C>
Current assets $ 23
Property and equipment 2,521
Other assets 35
Accounts payable and accrued liabilities (297)
Debt (1,595)
Equity (687)
-------
$ -
=======
</TABLE>
F-49
<PAGE>
WEDGWOOD RETIREMENT INNS
NOTES TO COMBINED FINANCIAL STATEMENTS - CONTINUED
(Amounts in thousands of dollars)
NOTE D - ACQUISITIONS AND NEW ENTITIES
VDR-Roswell acquired the operations of Camelot in Harlingen, Texas, Summerhill
in Oak Harbor, Washington and VFG in Beaverton, Oregon during 1994. The
acquisitions were accounted for using the purchase method of accounting and the
results of operations have been included in the Company's combined financial
statements subsequent to the acquisition date. The acquired assets and
liabilities have been recorded at their estimated fair values at the date of
acquisition. The date the facilities were acquired, the allocation of purchase
price to assets and the method of payment are as follows:
<TABLE>
<CAPTION>
Camelot Summerhill VFG
-------------- ---------- -----------
<S> <C> <C> <C>
Date acquired September 1994 April 1994 September 1
Purchase Price
- --------------
Land $1,250 $ 193 $ 148
Buildings 3,100 1,902 2,392
Furniture, fixtures and equipment 49 38 8
Acquisition agreements 100 - -
Goodwill 1 1 2
------ ------ -------
$4,500 $2,134 $2,550
====== ====== ======
Payment
- -------
Cash $ 661 $ 434 $ 699
Seller debt financing 3,625 - 1,595
Other debt financing - 1,700 -
Liabilities 214 - 256
------ ------ ------
$4,500 $2,134 $2,550
====== ====== ======
</TABLE>
During 1994, Liberty was formed and began to acquire three parcels of land in
Ellensburg, Washington. In November 1994, they began construction of a
retirement facility. The construction was completed in July 1995 at which time
operations began.
During 1994, Lincolnshire was formed and entered into a ground lease for
property located in Lincoln City, Oregon and began construction of a retirement
facility. The construction was completed in late 1995 and operations began in
November 1995.
During 1995, Lewiston Group LLC was formed and leased a facility (Wedgwood
Terrace) in Lewiston, Idaho. The facility began operations in November 1995.
During 1995, Rose Garden Estates, LLC was formed and construction was completed
on a facility (Rose Garden Estates) located in Ritzville, Washington. The
facility began operations in December 1995.
F-50
<PAGE>
WEDGWOOD RETIREMENT INNS
NOTES TO COMBINED FINANCIAL STATEMENTS - CONTINUED
(Amounts in thousands of dollars)
NOTE D - ACQUISITIONS AND NEW ENTITIES - CONTINUED
During 1995, Roswell Retirement, Ltd., Co. was formed and began construction of
a facility (Villa de la Rosa) located in Roswell, New Mexico. The facility was
under construction at December 31, 1995 and is anticipated to begin operations
in October 1996.
During 1995, Roswell Villa Partners was formed and construction was completed on
a facility (Villa Del Sol) located in Roswell, New Mexico. The facility began
operations in December 1995.
During 1995, Sweetwater Springs Group, LLP was formed and began construction of
a facility (Sweetwater Springs) in Lithia Springs, Georgia. At the completion of
the project in August 1996, Sweetwater will lease the facility from the owner
for a minimum of 15 years.
NOTE E - RESTRICTED ASSETS
Mortgage escrow deposits represent amounts in escrow for the payment of
insurance premiums and real property tax assessments. The escrow accounts are
required by mortgage lenders or by the Oregon Housing and Community Services
Department.
The reserve for capital improvements includes $137 of replacement reserves and
$645 of renovation funds in escrow. The replacement reserves represent
restricted amounts on deposit which are to be used for future acquisition of
equipment and building improvements at Pacific Pointe Retirement Inn.
Acquisitions must be approved by the Oregon Housing and Community Services
Department. The renovation funds represent amounts, disbursed from a loan, which
are to be used for the renovation of the congregate facility at Camelot.
The certificate of deposit is required as collateral for a loan to Camelot.
The Company's held-to-maturity securities consist of mortgage-backed securities
which mature through April 23, 1997. The amortized cost, unrealized gains and
fair value at December 31, 1995 are $1,460, $4 and $1,464, respectively. The
investments are held as collateral for outstanding letters of credit (see note
I) .
NOTE F - DEFERRED REVENUES AND TENANT DEPOSITS
<TABLE>
<CAPTION>
Total deferred revenues and tenant deposits are as follows:
1994 1995
---- ----
<S> <C> <C>
Prepaid rents $ 35 $ 65
Unit sales deposits 68 16
Tenant security deposits 206 288
---- ----
$309 $369
==== ====
</TABLE>
F-51
<PAGE>
WEDGWOOD RETIREMENTS INNS
NOTES TO COMBINED FINANCIAL STATEMENTS - CONTINUED
(Amounts in thousands of dollars)
NOTE G - LONG-TERM OBLIGATIONS
Long-term obligations consist of the following:
<TABLE>
<CAPTION>
1994 1995
---- ----
<S> <C> <C>
Notes payable to banks and financial institutions $ 4,598 $10,767
Notes payable to individuals and companies 5,840 5,039
Note payable to the Redevelopment Agency of
the City of Corona, California 7,950 7,815
Notes payable to related parties 680 2,234
Other - 58
------- -------
19,068 25,913
Less current maturities 1,146 1,517
------- -------
$17,922 $24,396
======= =======
</TABLE>
Notes payable to banks and financial institutions mature through the year 2015
and include fixed and variable interest rates ranging from 7.5% to 11.75% at
December 31, 1995. The notes are collateralized by real property, personal
property, fixtures, equipment and the assignment of rents.
