<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
(Amendment No. ___)
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule 14a-
6(e)(2))
[ ] 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:
...........................................................................
2) Form, Schedule or Registration Statement No.:
...........................................................................
3) Filing Party:
...........................................................................
4) Date Filed:
...........................................................................
<PAGE>
REVISED PRELIMINARY COPY FILED WITH THE SECURITIES
AND EXCHANGE COMMISSION JULY 24, 1996
GREENBRIAR CORPORATION
4265 Kellway Circle
Addison, Texas 75244
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
To Be Held August 22, 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
August 22, 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.
Pursuant to rules of the American Stock Exchange (the "Exchange"), Stockholder
approval is 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 are
raised by the Proposals, and you are being asked to approve the Proposals with
regard to the Conversion Shares. See "Approval of Conversion Shares" in the
accompanying Proxy Statement for a discussion of the effect of such approvals.
Only Stockholders of record at the close of business on July 24, 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
July 31, 1996
<PAGE>
GREENBRIAR CORPORATION
4265 Kellway Circle
Addison, Texas 75244
PROXY STATEMENT
FOR
SPECIAL MEETING OF STOCKHOLDERS
To Be Held August 22, 1996
This Proxy Statement (the "Proxy Statement") and the accompanying proxy card
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". Neither Nevada law nor the
Company's Articles of Incorporation or Bylaws require Stockholder approval of
the Proposals; 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 are raised by the Proposals, and
consequently, you are being asked to approve the Proposals at the Special
Meeting. See "Approval of Conversion Shares" for a discussion of the effect of
such approvals. This Proxy Statement and the enclosed forms of proxy are being
mailed on or about July 31, 1996.
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 July
24, 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 3,479,428 shares of Common Stock, 3,065
shares of Series B Preferred Stock
1
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and 20,000 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 Conversion Shares. 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. The Common Stock, Series B and Series C Preferred Stock were held by
approximately 3,900, 17 and 2 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 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 34.5% 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 68% 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
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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 issuance of the Series D and E
Preferred Stock, and consequently the Stockholders are being asked to approve
the Proposals at the Special Meeting.
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." In
1994, the Company began to shift its business emphasis to the full service
residential retirement and assisted living industries, and by early 1996 it had
sold its nursing homes and retirement center properties, most of its commercial
real estate, and its mobility equipment manufacturing subsidiaries. The Company
entered the assisted living market by commencing the design and construction of
a series of assisted living facilities. Additionally, on March 15, 1996, the
Company acquired (the "Wedgwood Acquisition") Wedgwood Retirement Inns, Inc.
("Wedgwood"). 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 $16,852,000,
and $220,000 in cash and notes to the sellers (the "Sellers"), who consisted of
20 persons, all of whom were previously unrelated to the Company. Such purchase
price was determined through arms' length negotiations. 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>
3
<PAGE>
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 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
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well as the number of shares of Common Stock into which such shares of Series D
Preferred Stock are convertible:
<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.
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
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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 6,127,910 shares having voting rights,
of which 3,479,428 shares (56.8%) are Common Stock, 675,000 shares (11.1%) are
Series D Preferred Stock, and 1,949,950 shares (31.8%) are Series E Preferred
Stock. Following full conversion of the Series D and E Preferred Stock, there
will be 5,465,518 shares having voting rights, and the voting percentage of the
current holders of Common Stock will increase to 63.7%, while the voting
percentage of the Common Stock issued in respect to the converted Series D and E
Preferred Stock will decrease to 6.2% and 29.6%, respectively.
Effect on Capitalization. The following table presents the capitalization of
the Company at March 31, 1996, and as adjusted to show the effect of the full
conversion of the Series D and Series E Preferred Stock. Amounts shown for the
four series of Preferred Stock constitute the amount of consideration paid for
such preferred shares, which is the same as their liquidation preferences.
<TABLE>
<CAPTION>
March 31, 1996
-------------------------------
Historical As Adjusted
-------------- ---------------
<S> <C> <C>
Series B Preferred Stock $ 353,000 $ 353,000
Series C Preferred Stock 2,000,000 2,000,000
Series D Preferred Stock 3,375,000 -
Series E Preferred Stock 18,552,000 -
Common Stock 17,326,000 39,253,000
-------------- ---------------
Total stockholders' equity $ 41,606,000 $ 41,606,000
============== ===============
Stockholders' equity
per common share before
conversion and as adjusted
for full conversion $ 4.98 $ 7.18
============== ===============
</TABLE>
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. 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
6
<PAGE>
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 such transactions, while Stockholders voting against such
transactions 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. A positive Stockholder vote may 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.
Recommendation of the Board of Directors of Greenbriar
At a meeting on February 9, 1996, the Board of Directors of Greenbriar
approved, subject to receipt of a fairness opinion and appraisal, the Wedgwood
Acquisition and 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 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, the Board of Directors
considered the following matters, each of which was determined to be a positive
benefit to Greenbriar and its Stockholders:
(1) 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 Stockholders' best interests because of
the increase in the Company's assets and stockholders' equity resulting from the
combination, and the immediate addition of more than $15 million of revenue from
assisted living operations.
(2) 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 industry is in a rapid phase of growth and
consolidation, and several assisted living companies completed or initiated
initial public offerings in 1995, 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.
(3) 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 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.
7
<PAGE>
(4) The Board of Directors sought independent confirmation of its reasons for
approving the acquisition of Wedgwood and retained the firm of J.C. Bradford &
Co. to render a fairness opinion covering the transaction. The report of J.C.
Bradford & Co. is attached hereto as Exhibit B, and states that in its opinion
the consideration paid by the Company for Wedgwood is fair to Greenbriar from a
financial point of view. As part of J.C. Bradford & Co.'s investment banking
business, it is regularly engaged in the valuation of businesses and securities
in connection with mergers and acquisitions. For its services to the Company,
J.C. Bradford & Co. was paid a fee of $125,000 plus expenses, which fee was not
contingent upon the successful consummation of the Wedgwood Acquisition. The
Company has agreed to indemnify J.C. Bradford & Co. against certain liabilities
and expenses in connection with its services, including certain liabilities
under the federal securities laws, to the fullest extent possible.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of Greenbriar consists of 100,000,000 shares of
Common Stock, par value $.01 per share ("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.
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.
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
8
<PAGE>
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
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.
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
9
<PAGE>
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 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."
10
<PAGE>
PRINCIPAL STOCKHOLDERS AND SECURITY OWNERSHIP
OF MANAGEMENT BEFORE AND AFTER CONVERSION
Securities Ownership of Certain Beneficial Owners
The following table sets forth as of March 31, 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)/ 62.8% 2,664,971 48.8%
4265 Kellway Circle
Addison, TX 75244
Sylvia M. Gilley 637,943/(4)/ 94.5% 2,346,000/(5)/ 62.8% 2,664,971 48.8%
13711 Creekside Place
Dallas, TX 75248
W. Michael Gilley 37,057/(6)/ 5.5% 261,000/(6)/ 7.5% 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 22.2%
816 N.E. 87th Ave.
Vancouver, WA 98664
Paul W. Dendy 19,360 1.0% 10,000/(10)/ 0.3% 26,133 0.4%
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
</TABLE>
11
<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>
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
Don C. Benton - - - - - -
9200 Inwood Road
Dallas, TX 75220
Series C Preferred Stock
------------------------
Richard C.W. Mauran 10,000/(1)/ 50.0% - - 66,667 1.2%
S Greenbriar Corporation
4265 Kellway Circle
Addison, TX 75244
Cove Capital Corporation 10,000/(1)/ 50.0% - - 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 69.3% 4,308,690 68.7%
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.
12
<PAGE>
(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 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.
