UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the period ended JuneSeptember 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-8187
Greenbriar Corporation
(Exact name of Registrant as specified in its charter)
Nevada 75-2399477
(State or other jurisdiction of (IRS Employer
Incorporation or organization) Identification No.)
14185 Dallas Parkway, Suite 650, Dallas, TX 75254
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 407-8400
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
------------------- ---------------------------------------
Common Stock, $.01 par value American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the issuer (1) filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
past 12 months (or for such shorter period that the issuer was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days.
YES [X] NO [ ]
At AugustNovember 14, 2002 the issuer had outstanding approximately 359,000 shares of
par value $.01 Common Stock.
GREENBRIAR CORPORATION
Index to Quarterly Report on Form 10-Q
Period ended JuneSeptember 30, 2002
Part I: Financial Information..................................................3
ITEM 1: FINANCIAL STATEMENTS.................................................3STATEMENTS................................................3
Consolidated Balance Sheets................................................3Sheets...............................................3
Consolidated Statements Of Operations......................................5Operations.....................................5
Consolidated Statements Of Cash Flow.......................................6Flow......................................6
Notes To Consolidated Financial Statements.................................7Statements................................7
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS..........................13
ITEM 4: CONTROLS AND PROCEDURES............................................18
Part II: Other Information....................................................17Information....................................................19
2
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
Greenbriar Corporation
Consolidated Balance Sheets
(Amounts in thousands)
June 30, December 31,
Assets 2002 2001
(Unaudited)
------------ ------------
Current Assets
Cash And Cash Equivalents $ 1,056 $ 1,246
Short-term investments -- 1,098
Accounts Receivable-Trade 68 106
Receivables from affiliated partnership 117 311
Prepaid expenses 451 572
Other Current Assets 553 541
------------ ------------
Total Current Assets 2,245 3,874
Notes receivable, from sale of properties
6,400 6,400
Less deferred gains (6,090) (6,090)
------------ ------------
310 310
Note receivable from affiliate partnership
1,600 1,600
Deferred Income Tax Benefit 2,350 2,350
Property And Equipment, At Cost
Land And Improvements 3,522 4,430
Buildings And Improvements 28,763 32,675
Equipment And Furnishings 3,052 3,134
------------ ------------
35,337 40,239
Less Accumulated Depreciation 6,346 6,498
------------ ------------
28,991 33,741
Deposits 1,693 1,730
Other Assets 543 417
------------ ------------
$ 37,732 $ 44,022
============ ============
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
Greenbriar Corporation
Consolidated Balance Sheets
(Amounts in thousands)
September 30, December 31,
Assets 2002 2001
(Unaudited)
------------- -------------
Current assets
Cash and cash equivalents $ 888 $ 1,246
Short-term investments -- 1,098
Accounts receivable-trade 52 106
Receivables from affiliated partnerships 537 311
Prepaid expenses 48 572
Note receivable 1,238 --
Other current assets 905 541
------------- -------------
Total current assets 3,668 3,874
Notes receivable, from sale of properties 6,400 6,400
Less deferred gains (6,090) (6,090)
------------- -------------
310 310
Note receivable from affiliate partnership 1,600 1,600
Deferred income tax benefit 1,950 2,350
Property and equipment, at cost
Land and improvements 1,741 4,430
Buildings and improvements 19,553 32,675
Equipment and furnishings 2,436 3,134
------------- -------------
23,730 40,239
Less accumulated depreciation 4,695 6,498
------------- -------------
19,035 33,741
Deposits 1,640 1,730
Other assets 366 417
------------- -------------
$ 28,569 $ 44,022
============= =============
3
Greenbriar Corporation
Consolidated Balance Sheets - Continued
(Amounts in thousands)
JuneSeptember 30, December 31,
Liabilities And Stockholders' Equityand stockholders' equity 2002 2001
(Unaudited)
------------ ------------------------- -------------
Current Liabilitiesliabilities
Current Maturities Of Long-Term Debtmaturities of long-term debt $ 3,516112 $ 4,316
Accounts Payablepayable - Trade 862trade 961 1,042