Notes payable to individuals and companies mature through the year 2015 and
include variable and fixed interest rates ranging from 7% to 10.64% at December
31, 1995. The notes are collateralized by real property, personal property,
fixtures, equipment and the assignment of rents.
The 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 to
$420 through May 1, 2015. The variable interest rate was 4.75% at December 31,
1995. The note is collateralized by personal property, land, fixtures and rents.
Notes payable to related parties mature through the year 2000 and include fixed
interest rates ranging from 9.5% to 12%.
Aggregate maturities of long-term debt for the five years following December 31,
1995 are as follows: 1996, $1,517; 1997, $530; 1998, $1,432; 1999, $2,726; and
2000, $2,512.
F-52
<PAGE>
WEDGWOOD RETIREMENT INNS
NOTES TO COMBINED FINANCIAL STATEMENTS - CONTINUED
(Amounts in thousands of dollars)
NOTE H - FINANCING OBLIGATIONS
During 1994, the Company entered into sale-leaseback transactions for the VDR-
Roswell and the Neawanna facilities. At the end of the tenth year of the fifteen
year leases, the Company has options to repurchase the facilities for the
greater of the sales prices or their fair market values. The sale-leaseback
transactions have been accounted for as financings. The Company has recorded the
proceeds from the sales as financing obligations, classified the lease payments
as interest expense, and continued to carry the facilities at historical cost
and to record depreciation. At the end of the ten year period, if the repurchase
options are not exercised by the Company, gain on sale will be realized and will
be recognized over the remaining five years of the leases. Annual payments under
the lease agreements are $1,167 for each of the years 1996 through 2000.
The Company sells certain of its individual independent living units at its
Camelot facility and, at the time of sale, enters into an agreement to
repurchase. The repurchase price of each unit will range from 65% to 80% of the
fair market value at the date of repurchase, based upon the number of years each
tenant has occupied the units. Upon the repurchase of a unit, Camelot has the
intention to resell it. The sales proceeds are recorded as a financing
obligation. At December 31, 1994 and 1995 Camelot had $32 and $985, respectively
of financing obligations under repurchase transactions.
NOTE I - COMMITMENTS
1. Operating Leases
----------------
The Company leases certain retirement centers under operating leases which
expire through the year 2024. The leases provide that the Company pay for
property taxes, insurance and maintenance. The rent payments normally include
monthly payment of property taxes and insurance into reserve accounts.
<TABLE>
Future minimum payments following December 31, 1995 are as follows:
<S> <C>
1996 $ 1,654
1997 1,737
1998 1,053
1999 1,078
2000 334
Thereafter 4,641
-------
$10,497
=======
</TABLE>
Lease expense in 1993, 1994 and 1995 was $1,617, $2,009 and $1,676,
respectively. Certain leases contain rent escalation clauses which are based
upon future events or changes in indices.
F-53
<PAGE>
WEDGWOOD RETIREMENT INNS
NOTES TO COMBINED FINANCIAL STATEMENTS - CONTINUED
(Amounts in thousands of dollars)
NOTE I - COMMITMENTS - CONTINUED
2. Commitments to Repurchase Units
-------------------------------
At the date of the acquisition of Camelot, it had outstanding obligations to
purchase 101 individual independent living units which had been sold with
agreements to repurchase. The repurchase prices are based on a discount from the
market value of each unit. At December 31, 1994 and 1995, the remaining
estimated outstanding repurchase obligation acquired in the Camelot acquisition
was $4,900 and $4,561, respectively. The estimated fair value of the properties
was $7,150 and $6,939, respectively.
3. Letters of Credit
-----------------
The Company has three outstanding letters of credit totaling $1,167 as of
December 31, 1995. The letters of credit were issued in conjunction with real
estate financing transactions and are collateralized by the Company's held-to-
maturity securities.
4. Agreement to Support
--------------------
The Company, as part of a ground lease for the Lincolnshire facility, entered
into an agreement to support the North Lincoln Hospital, a charitable foundation
and the ground lessor. The calculation of the annual contribution will be based
upon 33.33% of the distributable net income of Lincolnshire as defined in the
agreement, less ground rent paid. Contributions are to be made monthly. No
contribution was made in 1995.
NOTE J - RELATED PARTY TRANSACTION
The Company purchases services from Lund Construction and Wedgwood Services,
companies which are owned by a major investor in the Company. During the years
ended December 31, 1994 and 1995, the Company incurred $198 and $266,
respectively, for construction and remodeling services from these related
entities.
NOTE K - SUBSEQUENT EVENTS
Subsequent to year end, the Company entered into a merger agreement with
Greenbriar Corporation (Greenbriar). Under the terms of the agreement, the
Company's owners received preferred stock of Greenbriar and cash in exchange for
all of the outstanding shares of Wedgwood Retirement Inns, Inc. and
substantially all of the assets and liabilities of the combined entities
included in these financial statements.
F-54
<PAGE>
EXHIBIT A
March 25, 1996
Mr. Michael Gilley, Executive Vice-President
MEDICAL RESOURCE COMPANIES OF AMERICA
4265 Kellway Circle
Addison, Texas 75224
RE: Westwood Village Shopping Center, Clemmons, North Carolina
Dear Mr. Gilley:
In accordance with your request, we have prepared a narrative appraisal report
of the above referenced property. The date of valuation is March 11, 1996, and
the date of the report preparation is March 25, 1996. The purpose of the
appraisal is to estimate the Market Value of the leased fee interest of the
subject property as of March 11, 1996.