13
<PAGE>
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>
- --------------------
(1) Constitutes directors' fees paid by the Company to the named individuals.
14
<PAGE>
Option/SAR Grants Table
(Option/SAR Grants in Last Fiscal Year)
<TABLE>
<CAPTION>
Number of Percent of
Securities Underlying Total Options Granted to Exercise or Base Expiration
Name Options Granted Employees in Fiscal Year Price Per Share Date
- -------------- ------------------- ------------------------------ --------------------- ------------
<S> <C> <C> <C> <C>
James R. Gilley 200,000 95.2% $10.75 5/24/01
</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/
Shares Acquired Value SARs at 1995 FY-End SARs at 1995 FY-End
----------------------------------- -----------------------------------
Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ------------ ------------- ---------- ----------------------------------- -----------------------------------
<S> <C> <C> <C> <C> <C> <C>
James R. Gilley - - 200,000 - $0 -
Gene S. Bertcher - - 8,000 12,000 $0 $0
W. Michael Gilley - - - - - -
Robert L. Griffis - - - - - -
</TABLE>
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. Waldroft, of whom Messrs. Denby and Hall are Executive Vice Presidents and
directors of the Company. Such agreements are for a term of three years to Mr.
Denby and one year for Ms. Waldroft 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.
15
<PAGE>
MARKET PRICE AND DIVIDEND POLICY
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>
1994 1995
----------------------- -----------------------
High Low High Low
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
First Quarter $ 12 1/2 $ 9 1/16 $ 8 3/4 $ 5
Second Quarter 11 1/4 8 1/4 10 15/16 5 5/16
Third Quarter 10 5/8 5 5/16 13 7/16 9 1/16
Fourth Quarter 7 13/16 4 3/8 13 7/16 7 3/16
</TABLE>
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.
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.
16
<PAGE>
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 March 31, 1994 and 1995 and for the three
months ended March 31, 1994 and 1995, 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 three months ended March 31, 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
17
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
GREENBRIAR CORPORATION SELECTED FINANCIAL DATA F-3
GREENBRIAR CORPORATION MANAGEMENTS' DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.......................................... F-5
WEDGWOOD RETIREMENT INNS, INC.
SELECTED 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 three months
ended March 31, 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-19
Consolidated Balance Sheets as of December 31, 1994
December 31, 1995 and March 31, 1996 (unaudited)................... F-20
Consolidated Statements of Earnings for the years
ended December 31, 1993, 1994 and 1995, and
for the three months ended March 31, 1995 and 1996 (unaudited)..... F-22
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 1993, 1994
and 1995, and the three months ended March 31, 1996 (unaudited).... F-23
Consolidated Statements of Cash Flow for the years
ended December 31, 1993, 1994 and 1995,
and the three months ended March 31, 1995 and 1996 (unaudited)..... F-24
Notes to Consolidated Financial Statements........................... F-26
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>
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 Flow for the years
ended December 31, 1993, 1994 and 1995,
and the three months ended March 31, 1996.......................... F-45
Notes to Consolidated Financial Statements........................... F-46
F-2
<PAGE>
GREENBRIER 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. The selected historical consolidated
financial data of the Company as of and for the three-month periods ended March
31, 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. For pro forma information for the year ended
December 31, 1995 and the three months ended March 31, 1996, see the Pro Forma
Condensed Combined Statements of Operations appearing elsewhere herein.
F-3
<PAGE>
<TABLE>
<CAPTION>
For the Three Months
For the Year Ended December 31, Ended March 31,
-------------------------------------------- --------------------
1991 1992 1993 1994 1995 1995 1996
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Earnings Data
Revenue:
Assisted living facilities $ 511 $ 1,050 $ 510 $ 7,939 $ 557 $ 555 $ -
Real estate operations - - 4,280 2,029 666 195 156
Gain on sale of assets 345 8,333 2,450 4,633 7,043 5,149 32
Interest and dividends 37 1,854 1,326 418 1,205 193 261
Other 62 139 140 - 239 9 450
------- ------- ------- ------- ------- ------- -------
Total revenues 955 11,376 8,706 15,019 9,710 6,101 899
Operating expenses:
Assisted living facilities - 533 279 5,059 322 318 -
Real estate operations - - 2,407 1,486 337 97 73
General and administrative 741 1,104 2,844 4,028 2,764 837 724
Interest 116 640 1,500 2,979 206 121 26
Other 91 90 - - - - -
------- ------- ------- ------- ------- ------- -------
Total operating expenses 948 2,367 7,030 13,552 3,629 1,373 823
------- ------- ------- ------- ------- ------- -------
Earnings from
continuing operations
before income tax 7 9,009 1,676 1,467 6,081 4,728 76
Income tax expense - 1,440 13 240 186 1,606 29
------- ------- ------- ------- ------- ------- -------
Earnings from continuing
operations 7 7,569 1,603 1,227 5,895 3,120 47
Discontinued operations (net) (1,003) (516) (158) 561 (98) (14) 580
------- ------- ------- ------- ------- ------- -------
Net earnings (loss) $ (996) $ 7,053 $ 1,505 $ 1,788 $ 5,797 $ 3,106 $ 627
Preferred stock dividend
requirement - (182) (213) (327) (225) (81) (34)
------- ------- ------- ------- ------- ------- -------
Net earnings (loss)
allocable to common
stockholders $ (996) $ 6,871 $ 1,292 $ 1,461 $ 5,572 $ 3,025 $ 593
======= ======= ======= ======= ======= ======= =======
Earnings (loss) per share
Continuing operations $.03 $3.56 $.44 $.24 $1.60 $.83 $.01
Net earnings $ (4.13) $3.31 $.39 $.40 $1.57 $.83 $.17
Weighted average common
shares outstanding 241 2,074 3,296 3,679 3,539 3,655 3,444
At December 31, At March 31
----------------------------------------------------------------------- -------------
1991 1992 1993 1994 1995 1996
---- ---- ---- ---- ---- ----
Balance Sheet Data
Cash and cash equivalents $ 130 $ 1,197 $ 1,083 $ 8,311 $ 7,199 $ 5,642
Working capital (deficit) (612) 4,684 2,416 10,138 10,015 2,258
Total assets 20,990 23,469 74,962 44,964 29,772 88,351
Long-term debt, including
current portion 477 11,449 44,056 1,489 909 38,138
Stockholders' equity 2,952 7,904 20,549 22,144 24,895 41,606
</TABLE>
F-4
<PAGE>
GREENBRIER CORPORATION'S
MANAGEMENTS' DISCUSSION AND ANALYSIS OR FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
During 1994 the Company began a series of steps to focus its business on the
development, management and ownership of assisted living properties. The
Company's historical businesses during the past five years have included
ownership and operation of skilled nursing and retirement centers, real estate
investments and manufacture and leasing of electric convenience vehicles and
wheelchairs. The nursing and retirement centers and convenience vehicle
businesses have been sold, and the real estate investments are being liquidated.
Revenues and earnings in years prior to 1996 are attributed to these prior
businesses. During 1994, the Company began independently to develop its
assisted living business, began construction of its first assisted living
facility in July 1995, and opened such facility to residents on May 30, 1996.
By July 1, 1996, the Company (not including the properties of Wedgwood) had
three additional assisted living facilities under construction and nine under
development. In order to increase the Company's presence in the assisted living
industry, the Company acquired Wedgwood in March 1996. The Wedgwood Acquisition
is accounted for as a purchase, and the historical financial statements of the
Company do not include any revenues or earnings (losses) attributed to Wedgwood.
Liquidity and Capital Resources
At March 31, 1996, the Company had positive working capital of $2,258,000.