The legal description of the property, together with a definition of Market
Value and other important appraisal terminology is presented in the sections of
the report entitled Property Identification, Location and Description, and Scope
and Premises of the Assignment. Your attention is also directed to the
subsection for special and general Assumptions and Limiting Conditions, which
further identifies the scope and use of this report.
In addition to a careful physical inspection and analysis of the subject
property, other matters considered pertinent have been examined including the
social, economic, governmental and environmental characteristics of the
neighborhood and an assessment of pertinent market trends. The accompanying
report sets forth these findings and conclusions, together with maps, plats,
photographs and other exhibits considered essential in explaining the basis of
value.
The appraisal has been prepared in compliance with the requirements of the
Uniform Code of Professional Ethics and Standards of Professional Appraisal
Practice of the Appraisal Institute and the Appraisal Foundation. The appraisal
is also in compliance with 12 CFR, Part 1608.
<PAGE>
Gilley
March 25, 1996
Page 2
The subject property is not considered to have any significant natural,
cultural, recreational, or scientific value.
Based upon the data, analyses and reasoning contained in the attached report,
the market value estimate of the fee simple interest in the subject property, as
of March 11, 1996, is estimated as follows:
Market Value
Three Million Three Hundred Seventy-Five Thousand Dollars
$3,375,000
The narrative portion of the appraisal will follow. We appreciate the
opportunity to serve you, and trust you will advise us if we can be of further
assistance. We also hope you will consider us favorably for your future
valuation needs.
Respectfully,
Martin M. MacRae, MAI
State Certified: TX-1320273-G
<PAGE>
EXHIBIT B
SERIES D PREFERRED STOCK
1. Medical Resource Companies of America (the "Company") establishes a series
of Preferred Stock pursuant to the authority contained in the Articles of
Incorporation of the Company, to be known as Series D Preferred Stock, par
value $0.10 per share.
2. There shall be authorized the issuance of 675,000 shares of Series D
Preferred Stock.
3. The issue price of Series D Preferred Stock shall be $5.00 per share, (the
"Issue Price") issuable in exchange for property of like amount, or in lieu
of dividends as described below.
4. An annual cash dividend shall be payable on Series D Preferred Stock, in
the amount of $.47407 per share, payable quarterly beginning three months
following the date of issuance. Such dividends shall be cumulative from the
date of issue, so that no dividend (other than a dividend payable in Common
Stock of the Company) or other distribution shall be paid or declared or
made, and no amounts shall be applied to the purchase or redemption of the
Common Stock or any other class of stock ranking junior to the Series D
Preferred Stock as to dividends unless full cumulative dividends for all
past dividend periods shall have been paid or declared and set apart for
payment, and full dividends for the then current dividend period shall have
been or simultaneously therewith shall be paid or declared and set apart
for payment, on outstanding Series D Preferred Stock.
5. In the event of any dissolution, liquidation or winding up of the Company,
whether voluntarily or involuntarily, the holders of Series D Preferred
Stock, without any preference among them, along with and pari passu with
the holders of the Series A, B & C Preferred Stock, shall be entitled to
receive in cash out of the assets of the Company, whether capital or
surplus or otherwise, before any distribution of the assets shall be made
to the holders of Common Stock, an amount equal to the aggregate Issue
Price of their shares, together, in all cases, with unpaid accumulated
dividends, if any, whether such dividends are earned, declared or
otherwise, to the date fixed for such payment. After payment to the holders
of the Series D Preferred Stock of the full preferential amounts
hereinbefore provided for, the holders of Series D Preferred Stock will
have no other rights or claims to any of the remaining assets of the
Company, either upon distribution of such assets or upon dissolution,
liquidation or winding up. The sale of all or substantially all of the
property of the Company to, or the merger, consolidation or reorganization
of the Company into or with, any other company, or the purchase or
redemption by the Company of any shares of any class of its Preferred Stock
or its Common Stock or any other class of its stock shall not be deemed to
be a distribution of assets or a dissolution, liquidation or winding up for
the purposes of this paragraph.
6. So long as full cumulative dividends on all outstanding shares of Series D
Preferred Stock for all dividend periods have been paid or declared and set
apart for payment and subject to any applicable requirements of Nevada law,
the Company may, at its option, redeem the whole or any part of the shares
of Series D Preferred Stock, and the redemption price thereof shall be
equal to the Issue Price of the shares so redeemed, plus the amount of
unpaid accumulated dividends, if any, to the date of such redemption. All
such redemptions of Series D Preferred Stock shall be effected in
accordance with any procedure for redemptions set forth in the General
Corporation Law of the State of Nevada. Shares of Series D Preferred Stock
which are redeemed shall be restored to the status of authorized but
unissued shares.
On or before the date fixed for redemption, the Company, if it elects to
call such shares for redemption, shall provide for payment of a sum
sufficient to redeem the shares called for redemption either (1) by setting
aside the sum, separate from its other funds, in trust for the benefit of
the holders of the shares to be redeemed, or (2) by depositing such sum in
a bank or trust company as a trust fund, with irrevocable instructions and
authority to the bank or trust company to give or complete the notice of
redemption and to pay, on or after the date fixed for redemption, the
redemption price on surrender of certificates evidencing the shares of
Series D Preferred Stock called for redemption. From and after the date
fixed for redemption, (a) the shares shall be deemed to be redeemed, (b)
dividends thereon shall cease to accumulate, (c) such
<PAGE>
setting aside or deposit shall be deemed to constitute full payment of the
shares, (d) the shares shall no longer be deemed to be outstanding, (e) the
holders thereof shall cease to be shareholders with respect to such shares,
and (f) the holders thereof shall have no rights with respect thereto,
except the right to receive their proportionate shares of the fund set
aside pursuant hereto or deposited upon surrender of their respective
certificates. Any interest accrued on funds set aside pursuant hereto or
deposited shall belong to the Company. If the holders of shares do not,
within six (6) years after such deposit, claim any amount so deposited for
redemption thereof, the bank or trust company shall upon demand pay over to
the Company the balance of the funds so deposited, and the bank or trust
company shall thereupon be relieved of all responsibility to such holders.