During the first quarter of 1996, the Company sold the Mobility Group, which was
a continuation of the Company's program of selling its non-strategic assets and
using the proceeds to invest in existing operations. The sale of the Mobility
Group is not expected to have a material impact on the Company's liquidity. In
March 1996, the Company acquired Wedgwood. As of March 31, 1996, the Company
and Wedgwood have combined assets of $88,351,000, combined liabilities of
$46,745,000 and combined stockholders' equity of $41,606,000. The Company and
Wedgwood combined have sufficient liquidity and capital resources to meet their
current obligations.
Net cash used for operating activities during the three months ended March 31,
1996 was $251,000, principally constituting general and administrative expenses
in excess of the relatively small amount of income from real estate operations
and interest income. No revenue from assisted living operations was reported
during the quarter.
Net cash used in investing activities during the three months ended March 31,
1996 was $834,000, resulting primarily from development and construction of
assisted living facilities in Texas in the amount of $1,580,000, offset
partially by $739,000 of cash acquired from Wedgwood.
During the past five years the Company has met its needs for liquidity and
capital resources primarily from profitable sales of assets acquired for
investment, and, to a lesser extent, from cash flow from operated businesses.
The assets acquired and sold have included real estate properties acquired in
the merger in 1993 with EquiVest Inc. ("EquiVest"), six skilled nursing
facilities, two retirement centers, the Mobility Group, and an eating disorder
facility. Since January 1, 1994, these sources of cash from investment
activities included approximately $18,200,000 received in January 1995 from the
sale of the Fountainview retirement facility in West Palm Beach, Florida;
approximately $26,600,000 in proceeds after 1993 from the sale of the properties
acquired in the merger with EquiVest; and approximately $6,900,000 net proceeds
from the sale of the Rivermont retirement facility in December 1994.
Net cash used in financing activities since January 1, 1994 have consisted
primarily of repayments of mortgage indebtedness as real estate investments were
sold totaling approximately $50,000,000, payments of preferred dividends
totaling approximately $300,000, and repurchases of common stock totaling
approximately $2,000,000, offset by additional borrowings of approximately
$10,200,000 for real estate investments and working capital.
F-5
<PAGE>
The Company will utilize additional financing to develop additional assisted
living facilities currently under construction and development. The Company was
participating in the construction of seven facilities as of July 1, 1996. Of
the seven facilities under construction as of July 1, 1996 the Company is
responsible for arranging financing for six of them and a development partner is
responsible for arranging financing for the seventh. The six facilities for
which the Company is arranging financing are subject to fixed cost construction
contracts and other arrangements estimated to cost approximately $24,800,000 and
are estimated to be substantially completed by June 30, 1997. The eleven
facilities under development that the Company is responsible for financing are
estimated to cost approximately $45,100,000. Of the resulting total of
$69,900,000 of development costs that the Company is responsible for financing,
the Company has financing committed for five specific facilities costing
$21,530,000. The remaining development and construction costs of approximately
$48,370,000 is expected to be financed from available sources as described below
in the amount of $60,000,000 or from other sources the Company is seeking.
As of July 1, 1996, the Company has loans in place or has received commitments
for future financing, subject, in the case of the commitments, to final
documentation, as follows:
(i) Health Care REIT, Inc. has issued a commitment to provide $60 million
over three years to acquire and pay 100% of the construction costs of assisted
living facilities to be leased to the Company. The term of the leases will
range from 11 years to 14 years plus two five year renewal options, with lease
payments based upon the interest rate on U.S. Treasury notes plus 3.75%,
subject to inflation adjustments not to exceed .25% per year. A 1% commitment
fee is required. The Company will have the option to purchase each facility
at the end of the term for its original cost plus 50% of the increase in its
fair market value. As additional security to the lessor, the Company will
provide a letter of credit for 5% of the amount financed, a first lien on
personal property and receivables of the facility, and subordination of
management fees and rentals from subtenants.
(ii) In 1995 Health Care REIT, Inc. provided mortgage loan commitments for
two facilities totaling $16,891,000. Of that amount, $4,536,000 was used to
refinance one of the facilities (Camelot) and $5,625,000 is being used to
construct another facility (Villa de la Rosa) which will open in the fourth
quarter of 1996. The balance includes $5,160,000 to fund construction of the
Camelot Assisted Living facility scheduled to begin construction in the third
quarter of 1996 and $645,000 to fund certain improvements to the existing
Camelot facility that 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 development and
construction total. The construction loans convert to term loans upon
completion of construction. The term loans mature in seven to ten years,
initially bear interest at a rate of 4.5% over the corresponding U.S. Treasury
Note rate and are secured by the facilities, an assignment of leases, rents
and management contract, letters of credit, and an assignment of the
facilities licenses and permits.
(iii) Commitments from First National Bank & Trust Co. of McAlester,
Oklahoma of $5.2 million to provide mortgage financing for the two assisted
living facilities under construction in Muskogee, Oklahoma and Sherman, Texas.
Such loans require a 2% commitment fee and are payable in 10 years based on a
20 year amortization, with interest at prime plus 2% (subject to a minimum
interest rate of 8.70% and a maximum interest rate of 12.75%).
(iv) In 1995 Investors Real Estate Trust ("IRET") issued a commitment to
provide 100% of the construction costs up to $2,810,000 for the Sweetwater
Springs, Georgia facility that is presently under construction. Upon
completion the facility will be leased to the Company for a term of 15 years.
In 1996 the commitment was increased by $1,540,000 to a maximum of $4,350,000
in order to provide for the construction of a second phase of the facility,
consisting of 16 Alzheimer's special care units. The monthly lease payments
will be based on the funded amount and on annual interest rates of 11.0% for
the first five years, 12.65% for the next five years and 14.55% for the last
five years of the lease. The Company has an option to purchase the facility at
fair market value during the first nine months of the fourteenth year of the
lease. The lease is secured by the facility.
F-6
<PAGE>
In addition to development and construction financing Comerica Bank-Texas has
issued a commitment to provide $1,600,000 to finance buses and other vehicles to
transport residents of the Company's facilities. Each vehicle will be financed
at 90% of cost, and the loan for each vehicle will be amortized over 48 months.
The interest rate will be prime plus one percent.
Therefore, the Company believes it has adequate resources to complete its
facilities currently under construction and development and currently plans to
use the balance of such committed sources and its net working capital in excess
of operating needs for future development of assisted living facilities.
The Company will finance the construction, development and lease-up of the 17
facilities under construction or development as of July 1, 1996, for which it is
responsible for obtaining financing, which the Company expects to require
approximately $70 million of capital (including the $24,800,000 already under
construction), through a combination of the sources described above; its own
funds and additional funds from other traditional sources of financing,
including financial institutions, banks and real estate investment trusts; and
possible sales of debt or equity securities.
Three Months Ended March 31, 1996 as Compared to Three Months Ended March 31,
1995
Revenues. Revenues for the three months ended March 31, 1996 were $899,000 as
compared to $6,101,000 for the comparable period in 1995. Net earnings for the
three months ended March 31, 1996 were $627,000 as compared to $3,106,000 for
the three months ended March 31, 1995. Such decreases reflect the disposition
of the Company's historical business operations and start-up efforts in the
assisted living industry.
Long Term Care Facilities. The Company sold "The Fountainview" on January 28,
1995. During January 1995 "The Fountainview" generated revenue of $552,000 and
operating expenses of $318,000. For the three month period ended March 31, 1996
there was no comparable property.
Real Estate Operations. Revenue from real estate operations not related to
the development and acquisition of residential retirement and assisted living
facilities was $156,000 for the three months ended March 31, 1996 as compared to
$195,000 for the comparable period in 1995. Costs of operating these properties
were $73,000 for the three months ended March 31, 1996 as compared to $97,000
for the comparable period in the prior year. The reduced level of revenue and
expenses for real estate operations reflects the ongoing sale of those
properties.
Gain on Sale of Assets. During January 1995 the Company sold "The
Fountainview" and recorded a gain of $5,149,000. In February 1996, the Company
sold an investment in common stock for a gain of $32,000.
General and Administrative Expense. General and administrative expenses were
$724,000 for the three months ended March 31, 1996 compared to $837,000 for the
comparable period in 1995. The change is due principally to the reduction of
expenses related to the discontinued operations of the Mobility Group and "The
Fountainview."
Interest Income and Expense. Interest and dividend income were $261,000 for
the three months ended March 31, 1996 compared to $193,000 for the comparable
period in 1995. Interest expense was $26,000 for the three months ended March
31, 1996 compared to $121,000 for the comparable period in 1995. Throughout
1995 and the three months ended March 31, 1996 the Company disposed of assets
not essential to its long range healthcare strategy. The proceeds from those
sales were used to reduce debt and increase working capital. The increase in
interest income is the result of having more working capital to invest. The
decrease in interest expense is due to the reduction in debt due both to the
payoff of mortgages when real estate assets were sold and the reduction of
corporate debt when the proceeds from the sale of assets were used to pay off
that debt.
F-7
<PAGE>
Discontinued Operations. During the first quarter of 1996 the Company sold
all of its operations in the Mobility Group and recorded a gain on sale, net of
tax, of $580,000.
Fiscal 1995 as Compared to Fiscal 1994
Revenues. The Company reported total revenue of $9,710,000 and net earnings
of $5,797,000 or $1.57 per share for the year ended December 31, 1995 compared
to total revenue of $15,019,000 and net earnings of $1,788,000 or $.40 per share
for the year ended December 31, 1994.
Gain on Sale of Assets. During 1995 the Company continued its program of
selling assets that were not essential to its new business focus on assisted
living. In January 1996, the Company sold its mobility products subsidiaries,
and the financial statements reflect the revenue and costs associated with this
operation as discontinued operations.
In January 1995 the Company sold what was then its remaining retirement and
assisted living facility, The Fountainview, at a gain of $5,149,000. During the
month of January 1995, The Fountainview generated revenues of $552,000 and
operating expenses of $318,000, but the Company determined to sell it due to the
increased competition in West Palm Beach and to the refinancing required as a
result of the pending maturity of existing financing. During 1994 the Company
owned both The Fountainview and Rivermont Retirement Center, which was sold in
December 1994. The revenue and expenses reflected in long term care for 1994
reflect the operations for both The Fountainview and Rivermont for the entire
year.
Gain on sales of assets for the year ended December 31, 1995 was $7,043,000.
This compares to $4,633,000 for the year ended December 31, 1994. The majority
of 1995's gain consists of $5,149,000 from the sale of The Fountainview.
In April 1995 EquiVest sold a shopping center in Florida for $750,000 and
reported a gain of $100,000.
In June 1995 the Company sold its economic interest in a legal claim with
respect to Wespac Investors Trust III. The sales price was $1,085,000 and the
Company recorded a gain of $654,000. Separately, the Company acquired 49% of
the outstanding common stock of Wespac Investors Trust III in a private
transaction. The Company immediately sold its economic interest in that stock
at no gain or loss.
As part of a larger transaction that occurred in 1992 the Company received the
rights to the interest on certain escrow funds in the year 2028. At the time of
the transaction, for accounting purposes, the Company placed no value on that
right. In August 1995 the Company sold its rights to the future interest for
$1,140,000 in cash.
Real Estate Operations. Revenue from real estate operations was $666,000 in
1995 as compared to $2,029,000 in 1994. Cost of operating these properties was
$337,000 in 1995 as compared to $1,486,000 in 1994. Real estate operations
reflect the revenue and expenses from commercial real estate properties which
the Company acquired in 1993 through the acquisition of EquiVest. The Company
acquired EquiVest with the stated intention of selling the acquired assets to
generate cash. The reduced level of revenue and expense for real estate
operations reflects the ongoing sales of EquiVest properties.
General and Administrative Expense. General and administrative expenses were
$2,764,000 in 1995 as compared to $4,028,000 in 1994. The most significant
reason for this decrease was the sale of The Fountainview in January 1995.
Interest Income. Interest income was $1,205,000 in 1995 as compared to
$418,000 in 1994. Interest expense was $206,000 in 1995 as compared to
$2,979,000 in 1994. As the Company sells assets, it increases the cash it has
available for investments. The increase in interest income reflects the
interest received on those
F-8
<PAGE>
investments. The decrease in interest expense was caused principally by two
factors. First, when the Company sold its assets it was also relieved of the
obligation to pay interest on liabilities associated with those assets. Second,
the Company used certain of its available cash to pay down corporate debt which
further reduced interest expense in 1995.
Fiscal 1994 as Compared to Fiscal 1993
Revenues. The Company reported total revenues from continuing operations of
$15,019,000 and net earnings of $1,788,000 or $.40 per share for the year ended
December 31, 1994 compared to total revenues from continuing operations of
$8,706,000 and net income of $1,505,000 or $.39 per share for 1993.
Long Term Care Facilities. During all of 1994, the Company owned and operated
two retirement facilities: The Fountainview in West Palm Beach, Florida and
Rivermont Retirement Center in Norman, Oklahoma. For these two facilities,
combined 1994 operating revenues were $7,939,000 and combined operating expenses
were $5,059,000. Based upon the Company's business plan during 1993, these
assets were classified as assets held for sale and there are, therefore, no
comparative figures for 1993. During 1993, CareAmerica, Inc., a subsidiary of
the Company, managed certain properties for third parties. This effort
concluded during 1993. CareAmerica is no longer managing properties for others.
Real Estate Operations. On March 31, 1993, the Company merged with EquiVest.
EquiVest owned and operated commercial real estate. Real estate operations
reflect the revenue and expenses from the EquiVest properties. Revenues from
real estate operations decreased from $4,280,000 in 1993 to $2,029,000 in 1994.
Expenses from real estate operations decreased from $2,407,000 in 1993 to
$1,486,000 in 1994. The Company acquired EquiVest with the stated intention of
selling EquiVest's assets. Although 1994 included a full year of operations,
several such properties were sold during 1994 and revenues therefore decreased.
Gain on Sales of Assets. Gain on sales of assets for the year ended December
31, 1994, was $4,633,000 compared to $2,450,000 for 1993. The gains in 1994
include those from the sale of the Rivermont Retirement facility as well as
various EquiVest assets including recognition of a $1,070,000 deferred gain
which resulted from cash received relating to sales of properties in 1991 that
were accounted for by the installment method. Absent recognition of these
gains, the Company would have had losses before income taxes in both 1994 and
1993.
General and Administrative Expenses. General and administrative expenses
decreased from $5,964,000 in 1993 to $4,028,000 in 1994. During 1994 the sale
of EquiVest assets provided the opportunity to substantially reduce
administrative costs of that operation. The administrative costs of EquiVest
decreased from $581,000 in 1993 to $527,000 in 1994. This decrease was offset
by the increase in administrative costs due to the consolidation of Fountainview
and Rivermont. During 1993 these investments were classified as assets held for
sale.
Interest Income and Expense. Interest income decreased from $1,326,000 in
1993 to $418,000 in 1994. On March 31, 1993, the Company sold an $8.7 million
mortgage bearing interest at 10%. The reduction in interest income is a result
of the Company no longer receiving interest from that mortgage. Further, the
Company holds a $6.7 million receivable from Southern Care Corporation. The
Company is in litigation with Southern Care Corporation in which, among other
things, Southern Care is challenging the enforceability of the note. As a
result, the Company has ceased accruing income with respect to the note until
such time as the litigation is resolved. See Item 3. "Legal Proceedings."