7. Holders of the Series D Preferred Stock shall have no right to cause
redemption of the Series D Preferred Stock by the Company.
8. Holders of Series D Preferred Stock shall have the right to vote together
with the holders of the Common Stock, and not as a class (except as
provided below), on any matters to come before a vote of the shareholders.
Each share of Series D Preferred Stock shall be entitled to one vote.
9. In addition, the holders of shares of any and all series of Series D
Preferred Stock outstanding on the record date for any such meeting of the
shareholders shall be entitled to vote, as a single class, upon any
proposed amendment to the Company's Articles of Incorporation, and their
consent shall be required for any action of the Board of Directors, if such
amendment or action would (1) increase or decrease the aggregate number of
authorized shares of Series D Preferred Stock, (ii) increase or decrease
the Issue Price of shares of Series D Preferred Stock, (iii) effect an
exchange, reclassification or cancellation of all or part of the shares of
Series D Preferred Stock, (iv) effect an exchange, or create a right of
exchange, of all or any part of the shares of another class into shares of
Series D Preferred Stock, (v) change the designations, preferences,
limitations, or relative rights of any series of Series D Preferred Stock
at the time outstanding in those respects in which the shares thereof vary
from shares of other series or Series D Preferred Stock at the time
outstanding, (vi) change the shares of Series D Preferred Stock into the
same or a different number of shares, either with or without par value, of
the same class or another class or classes, or (vii) cancel or otherwise
affect accumulated but undeclared dividends on the shares of Series D
Preferred Stock, and no such proposed amendment or action shall be deemed
to have been adopted and approved without the affirmative vote or consent
of holders of a majority of shares of Series D Preferred Stock then
outstanding.
10. Subject to and upon compliance with the provisions hereof, and upon the
approval of a majority of the shareholders of Common Stock (the "Common
Stock") of the Company, which shall specifically exclude the vote of the
holders of the Series D and E Preferred Stock for the approval, each holder
of shares of Series D Preferred Stock shall have the right, at such
holder's election, at any time after the close of business one year
following the issuance of the Series D Preferred Stock, to convert all or
any portion (in minimum increments of $25,000 per exercise if for less than
all shares owned) of shares of Series D Preferred Stock into shares of
Common Stock of the Company on the basis of Issuance Conversion Price per
each share of Common Stock. The formula for such conversion shall be that
the aggregate amount of the Issue Price of the shares of Series D Preferred
Stock to be converted, divided by the Issuance Conversion Price, shall
equal the number of shares of Common Stock to be issued upon conversion.
The "Issuance Conversion Price" per share of the stock conveyed shall be
$10.00. The Issuance Conversion Price and number of common shares issuable
upon conversion shall be adjusted to take into account any and all
increases or reductions in the number of shares of Common Stock outstanding
which may have occurred since the date of issuance of the Series D
Preferred Shares by reason of a split, share dividend, merger,
consolidation, or other capital change or reorganization affecting the
number of outstanding common shares so as fairly and equitably to preserve
so far as reasonably possible the original conversion rights of the Series
D Preferred Shares, and provided further that when such adjustment is
required, no notice of redemption shall be given until such amendment and
adjustment shall have been accomplished.
Upon any conversion by a holder of all shares of Series D Preferred Stock,
cumulative unpaid dividends shall be paid to the holder concurrently with the
presentation of the shares for conversion. Upon any conversion of
<PAGE>
less than all shares owned by such holder, cumulative unpaid dividends on such
portion not converted shall remain payable and shall be paid on the next
scheduled dividend payment date. Upon conversion of all or a part of the
outstanding Series D Preferred Shares, the Series D Preferred Shares surrendered
for conversion shall be canceled and returned to the status of authorized but
unissued shares. Under no circumstances shall the Company be obligated to issue
any fractional shares.
In order to exercise the conversion privilege, the holder of Series D
Preferred Stock shall present the shares to the Company at its office,
accompanied by written notice to the Company that the holder elects to convert
all or a portion of Series D Preferred Stock. Such notice shall also state the
name or names (with the address or addresses) in which the certificate or
certificates representing Common Stock which shall be issuable on such
conversion shall be issued. As soon as practicable after the receipt of such
notice and the presentation of the Shares of the Series D Preferred Stock, the
Company shall issue and shall deliver to the holder a certificate or
certificates for the number of full shares of common stock issuable upon the
conversion of Series D Preferred Shares (or portion hereof), and provision shall
be made for any fraction of a Unit as provided above. Such conversion shall be
deemed to have been effected immediately prior to the close of business on the
date on which such notice shall have been received by the Company, and the
shares of Series D Preferred Stock shall have been presented as aforesaid, and
conversion shall be at the Issuance Conversion Price in effect at such time, and
at such time the rights (other than rights in respect of accrued dividends) of
tile holder of the shares of Series D Preferred Stock as such holder shall cease
(to the extent the shares of Series D Preferred Stock are so converted) and the
person or persons in whose name or names any certificate or certificates for
Common Stock shall be issuable upon such conversion shall be deemed to have
become the holder or holders of record of the Common Stock represented thereby.