Interest expense increased from $1,500,000 in 1993 to $2,979,000 in 1994. The
increase is due primarily to the inclusion of Rivermont and Fountainview in
1994.
F-9
<PAGE>
Deferred Taxes. As of December 31, 1994 the Company had a deferred tax asset
of $2,185,000. This asset is expected to be recovered within two to three years
from earnings from current operations as well as gains from the sales of certain
of the Company's real estate assets.
Discontinued Operations. During 1994, management determined that it was in
the Company's best interest to discontinue its operations in skilled medical
care which consist of nursing and eating disorder facilities and sold the two
nursing home facilities which it owned in Houston and San Antonio, Texas and an
eating disorder facility which it owned in Wickenburg, Arizona.
Effect of Inflation
The Company's principal sources of revenues are from resident fees from
Company-owned or leased assisted living facilities and management fees from
facilities operated by the Company for third parties. The operation of the
facilities are affected by rental rates which are highly dependent upon market
conditions and the competitive environment in the areas where the facilities are
located. Compensation to employees is the principal cost element relative to
the operations of the facilities. Although the Company has not historically
experienced any adverse effects of inflation on salaries or other operating
expenses, there can be no assurance that such trends will continue or that
should inflationary pressures arise that the Company will be able to offset such
costs by increasing rental rates or management fees.
Statements of Financial Accounting Standards Not Yet Adopted
Statement of Financial Accounting Stardards (SFAS) No. 121, which the Company
will adopt in 1996, establishes accounting standards for the impairment of long-
lived assets and certain other intangible assets. Management is currently
analyzing the impact of the adoption of SFAS No. 121, but does not anticipate
any material impact on the Company's consolidated financial statements.
SFAS No. 123, "Accounting For Stock-Based Compensation," establishes financial
accounting and reporting standards for stock-based employee compensation plans.
SFAS No. 123 permits, as an alternative, the use of existing accounting rules
for such plans. The Company expects to adopt this alternative in 1996 and,
therefore, SFAS 123 will have no effect on the Company's consolidated financial
statements except for the additional required disclosures.
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 Year Ended December 31, For the Three Months
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)
============ ============ ============ ============ ============
</TABLE>
<TABLE>
<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 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. Owners of the Predecessors
Entities, as individuals or private entities, generally were more interested in
positive cash flow than net profit. Therefore, it may be assumed that Wedgwood
often has experienced net losses since its inception 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 amounted to $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.
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
F-12
<PAGE>
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 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 residences account 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 residences during 1994, which accounted for $871,000 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 facilities
mentioned above. The balance of the increase relates 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
F-13
<PAGE>
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-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 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 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
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>
Historical
-------------------------
Company
Pro Forma Pro Forma
Company Wedgewood Adjustments Combined
------- ----------- -------------- ----------
<S> <C> <C> <C> <C>
REVENUES
Assisted living facilities $ - $ 14,940 $ $ 14,940
Long term care facilities 557 - 557
Real estate operations 666 - (666)/(4)/ -
Gain on sale of assets 7,043 - (7,043)/(4)/ -
Interest and dividends 1,205 - (1,205)/(4)/ -
Other 239 - 239
------- ----------- -------------- ----------
9,710 14,940 (8,914) 15,736
Expenses
Assisted living facilities - 10,916 1,279/(1)/ 12,195
Long term care facilities 322 322
Real estate operations 337 - (337)/(4)/ -
Depreciation and amortization - 1,374 (1,374)/(4)/ -
General and administrative 2,764 959 3,723
Interest 206 - (206) -
------- ----------- -------------- ----------
3,629 13,249 (638) 16,240
------- ----------- -------------- ----------
Operating profit (loss) 6,081 1,691 (8,276) (504)
Other income (expense)
Interest and dividend income - 160 1,205/(4)/ 1,365
Interest expense - (2,843) (206)/(4)/ (3,049)
Gain on sale of assets - - 7,043/(4)/ 7,043
Real estate operations, net - - 329/(4)/ 329
Other - 94 - 94
------- ----------- -------------- ----------
- (2,589) 8,371 5,782
------- ----------- -------------- ----------
Earnings (loss) from continuing
operations before income taxes 6,081 (898) 95 5,278
Income tax expense 186 - 1,820/(3)/ 2,006
------- ----------- -------------- ----------
Earnings (loss) from continuing
operations 5,895 (898) (1,725) 3,272
Preferred dividend requirement 225 - (320)/(2)/ (545)
------- ----------- -------------- ----------
Earnings (loss) from continuing
operations allocable to
common shareholders $ 5,670 $ (898) $ (2,045) $ 2,727
------- ----------- -------------- ----------
Earnings per share
Continuing operations $ 1.60 $ 0.53
Weighted average number of
common and equivalent
shares outstanding 3,539 5,164
</TABLE>
* See accompanying explanatory notes
F-16
<PAGE>
Pro Forma Condensed Combined
Statement of Operations
(Unaudited)
For the Three Months Ended March 31, 1996
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Historical
-------------------------
Pro Forma Pro Forma
Company Wedgewood Adjustments Combined
------- ----------- -------------- ----------
<S> <C> <C> <C> <C>
Revenues
Assisted living facilities $ - $ 4,262 $ - $ 4,262
Real estate operations 156 - (156)/(4)/ -
Gain on sale of assets 32 - (32)/(4)/ -
Interest and dividends 261 - (261)/(4)/ -
Other 450 - - 450
------- ----------- -------------- ----------
899 4,262 (449) 4,712
------- ----------- -------------- ----------
Expenses
Assisted living facilities - 3,182 393/(1)//(4)/ 3,575
Real estate operations 73 - (73)/(4)/ -
Depreciation and amortization - 488 (488)/(4)/ -
General and administrative 724 322 - 1,046
Interest 26 - (26)/(4)/ -
------- ----------- -------------- ----------
823 3,992 (194) 4,621
------- ----------- -------------- ----------
Operating profit (loss) 76 270 (255) (91)
Other income (expense)
Interest and dividend income - 13 261/(4)/ 274
Interest expense - (845) (26)/(4)/ (871)
Gain on sale of assets - - 32/(4)/ 32
Real estate operations, net - - 83/(4)/ 83
Other - 28 - 28
------- ----------- -------------- ----------
- (804) 350 (154)
------- ----------- -------------- ----------
Earnings (loss) before income taxes 76 (534) 95 (363)
Income tax expense 29 - (167)/(3)/ (138)
------- ----------- -------------- ----------
Net earnings (loss) 47 (534) 262 (225)
Preferred stock dividend requirement (34) - (80)/(3)/ (114)
------- ----------- -------------- ----------
Earnings allocable to
common shareholders $ 13 $ (534) $ 182 $ (339)
------- ----------- -------------- ----------
Earnings per share $ .01 $ .07
Weighted average shares outstanding 3,441 5,069
</TABLE>
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 Retirement Inns, Inc. ("Wedgwood"). Total purchase price was
$18,077,000, consisting of preferred stock valued at $16,852,000 and cash and
transaction costs totaling $1,225,000.
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
<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)
========== ========== ==========
Three months ended March 31, 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 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 34% rather than the 3% actually
experienced
4. to classify income and expenses in a manner consistent with the future
direction of the Company in the assisted living business
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 adjustments, due to the lack of any
eliminations of personnel, management, officers or facilities following the
acquisition. 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.
On a combined pro forma basis, the Company would have had revenues of
$15,736,000 for the year ended December 31, 1995, and $4,712,000 for the quarter
ended March 31, 1995; $14,940,000 (95%) of such revenues for the year and
$4,262,000 (90%) of such revenues for the quarter are assisted living revenues
from Wedgwood.
Pro forma operating loss was $504,000 for 1995 and $91,000 for the first
quarter of 1996. Pro forma net loss for the first quarter was $225,000. 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 centers. An
assisted living center takes from six to twelve months to build, and,
historically, approximately six to twelve months after licensure to reach a
stabilized occupancy level of 95%.
F-18
<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
F-19
<PAGE>
Greenbriar Corporation
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
December 31, March 31,
------------------------
ASSETS 1994 1995 1996
------- ------- -------
(unaudited)
<S> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 8,311 $ 7,199 $ 5,642
Accounts receivable - trade, less allowance of
$601 in 1994 1,925 23 584
Deferred income tax benefit 2,185 2,150 --
Real estate under contract of sale 14,889 -- --
Other current assets 1,455 1,536 1,636
------- ------- -------
Total current assets 28,765 10,908 7,862
REAL ESTATE 3,204 3,190 5,455
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 9,117
PROPERTY AND EQUIPMENT, AT COST
Land 100 322 6,360
Buildings and improvements 767 767 46,358
Equipment and furnishings 192 203 1,789
Construction in progress -- 1,576 3,884
------- ------- -------
1,059 2,868 58,391
Less accumulated depreciation 186 252 268
------- ------- -------
873 2,616 58,123
RESTRICTED CASH AND INVESTMENTS -- -- 3,254
OTHER ASSETS 414 466 387
------- ------- -------
$44,964 $29,772 $88,351
======= ======= =======
</TABLE>
F-20
<PAGE>
Greenbriar Corporation
CONSOLIDATED BALANCE SHEETS - CONTINUED
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
December 31, March 31,
-----------------------
LIABILITIES AND STOCKHOLDERS' EQUITY 1994 1995 1996
---------- ----------- ------------
(unaudited)
<S> <C> <C> <C>
CURRENT LIABILITIES
Note payable $ 5,008 $ -- $ --
Current maturities of long-term debt 379 8 1,575
Long-term debt collateralized by properties under
contract of sale 8,933 -- --
Accounts payable - trade 1,149 412 1,554
Accrued expenses 1,753 343 1,980
Other current liabilities 1,405 130 495
-------- ------- -------
Total current liabilities 18,627 893 5,604
LONG-TERM DEBT 1,110 901 36,563
DEFERRED INCOME TAXES -- -- 1,495
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 1966 -- -- 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 49,847
Accumulated deficit (12,156) (6,584) (6,026)
-------- ------- -------
24,582 27,411 44,122
Less stock purchase notes receivable (including
$2,438 from related parties) (2,438) (2,516) (2,516)
-------- ------- -------
22,144 24,895 41,606
-------- ------- -------
$ 44,964 $ 29,772 $88,351
======== ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-21
<PAGE>
Greenbriar Corporation
CONSOLIDATED STATEMENTS OF EARNINGS
(Amounts in thousands, except share data)
<TABLE>
<CAPTION>
Three months
Year ended December 31, ended March 31,
--------------------------- ----------------
1993 1994 1995 1995 1996
------- ------- ------- ------- -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenue
Long-term care facilities $ 510 $7,939 $ 557 $ 555 $ --
Real estate operations 4,280 2,029 666 195 156
Gain on sales of assets 2,450 4,633 7,043 5,149 32
Interest 1,326 418 1,205 193 261
Other 140 -- 239 9 450
------- ------ ------ ------ ------
8,706 15,019 9,710 6,101 899
Expenses
Long-term care facilities 279 5,059 322 318 --
Real estate operations 2,407 1,486 337 97 73
General and administrative 2,844 4,028 2,764 837 724
Interest 1,500 2,979 206 121 26
------- ------ ------ ------ ------
7,030 13,552 3,629 1,373 823
------- ------ ------ ------ ------
Earnings from continuing
operations before income
taxes 1,676 1,467 6,081 4,728 76
Income tax expense 13 240 186 1,608 29
------- ------ ------ ------ ------
Earnings from continuing
operations 1,663 1,227 5,895 3,120 47
Discontinued operations
Loss from operations, net of income taxes (158) (617) (98) (14) --
Gain on disposal, net of income taxes -- 1,178 -- -- 580
------- ------ ------ ------ ------
NET EARNINGS 1,505 1,788 5,797 3,106 627
Preferred stock dividend requirement (213) (327) (225) (81) (34)
------- ------ ------ ------ ------
Earnings allocable to common stockholders $ 1,292 $ 1,461 $5,572 $3,025 $ 593
======= ====== ====== ====== ======
Earnings per share
Continuing operations $.44 $.24 $1.60 $.83 $.01
Net earnings $.39 $.40 $1.57 $.83 $.17
Weighted average number of common and
equivalent shares outstanding 3,296 3,679 3,539 3,655 3,444
</TABLE>
The accompanying notes are an integral part of these statements.
F-22
<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 -- -- -- -- -- 627 -- -- 627
Conversion of preferred stock (10) -- 38 -- -- -- -- -- --
Purchase of common stock -- -- (12) -- (120) -- -- -- (120)
Dividends on preferred stock -- -- -- -- -- (69) -- -- (69)
Issuance of preferred stock -
purchased company 2,625 263 -- -- 16,010 -- -- -- 16,273
------ ----- ------- ----- ------- -------- ---------- -------- -------
Balances at March 31, 1996
(unaudited) 2,649 $ 266 3,478 $ 35 $49,847 $ (6,026) $(2,516) $ -- $41,606
====== ===== ======= ===== ======= ======== ========== ======== =======
</TABLE>
The accompanying notes are an integral part of this statement.
F-23
<PAGE>
Greenbriar Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
<TABLE>
<CAPTION>
Three months
Year ended December 31, ended March 31,
---------------------------- -----------------
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 $ 3,106 $ 627
Adjustments to reconcile net earnings to net
cash used in operating activities
Discontinued operations 158 (561) 98 14 (580)
Depreciation and amortization 533 1,306 182 206 34
Gain on sales of assets (2,520) (4,633) (7,043) (5,149) (32)
Recognition of deferred gain (1,070) -- -- --
Stock dividends on investment securities -- (175) -- --
Changes in operating assets and liabilities
Due from (to) affiliates (58) -- -- 7
Accounts receivable (1,348) (72) 1,902 790 (4)
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 1,598 378
Other current and noncurrent assets (509) (2,381) (9) 1,172 (550)
Accrued interest payable 56 -- -- -- --
Income taxes payable (1,174) -- -- -- --
Accounts payable and other liabilities 1,249 818 (3,546) (2,087) (124)
------- ------- ------- ------- -----
Total adjustments (3,938) (5,279) (8,556) (3,449) (878)
------- ------- ------- ------- -----
Net cash provided by (used in)
operating activities of:
Continuing operations (2,433) (3,491) (2,759) (343) (251)
Discontinued operations 93 (231) 209 78 (349)
------- ------- ------- ------- -----
Net cash used in operating activities (2,340) (3,722) (2,550) (265) (600)
</TABLE>
The accompanying notes are an integral part of these statements.