Upon conversion by a holder of only a part of the shares of Series D Preferred
Stock held by such holder, new shares of Series D Preferred Stock representing
the shares not converted shall be issued in the name of such holder.
Notwithstanding the holders' designation of names in which shares of Common
Stock are to be issued, this Section shall permit the holder of the Series D
Preferred Shares to make any transfer or assignment of its rights hereunder
which is otherwise prohibited by the Series D Preferred Shares or by law.
<PAGE>
EXHIBIT C
SERIES E PREFERRED STOCK
1. Greenbriar Corporation, formerly Medical Resource Companies of America (the
"Company"), establishes a series of Preferred Stock pursuant to the authority
contained in the Articles of Incorporation of the Company, to be known as
Series E Preferred Stock, par value $0.10 per share.
2. There shall be authorized the issuance of 1,949,950 shares of Series E
Preferred Stock.
3. The issue price of Series E Preferred Stock shall be $9.514 per share (the
"Issue Price"), issuable in exchange for property of like amount, or in lieu
of dividends as described below.
4. The Series E Preferred Stock shall have equal dividend or distribution,
liquidation and other rights as the Common Stock of the Company except as set
forth below.
5. Holders of the Series E Preferred Stock shall have no right to cause
redemption of the Series E Preferred Stock by the Company.
6. Holders of Series E Preferred Stock shall have the right to vote together
with the holders of the Common Stock, and not as a class (except as provided
below), on any matters to come before a vote of the shareholders. Each share
of Series E Preferred Stock shall be entitled to one vote.
7. In addition, the holders of shares of any and all series of Series E
Preferred Stock outstanding on the record date for any such meeting of the
shareholders shall be entitled to vote as a single class, upon any proposed
amendment to the Company's Articles of Incorporation, and their consent shall
be required for any action of the Board of Directors, if such amendment or
action would (i) increase or decrease the aggregate number of authorized
shares of Series E Preferred Stock, (ii) increase or decrease the Issue Price
of shares of Series E Preferred Stock, (iii) effect an exchange,
reclassification or cancellation of all or part of the shares of Series E
Preferred Stock, (iv) effect an exchange, or create a right of exchange, of
all or any part of the shares of another class into shares of Series E
Preferred Stock, (v) change the designations, preferences, limitations, or
relative rights of any series of Series E Preferred Stock at the time
outstanding in those respects in which the shares thereof vary from shares of
other series or Series E Preferred Stock at the time outstanding, (vi) change
the shares of Series E Preferred Stock into the same or a different number of
shares, either with or without par value, of the same class or another class
or classes, or (vii) cancel or otherwise affect accumulated but undeclared
dividends on the shares of Series E Preferred stock, and no such proposed
amendment or action shall be deemed to have been adopted and approved without
the affirmative vote or consent of holders of a majority of shares of Series
E Preferred Stock then outstanding.
8. Subject to and upon compliance with the provisions hereof, and upon the
approval of a majority of the shareholders of Common Stock (the "Common
Stock") of the Company, which shall specifically exclude the vote of the
holders of the Series D and E Preferred Stock for the approval, but not for
quorum purposes, each holder of shares of Series E Preferred Stock shall have
the right, at such holder's election, to convert all or any portion (in
minimum increments of $25,000 per exercise if for less than all shares owned)
of the Issue Price of shares of Series E Preferred Stock into shares of
Common Stock of the Company on the basis of 1.2 shares of Series E Preferred
Stock per each share of Common Stock.
<PAGE>
The number of common shares issuable upon conversion shall be adjusted to take
into account any and all increases or reductions in the number of shares of
Common Stock outstanding which may have occurred since the date of issuance of
the Series E Preferred Shares by reason of a split, share dividend, merger,
consolidation, or other capital change or reorganization affecting the number of
outstanding common shares so as fairly and equitably to preserve so far as
reasonably possible the original conversion rights of the Series E Preferred
Shares, and provided further that when such adjustment is required, no notice of
redemption shall be given until such amendment and adjustment shall have been
accomplished.
Upon conversion of all or a part of the outstanding Series E Preferred Shares,
the Series E Preferred Shares surrendered for conversion shall be canceled and
returned to the status of authorized but unissued shares. Under no
circumstances shall the Company be obligated to issue any fractional shares.
In order to exercise the conversion privilege, the holder of Series E Preferred
Stock shall present the shares to the Company at its office, accompanied by
written notice to the Company that the holder elects to convert all or a portion
of Series E Preferred Stock. Such notice shall also state the name or names
(with the address or addresses) in which the certificate or certificates
representing Common Stock which shall be issuable on such conversion shall be
issued. As soon as practicable after the receipt of such notice and the
presentation of the Shares of the Series E Preferred Stock, the Company shall
issue and shall deliver to the holder a certificate or certificates for the
number of full shares of Common Stock issuable upon the conversion of Series E
Preferred Shares (or portion thereof), and provision shall be made for any
fraction of a Unit as provided above. Such conversion shall be deemed to have
been effected immediately prior to the close of business on the date on which
such notice shall have been received by the Company, and the shares of Series E
Preferred Stock shall have been presented as aforesaid, and at such time the
rights of the holder of the shares of Series E Preferred Stock as such holder
shall cease (to the extent the shares of Series E Preferred Stock are so
converted) and the person or persons in whose name or names any certificate or
certificates for Common Stock shall be issuable upon such conversion shall be
deemed to have become the holder or holders of record of the Common Stock
represented thereby. Upon conversion by a holder of only a part of the shares
of Series E Preferred Stock held by such holder, new shares of Series E
Preferred Stock representing the shares not converted shall be issued in the
name of such holder. Notwithstanding the holder's designation of names in which
shares of Common Stock are to be issued, nothing contained in this Section shall
permit the holder of the Series E Preferred Shares to make any transfer or
assignment of its rights hereunder which is otherwise prohibited by the Series E
Preferred Shares or by law.