F-24
<PAGE>
Greenbriar Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(Amounts in thousands)
<TABLE>
<CAPTION>
Three months
Year ended December 31, ended March 31,
------------------------------ -------------------
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 $ 18,276 $ 256
Collections of notes receivable 11,354 -- -- -- --
Proceeds from sales of discontinued operations -- 6,557 -- -- --
Additions to real estate (334) (462) (54) (33) --
Purchase of property and equipment (538) (608) (1,809) (103) (1,580)
Net cash effect of (sale) purchase of subsidiary -- (273) -- 739
Additions to mortgage notes receivable (544) -- (668) (3,100) (249)
Investing activities of discontinued operations -- (344) (348) (90) --
Preacquisition loan to acquired company (4,023) -- -- -- --
Distributions from limited partnership 105 -- -- -- --
Acquisition of companies, net of cash acquired 11 -- -- -- --
------- -------- -------- -------- -------
Net cash provided by investing activities 8,570 37,066 19,006 14,950 (834)
Cash flows from financing activities
Proceeds from borrowings
Affiliates 625 1,000 -- -- --
Other 840 10,156 -- -- --
Payments on debt
Affiliates (50) (1,625) -- -- --
Other (9,664) (35,434) (14,321) (14,049) (3)
Dividends on preferred stock (44) (193) (152) (62) --
Sale (purchase) of common and preferred stock 1,950 -- (3,095) (1,065) (120)
Purchase of treasury stock (1) -- -- -- --
------- -------- -------- -------- -------
Net cash used in financing activities (6,344) (26,096) (17,568) (15,176) (123)
------- -------- -------- -------- -------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (114) 7,248 (1,112) (491) (1,557)
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 $ 7,820 $ 5,642
======= ======== ======== ======== =======
</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-25
<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.
F-26
<PAGE>
Greenbriar Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE A - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES - Continued
Impairment of Notes Receivable
------------------------------
A note receivable is identified as impaired when it is probable that
interest and principal will not be collected according to the contractual
terms of the note agreement. The accrual of interest is discontinued on
such notes, and no income is recognized until all past due amounts of
principal and interest are recovered in full.
Impairment of Long-Lived Assets
-------------------------------
The Company reviews its long-lived assets and certain identifiable
intangibles for impairment when events or changes in circumstances
indicate that the carrying amount of the assets may not be recoverable.
In reviewing recoverability, the Company estimates the future cash flows
expected to result from 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.
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 1996. 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 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.
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.
F-27
<PAGE>
Greenbriar Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE B - ACQUISITIONS - Continued
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
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.
F-28
<PAGE>
Greenbriar Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE C - DISCONTINUED OPERATIONS - Continued
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
patents 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 and the mobility
products segment have been presented in the accompanying financial
statements as discontinued operations.
Summarized operating results of these segments are as follows (in
thousands):
<TABLE>
<CAPTION>
1993 1994 1995
-------- -------- -------
<S> <C> <C> <C>
Revenues $12,027 $13,581 $2,027
======= ======= ======
Loss before income taxes $ (270) $ (935) (149)
Income tax benefit (112) (318) (51)
------- ------- ------
Net loss from operations $ (158) $ (617) $ (98)
======= ======= ======
</TABLE>
F-29
<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-30
<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 carryforward 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-31
<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 from
continuing operations (in thousands):
<TABLE>
<CAPTION>
Year ended
December 31,
-------------------------------
1993 1994 1995
------- ------ ------
<S> <C> <C> <C>
Current $ (945) $ 160 $ 151
Deferred 958 80 35
------- ----- -----
$ 13 $ 240 $ 186
======= ===== =====
</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-32
<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 $ 570 $ 499 $ 2,004
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 37 47
----- ----- -------
Tax expense $ 13 $ 240 $ 186
===== ===== =======
</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-33
<PAGE>
Greenbriar Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENT - 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-34
<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>
1994 Gain
------ ------
<S> <C>
Sale of Fountainview retirement center for cash
of approximately $18,000 $5,149
Sale of economic interest in legal claim for
for $1,085 in cash 654
Sale of rights to the interest on escrow funds
for cash of $1,140 1,140
Other 100
------
$7,043
======
1995
----
Sale of Rivermont retirement center for cash
of approximately $6,900 $1,720
Sale of five commercial properties for
approximately $22,000 in cash and $2,050 in rates 1,095
Sale of investment securities for cash of $2,730 736
Recognition of deferred gain on long-term care facilities
sold in 1991 for approximately $15,400 in notes 1,070
Other 12
------
$4,633
======
</TABLE>
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 noninterest-bearing note
of $187,500 with principal due in December 1999. Additional loans to
executives and directors of $55,000 were made in 1994. Also, a former
executive of the Company was paid commissions of $145,000 relating to the
sale of property.
Sylvia Gilley, wife of the Company's Chief Executive Officer, James R.
Gilley, made a loan of $1,000,000 to the Company. The loan was repaid
during 1994.
1995
----
The Company purchased land from Sylvia Gilley for $221,000.
F-35
<PAGE>
Greenbriar Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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 against the plaintiff.
The Company is also defendant in several other lawsuits arising in the
ordinary course of business. Management of the Company is of the opinion
that these lawsuits will not have a material effect on the consolidated
results of operations or financial position of the Company.
NOTE L - SEGMENT INFORMATION
The Company's operations are classified into two business segments: real
estate and residential retirement centers. The real estate segment
involves the ownership and operation of commercial real estate. The
residential retirement segment involves the ownership and management of
retirement centers. The Company's mobility products segment has been
presented as a discontinued operation (Note B). Information with respect
to business segments for the years ended December 31, 1993, 1994 and 1995
is set forth below (amounts in thousands):
<TABLE>
<CAPTION>
Real Residential Corporate
estate retirement and other Total
-------- ---------- ------------ ---------
1993
----
<S> <C> <C> <C> <C>
Revenues $ 8,706 $ -- $ -- $ 8,706
Gain on sale of assets 2,450 -- -- 2,450
Earnings (loss) before income taxes 3,943 -- (2,267) 1,676
Identifiable assets 31,874 24,536 18,552 74,962
Depreciation 409 -- 62 471
Capital expenditures 334 -- 407 741
1994
----
Revenues $ 5,132 $ 9,660 $ 227 $15,019
Gain on sale of assets 2,913 1,720 -- 4,633
Earnings (loss) from continuing
operations before income taxes 2,483 1,848 (2,864) 1,467
Identifiable assets 11,608 15,038 18,318 44,964
Depreciation 239 683 66 988
Capital expenditures 462 43 573 1,078
</TABLE>
F-36
<PAGE>
Greenbriar Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE L - SEGMENT INFORMATION - Continued
<TABLE>
<CAPTION>
Real Residential Corporate
estate retirement and other Total
-------- ---------- ------------ ---------
1995
----
<S> <C> <C> <C> <C>
Revenues $ 789 $ 5,706 $ 3,215 $ 9,710
Gain on sale of assets 93 5,149 1,801 7,043
Earnings from continuing
operations before income taxes 271 5,274 536 6,081
Identifiable assets 3,326 1,527 24,919 29,772
Depreciation 77 43 62 182
Capital expenditures 54 353 11 418
</TABLE>
NOTE M - FAIR VALUE OF FINANCIAL INVESTMENTS
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
the plaintiff in the lawsuit discussed in Note K. It is not practicable to
estimate the fair value of the notes.
Long-term debt - The fair value of the Company's long-term debt is estimated
based on market rates for the same or similar issues. At December 31, 1995,
the carrying amount of long-term debt approximates its fair value.
Accounts receivable and payable - The carrying amount approximates fair value
because of their short maturity.
F-37
<PAGE>
Greenbriar Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE N - NOTES RECEIVABLE
<TABLE>
<CAPTION>
Stock Purchase Notes
--------------------
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 --
------ ------
$2,516 $2,438
====== ======
</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.
<TABLE>
<CAPTION>
Mortgage Notes
--------------
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 --
------ ------
$7,368 $6,700
====== ======
</TABLE>
In connection with certain litigation against the Company (Note K), the maker
of the $6,700,000 note ceased making the required interest payments. As a
result, the Company stopped accruing interest income. Had the Company been
accruing interest, the amount recognized would have been approximately
$900,000 in 1995. No interest income was recognized on the note in 1995.
Based on the value of the underlying collateral, no impairment reserve was
required on this note at December 31, 1995.
NOTE O - 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.