If a majority of the shareholders of Common Stock of the Company fail to approve
the right of holders of Series E Preferred stock to convert to Common Stock
within two years of the date of issuance, a dividend shall become payable on the
Series E Preferred Stock, in the amount of 12% of the Issue Price, payable
quarterly beginning twenty-seven months following the date of issuance, in cash.
Such dividends shall be cumulative from the date of issue, so that no dividend
(other than a dividend payable in Common Stock of the Company) or other
distribution shall be paid or declared or made, and no amounts shall be applied
to the purchase or redemption of the Common Stock or any other class of stock
ranking junior to the Series E Preferred Stock as to dividends unless full
cumulative dividends for all past dividend periods shall have been paid or
declared and set apart for payment, and full dividends for the then current
dividend period shall have been or simultaneously therewith shall be paid or
declared and set apart for payment, on outstanding Series E Preferred Stock.
<PAGE>
GREENBRIAR CORPORATION
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby (I) acknowledges receipt of the Notice of Special
Meeting of Stockholders of Greenbriar Corporation (the "Company") to be held at
the offices of the Company in Addison, Texas, on September 16, 1996, beginning
at 10:00 a.m., Dallas Time, and the Proxy Statement in connection therewith and
(2) appoints James R. Gilley and Gene S. Bertcher, and each of them, the
undersigned' proxies with full power of substitution for and in the name, place
and stead of the undersigned, to vote with and act with respect to all of the
shares of Common Stock and Series B and C Preferred Stock of the Company
standing in the name of the undersigned, or with respect to which the
undersigned is entitled to vote and act, at the meeting and at any adjournment
thereof.
The undersigned directs that the undersigned's proxy be voted as follows:
<TABLE>
<S> <C> <C> <C>
1. PROPOSAL I:
APPROVAL PROPOSAL TO [ ] FOR [ ] AGAINST [ ] ABSTAIN
APPROVE THE RIGHT TO
CONVERT SERIES E
PREFERRED STOCK INTO
COMMON STOCK
2. PROPOSAL II:
APPROVAL PROPOSAL TO [ ] FOR [ ] AGAINST [ ] ABSTAIN
APPROVE THE RIGHT TO
CONVERT SERIES D
PREFERRED STOCK INTO
COMMON STOCK
</TABLE>
3. IN THE DISCRETION OF THE PROXIES, ON ANY OTHER MATTER WHICH MAY PROPERLY
COME BEFORE THE MEETING.
This proxy will be voted as specified above. If no specification is made,
this proxy will be voted for approval of the Proposal.
The undersigned hereby revokes any proxy heretofore given to vote or act
with respect to the Common Stock of Series B and C Preferred Stock of the
Company and hereby ratifies and confirms all that the proxies, their
substitutes, or any of them may lawfully do by virtue hereof.
If more than one of the proxies named shall be present in person or by
substitute at the meeting or at any adjournment thereof, the majority of the
proxies so present and voting, either in person or by substitute, shall exercise
all of the powers hereby given.
Please date, sign and mail this proxy in the enclosed envelope. No postage
is required.
Date , 1996
--------------
---------------------------------
Signature of Stockholder
---------------------------------
Signature of Stockholder
Please date this proxy and sign your name
exactly as it appears hereon. Where there
is more than one owner, each should sign.
When signing as an attorney,
administrator, guardian or trustee,
please add your title as such. If
executed by a corporation, the proxy
should be signed by a duly authorized
officer.
<PAGE>
GLAST, PHILLIPS & MURRAY
A PROFESSIONAL CORPORATION
2200 ONE GALLERIA TOWER
ATTORNEYS AND COUNSELORS 13355 NOEL ROAD, L.B. 48
RONALD L. BROWN, P.C. DALLAS, TEXAS 75240-6657
DIRECT DIAL NUMBER: TELEPHONE: (214) 419-8300
(214) 419-8302 FAX: (214) 419-8329
August 23, 1996
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-1004
Re: Greenbriar Corporation, Commission File No. 0-8187
Our File No. 356069.53
Ladies and Gentlemen:
On behalf of Greenbriar Corporation (the "Company"), we hereby enclose
for electronic filing the following documents:
1. One copy of the Definitive Proxy Materials on Schedule 14A (Amendment
No. 4), originally filed June 5, 1996.
Courtesy copies marked to show changes are also being delivered to David
Lynn and Mary Farrar of the Staff.
The paragraphs in the attached letter from Grant Thornton LLP to Mary
Farrar of the Staff correspond to the numbered paragraphs of the Commission's
comment letter dated August 19, 1996 to James R. Gilley, President and Chief
Executive Officer of the Company (the "Comment Letter").
We are also responding to the staff's comment letter dated August 23, 1996.
In response to comment one, the average shares outstanding and revised pro forma
loss per share have been revised to exclude the Series E Preferred Stock. In
response to comment two, Note I has been expanded.
Registrant acknowledges the requirement to file an amendment to Form 10-KSB
to make conforming changes to the Notes to Financial Statements.
Please call the undersigned at (214) 419-8302 with any further questions or
comments.