F-38
<PAGE>
Greenbriar Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE P - 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 three-month periods ended March 31, 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 combined companies (in thousands):
<TABLE>
<CAPTION>
Three months ended
March 31,
------------------
1995 1996
------ ------
<S> <C> <C>
Revenue $9,617 $5,202
Earnings (loss) from continuing operations 2,870 (225)
Net earnings 2,856 355
Earnings per share 0.51 0.05
</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,
ASSETS 1994 1995 1996
-------- ------- -------
(unaudited)
<S> <C> <C> <C>
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 2,942
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>
LIABILITIES AND STOCKHOLDERS', MEMBERS', December 31,
------------------ March 31,
PARTNERS' AND OWNERS' DEFICIT 1994 1995 1996
-------- -------- -----------
(unaudited)
<S> <C> <C> <C>
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>
<CAPTION>
Balance at January 1, 1993 $(3,373)
<S> <C>
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
------ ------- -------- --------- ---------
(unaudited)
<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 - - 15 - -
Purchase of restricted
certificate of deposit - - (400) - -
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
*Transferred to partners
on January 1, 1995.
The following additional entities are included as of and for the year ended
December 31, 1995:
<CAPTION>
Common
Entity Control Legal Form
- --------------------------- ----------------------- -------------------------
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:
Buildings and improvements 5 to 28 years
Furniture fixtures and equipment 5 to 7 years
Vehicles 5 years
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. The adoption of Statement of Financial Accounting
Standards No. 121 is not expected to have a material impact on the Company's
financial statements.
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 - -
<CAPTION>
On January 1, 1995 the operations of The Village at Forest Glen were
transferred to the individual partners as follows:
<S> <C> <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
-------------- ---------- --------------
Date acquired September 1994 April 1994 September 1994
Purchase Price
- ------------------------------------
<S> <C> <C> <C>
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
Total deferred revenues and tenant deposits are as follows:
<TABLE>
<CAPTION>
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 Retirement 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.
Future minimum payments following December 31, 1995 are as follows:
<TABLE>
<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>
[LETTERHEAD OF PINNACLE CONSULTING GROUP, INC. APPEARS HERE]
- --------------------------------------------------------------------------------
Business and Real Estate Consultants
March 25, 1996
Mr. Michael Gilley, Executive Vice-President
MEDICAL RESOURCE COMPANIES OF AMERICA
4265 Kellway Circle
Addison, Texas 75244
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.
EXHIBIT "A"
<PAGE>
Gilley
March 11, 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>
[LETTERHEAD OF J.C. BRADFORD & CO. CORPORATE FINANCE APPEARS HERE]
March 15, 1996
Board of Directors
Greenbriar Corporation
4265 Kellway Circle
Addison, TX 75244-2033
Ladies and Gentlemen:
You have requested our opinion as to the fairness, from a financial point
of view, to Greenbriar Corporation ("Greenbriar"), of the consideration to be
paid by Greenbriar for 100% of the outstanding capital stock (the "Shares") of
Wedgwood Retirement Inns, Inc., a Washington corporation ("Wedgwood"), pursuant
to the terms of the Stock Purchase Agreement, as amended (the "Stock Purchase
Agreement"), among Greenbriar, Wedgwood and Victor L. Lund, Paul Dendy, Mark
Hall, Frank R. Reeves, Doris Thornsbury and Theresa Waldroff (the "Selling
Stockholders"). Pursuant to the Stock Purchase Agreement, the consideration to
be paid to Wedgwood shall consist of 1,912,784 shares of Series E Preferred
stock convertible into 1,594,987 shares of common stock of Greenbriar and
$425,000 in cash and notes, plus the assumption of certain liabilities. The
terms and conditions of the foregoing transaction (the "Transaction") are more
fully set forth in the Stock Purchase Agreement.
J.C. Bradford & Co. ("Bradford"), as part of its investment banking
business, engages in the valuation of businesses and securities in connection
with mergers and acquisitions, negotiated underwritings of listed and unlisted
securities, private placements and valuations for estate, corporate and other
purposes. We have acted as Greenbriar's financial advisor in connection with
the Transaction and will receive a fee from Greenbriar for our services.
In rendering our opinion, we reviewed the Stock Purchase Agreement, certain
financial information concerning Wedgwood and Greenbriar and certain internal
financial and other information with respect to the business, operations and
prospects of Wedgwood, furnished by management of Wedgwood to us. We held
discussions with members of the senior management of each of Greenbriar and
Wedgwood regarding the business and prospects of their companies and the
combined Greenbriar and Wedgwood. In addition, we have (i) reviewed the
reported price and trading activity for Greenbriar's Common Stock; (ii) compared
certain financial information for Wedgwood with similar information and several
valuation measures for certain other companies whose securities are publicly
traded; (iii) reviewed the financial terms of certain business combinations
which we deemed comparable in whole or in part; (iv) evaluated the
Exhibit "B"
<PAGE>
Greenbriar Corporation
March 15, 1996
Page 2
potential pro forma financial impact of the Transaction on Greenbriar (v)
performed such other studies and analyses and considered other factors as we
deemed appropriate to arrive at our opinion.
In rendering this opinion, we have relied upon the accuracy and
completeness of all of the financial and other information reviewed by us for
purposes of our opinion and have not assumed any responsibility for, nor
undertaken an independent verification of, such information. With respect to
the financial projections supplied to us by the management of Wedgwood, we have
assumed that such forecasts were reasonably prepared on a basis reflecting the
best currently available estimates and judgments of Wedgwood's management as to
the future performance of Wedgwood. We did not assume any responsibility for
the financial projections provided to us and relied upon the assurances of
management of Wedgwood and Greenbriar that they were unaware of any facts that
would make such financial projections incomplete or misleading. We have not
made or been provided with an independent evaluation or appraisal of the assets
or liabilities (contingent or otherwise) of Greenbriar or Wedgwood nor have we
made any physical inspection of the properties or assets of Greenbriar or
Wedgwood. We were not asked to consider and our opinion does not address the
relative merits of the proposed Transaction as compared to any alternative
business strategies that might exist for Greenbriar or the effect of any other
transactions in which Greenbriar might engage. Our opinion is necessarily based
upon economics, market and other conditions existing on, and the information
made available to us as of the date hereof. We are not expressing any opinion
as to what the value of Greenbriar's Common Stock actually will be when issued
to the Wedgwood shareholders pursuant to the Transaction or the price at which
the Greenbriar Common Stock will trade subsequent to the Transaction.
This letter is for the information of the Board of Directors of Greenbriar
only and is not to be reproduced, summarized, described or referred to or given
to or relied upon by any other person, in whole or in part, without our prior
written consent.
Based upon and subject to the foregoing and based upon such other matters
as we consider relevant, it is our opinion that, as of the date hereof, the
consideration to be paid by Greenbriar in the Transaction is fair to Greenbriar
from a financial point of view.
Very truly yours,
J.C. BRADFORD & CO.
<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 August 22, 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's proxies with full power of substitution for and in the name, place
and stead of the undersigned, to vote upon 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:
1.PROPOSAL I:
APPROVE PROPOSAL TO [ ] FOR [ ] AGAINST [ ] ABSTAIN
APPROVE THE RIGHT TO
CONVERT SERIES E
PREFERRED STOCK INTO
COMMON STOCK
2.PROPOSAL II:
APPROVE PROPOSAL TO [ ] FOR [ ] AGAINST [ ] ABSTAIN
APPROVE THE RIGHT TO
CONVERT SERIES D
PREFERRED STOCK INTO
COMMON STOCK
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 Proposals.
The undersigned hereby revokes any proxy heretofore given to vote or act with
respect to the Common Stock or 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, executor, guardian or
trustee, please add your title as such. If
executed by a corporation, the proxy should be
signed by a duly authorized officer.