Sincerely,
Ronald L. Brown
RLB/lds
enclosures
<PAGE>
Securities and Exchange Commission
August 23, 1996
Page 2
cc: Greenbriar Corporation
Grant Thornton, LLC
<PAGE>
[LETTERHEAD OF GRANT THORNTON LLP APPEARS HERE]
VIA FACSIMILE
- -------------
August 22, 1996
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-1004
Re: Greenbriar Corporation, Commission
File No. 0-8187
Revised Preliminary Proxy Materials
on Schedule A, filed August 20, 1996
Ms. Mary Farrar:
On behalf of Greenbriar Corporation (the "Company"), we are providing responses
to the Commission's comment letter dated August 22, 1996.
1. The tax adjustment on page F-16 has been changed so that the resulting pro
forma tax benefit is at a rate of 38%, consistent with the footnote.
2. Amounts in Note A on F-18 were transposed in your courtesy copy of the
filing. Amounts in the filed proxy statements add correctly. Related
adjustments do not need revision, because they were based on the final
transaction values. The error had been in the figures previously appearing
in Note A.
Disclosure has been made in Note A regarding valuation of the Series D
preferred stock.
3. The weighted average number of shares used in the pro forma column on page
F-17 was computed as follows (in thousands):
First quarter:
Weighted average shares 3,442
Common stock equivalent -
Series E preferred 1,628
-----
<PAGE>
[GRANT THORNTON LETTERHEAD APPEARS HERE]
Securities and Exchange Commission -2- August 22, 1996
5,020
-----
Second quarter:
Weighted average shares 3,478
-----
Six months - average of first and
second quarters 4,274
The Series E preferred is not considered as common stock, pursuant to our
previous discussions. However, it is considered a common stock equivalent
because the granting of conversion rights is within the control of Mr.
Gilley, the controlling shareholder of the Company.
For the first quarter, the Series E preferred should be included in common
share equivalents because the Company had net earnings (after preferred
dividends) even though there was a net loss from continuing operations.
Please refer to Form 10-Q for March 31 and June 30, 1996.
4. The calculation of earnings (loss) per share give effect to the preferred
stock dividend requirements. Note O on page F-39 has been revised to
reflect the requested disclosures.
5. The Company held a claim for $1,085,000 against Wespac Investors Trust III
("Westpac") based upon an award of legal fees following a protected
lawsuit. Wespac subsequently filed for protection under Chapter 11 of the
Bankruptcy Code. The Company determined to propose a creditors' plan of
reorganization in competition with a plan previously proposed by a 49%
Wespac shareholder. As an alternative to pursuing its plan of
reorganization and the attendant litigation over competing plans, the
Company located a buyer for its claim against Wespac. Such buyer required
the purchase of the Company's claim and the 49% shareholder's position to
insure it could acquire Wespac without the conflict over competing plans.
To facilitate the transaction, the Company acquired the 49% equity interest
from the shareholder and immediately conveyed the stock to such buyer. The
funds for the purchase were paid directly from the buyer to the
shareholder. The Company recorded a gain of $654,000 on the sale of its
claim, and disregarded the stock transaction as a mere accommodation to the
buyer of the claim. Therefore, the Company believes the statement of cash
flows reflects the substance of the transaction and footnote I needs no
revision.
Please call Gene Bertcher, Chief Financial Officer of the Company, at (214)
407-8400 with any questions.
Sincerely,
/s/ GEORGE BANKS
George Banks
Partner
bc
<PAGE>
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Less operations
of The Pro Forma
Company Fountainview(4) Subtotal Wedgwood Adjustments Combined
------- ---------------- -------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
REVENUES
Assisted living facilities $ 557 $ (557) $ - $14,940 $ - $14,940
Expenses
Assisted living facilities 322 (322) - 10,916 - 10,916
Facility depreciation and
amortization - - - 1,374 (95)(1) 1,279
General and administrative 2,688 (38) 2,650 959 - 3,609
------- ------- ------- ------- ----- -------
3,010 (360) 2,650 13,249 (95) 15,804
------- ------- ------- ------- ----- -------
Operating profit (loss) (2,453) (197) (2,650) 1,691 95 (864)
Other income (expense)
Interest and dividend income 1,176 - 1,176 160 - 1,336
Interest expense (101) 73 (28) (2,843) - (2,871)
Gain on sales of assets 6,950 (5,149) 1,801 - - 1,801
Other 239 - 239 94 - 333
------- ------- ------- ------- ----- -------
8,264 (5,076) 3,188 (2,589) - 599
------- ------- ------- ------- ----- -------
Earnings (loss) from
continuing operations
before income taxes 5,811 (5,273) 538 (898) 95 (265)
Income tax expense 94 - 94 - (195)(3) (101)
------- ------- ------- ------- ----- -------
Earnings (loss) from
continuing operations 5,717 (5,273) 444 (898) 290 (164)
Preferred dividend requirement (225) - (225) - (320)(2) (545)
------- ------- ------- ------- ----- -------
Earnings (loss) from
continuing operations
allocable to common
shareholders $ 5,492 $(5,273) $ 219 $ (898) $ (30) $ (709)
======= ======= ======= ======= ===== =======
Earnings per share
Continuing operations $ 1.55 $ (0.20)
Weighted average number of
common and equivalent
shares outstanding 3,539 3,539
</TABLE>
See accompanying explanatory notes.
F-16
<PAGE>
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
(UNAUDITED)
A. The pro forma condensed combined financial statements reflect the
acquisition by the Company in March 1996 of substantially all of the assets
and liabilities of a number of companies under common control and managed by
Wedgwood. The total purchase price was $17,223,000 consisting of preferred
stock valued at $16,203,000 and cash and transaction costs totaling
approximately $1,020,000. The preferred stock issued includes 675,000 shares
of Series D Preferred Stock which was issued to James R. Gilley, Chief
Executive Officer of the Company, and members of his family. These shares
were valued at Mr. Gilleys' cost in the acquired property of approximately
$2,300,000.
B. The pro forma financial statements reflect the following adjustments:
1. to reflect the difference in depreciation and amortization on Wedgwood
property and equipment and other assets due to change in asset bases and
lives under purchase accounting using lives from 5 to 35 years; Wedgwood
historically had utilized lives of 5 to 28 years.
<TABLE>
<CAPTION>
Depreciation Amortization Total
------------ ------------ -----
<S> <C> <C> <C>
Year ended December 31, 1995
New basis $1,279,000 $ - $1,279,000
Old basis 1,090,000 284,000 1,374,000
---------- --------- ----------
$ 189,000 $(284,000) $ (95,000)
========== ========= ==========
Six months ended June 30, 1996
New basis $ 393,000 $ - $ 393,000
Old basis 405,000 83,000 488,000
---------- --------- ----------
$ (12,000) $ (83,000) $ (95,000)
========== ========= ==========
</TABLE>
2. to reflect the dividend requirement on the Series D Preferred Stock
issued in the acquisition
3. to adjust income tax expense based upon applying the statutory tax rate
to pre-tax income. If the Wedgwood acquisition had taken place at
January 1, 1995, the deferred tax liabilities arising from the
transaction would have eliminated the need for a change in the deferred
tax asset valuation allowance at that date. Accordingly, there would
have been no change in the valuation allowance during the year ended
December 31, 1995 and, therefore, the effective tax rate would have
approximated 38% rather than the 3% actually experienced. The Company
considers the use of its net operating loss carryforwards as a result of
Wedgwood acquisition to be more likely than not.
4. In January 1995, the Company sold The Fountainview. The pro forma
statement of operations reflects the operations of the Company as
adjusted to reflect this disposition.
5. The statement of operations of Wedgwood covers the three months ended
March 31, 1996. Beginning April 1, 1996, Wedgwood operations are
consolidated with the Company.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF PRO FORMA CONDENSED COMBINED STATEMENTS
OF OPERATIONS
The acquisition of Wedgwood will give the Company an immediate presence in
the assisted living industry and annual revenues exceeding $16 million from its
operating facilities. Combining the statements of earnings of Wedgwood and
Greenbriar does not result in significant pro forma adjustments, due to the lack
of any eliminations of personnel, management, offices or facilities following
the acquisition. All such personnel and infrastructure are believed to be needed
to support the Company's existing assisted living facilities and its future
anticipated growth and development. Such resources will be especially needed as
the Company expands its presence into the South and Southwestern United States
from its West Coast concentration of operations. Wedgwood will continue to
operate its existed assisted living facilities and develop new facilities,
maintaining its offices and staff necessary to manage such operations and
growth.
<PAGE>
GREENBRIAR CORPORATIION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE N - FOURTH QUARTER ADJUSTMENTS
During the fourth quarter of 1995, the Company made an adjustment to reduce the
deferred tax valuation allowance by $1,895,000.
During the fourth quarter of 1994, the Company wrote off goodwill related to a
1992 acquisition of approximately $150,00, made other adjustments reducing
earnings by approximately $175,000 and reduced the deferred tax valuation
allowance by approximately $550,000. The goodwill write off resulted from the
decision to discontinue the sale of mobility products to third parties.
The adjustments to the deferred tax valuation allowance resulted from
assessments made by the Company of its expected future taxable income available
to absorb its net operating loss carryfowards.
NOTE O - ACQUISITION OF WEDGWOOD RETIREMENT INNS, INC. AND AFFILIATES
In March 1996, the Company acquired substantially all of the assets and
liabilities of a number of companies under common control and managed by
Wedgwood Retirement Inns, Inc. The business of these companies consists of the
operation of 16 assisted living, congregate and Alzheimer's facilities. To
structure the Wedgwood acquisition as a tax-free exchange, the Company also
acquired a shopping center in North Carolina from James R. Gilley and members of
his family (the Gilley Group). Due to the fact that the Gilley Group is a
majority shareholder of Greenbriar and owner of the shopping center, the
property was recorded at the Gilley Group's historical cost basis of
approximately $2,300,000. Consideration given was 675,000 shares of Series D
preferred stock. Wedgwood's assets were valued at approximately $58,000,000
($54,000,000 of property and equipment) and liabilities assumed were
approximately $44,000,000. In exchange, Greenbriar issued 1,949,950 shares of
Series E preferred stock, valued at approximately $14,000,000, to the Wedgwood
shareholders. The Series D and E preferred stock is convertible, upon approval
of the common stockholders, into 1,962,458 shares of common stock. The
operations of Wedgwood will be reflected in the consolidated financial
statements of the Company beginning April 1, 1996.
The following table presents pro forma unaudited consolidated results of
operations for the six-month periods ended June 30, 1995 and 1996, assuming
that the acquisition had taken place on January 1, 1995. The pro forma results
are not necessarily indicative of the results of operations that would have
occurred had the acquisition been made on January 1, 1995, or of future results
of operations of the combines companies (in thousands):
<TABLE>
<CAPTION>
Six months ended
June 30,
------------------
1995 1996
------- -------
<S> <C> <C>
Revenue $7,589 $8,628
Earnings (loss) from continuing operations 3,052 (643)
Net earnings 3,064 53
Preferred stock dividend requirement (288) (288)
Earnings (loss) from continuing
operations allocable to common
stockholders 2,764 (871)
Net earnings (loss) allocable to
common stockholders 2,776 (175)
Earnings (loss) per share
Continuing operations 0.52 (0.20)
Net earnings 0.52 (0.04)
</TABLE>
F-39