Accrued Expenses 413expenses 1,300 1,116
Other Current Liabilities 949current liabilities 724 467
------------ ------------------------- -------------
Total Current Liabilities 5,740current liabilities 3,097 6,941
Long-Term Debt 12,679Long-term debt 10,363 16,693
Financing Obligationsobligations 10,815 10,815
Other Long Term Liabilities 722long term liabilities 1,041 304
------------ ------------------------- -------------
Total Liabilities 29,956liabilities 25,316 34,753
Stockholders' Equityequity
Preferred Stockstock 1 1
Common Stockstock $.01 Par Value;par value; authorized,100,000
shares; 359 shares issued and outstanding 75 75
Additional Paid-In Capital 56,828paid-in capital 56,826 56,828
Accumulated Deficit (46,761)deficit (51,282) (45,268)
------------ ------------
10,143------------- -------------
5,620 11,636
Less Stock Purchase Notes Receivablestock purchase notes receivable
(Including $2,250 From Related Parties)from related parties) (2,367) (2,367)
------------ ------------------------- -------------
Total Equity 7,776stockholders' equity 3,253 9,269
------------ ------------------------- -------------
$ 37,73228,569 $ 44,022
============ ========================= =============
4
Greenbriar Corporation
Consolidated Statements Of Operations
(Amounts in thousands, except per share data)
For The Three Month For The SixNine Month
Period Ended Period Ended
JuneSeptember 30, JuneSeptember 30,
2002 2001 2002 2001
-------- -------- -------- --------
(Unaudited) (Unaudited)
Revenue
Assisted living operations $ 2,5492,342 $ 9,2478,186 $ 5,4747,816 $ 19,22327,409
-------- -------- -------- --------
2,549 9,247 5,474 19,2232,342 8,186 7,816 27,409
Operating Expensesexpenses
Assisted living community
operations $ 1,4421,404 $ 5,7225,327 $ 3,0694,473 $ 11,72617,053
Lease expense 404 923 813 2,077388 671 1,201 2,748
Depreciation and amortization 373 794 704 1,659380 783 1,084 2,442
Corporate general and
administrative 438 1,948 869 3,132480 989 1,349 4,121
-------- -------- -------- --------
2,657 9,387 5,455 18,5942,652 7,770 8,107 26,364
-------- -------- -------- --------
Operating income (loss) (108) (140) 19 629(310) 416 (291) 1,045
Other income (expense)
Interest and dividend income $ 66178 $ 6471 $ 230408 $ 141212
Interest expense (684) (1,252) (1,312) (2,674)(605) (1,516) (1,917) (4,190)
Net gain (loss) on the sale of
assets (19)
(222) (19) 159
Loss due to partnership
(292)and write-downs of
$1,002 in 2002 (2,422) 4,239 (2,441) 4,398
Equity in net loss of partnerships (254) -- (413)(667) --
Minority interest (3,738) (3,880)
Other -- (61) -- (142)(660) 48 (660) 48
-------- -------- -------- --------
(929) (1,471) (1,514) (2,516)(3,763) (896) (5,277) (3,412)
-------- -------- -------- --------
Loss from operations before (4,073) (480) (5,568) (2,367)
income taxes
Income tax expense (400) (400)
-------- -------- -------- --------
Net loss
(1,037) (1,611) (1,495) (1,887)(4,473) (480) (5,968) (2,367)
-------- -------- -------- --------
Preferred stock dividend requirement -- (80)-- -- (160)
-------- -------- -------- --------
Loss allocable to common
stockholders (1,037) (1,691) (1,495) (2,047)(4,473) (480) (5,968) (2,527)
======== ======== ======== ========
Net loss per common share -
basic and diluted $ (2.89)(12.46) $ (4.06)(0.06) $ (4.16)(16.63) $ (4.91)(0.30)
Weighted average number of common and
equivalent shares outstanding 359 4178,348 359 4178,348
5
Greenbriar Corporation
Consolidated Statements Of Cash Flow
(Amounts in thousands)
For the sixnine month
Period Ended JuneSeptember 30,
2002 2001
------- ------------------ -----------
(Unaudited) (Unaudited)
Cash flows from operating activities
Net loss $(1,495) $(1,887)$ (5,968) $ (2,367)
Adjustments to reconcile net loss to net
cash used in operating activities
Depreciation and amortization 704 1,6591,084 2,404
Loss on sale of assets 19 (159)2,441 (4,398)
Minority interest 3,880
Loss on partnership 413667 --
Changes in operating assets and liabilities
Changes in Deferred Taxes 400 --
Accounts receivable 248 74(175) 47
Other current and noncurrent assets 4 (207)301 (2,554)
Accounts payable and other liabilities (395) (1,360)
------- -------384 (1,650)
----------- -----------
Net cash used in operating activities (502) (1,880)
------- -------(866) (4,638)
----------- -----------
Cash flows used in investing activities
Proceeds from sale of property 4,236 7,55012,488 21,267
Purchase of property and equipment (208) (477)
------- -------(209) (12,284)
----------- -----------
Net cash provided by investing
......activities 4,028 7,073activities 12,279 8,983
Cash flows from financing activities
Redemption of preferred stock -- (3,375)
Notes Receivable (1,238) --
Payments on debt (4,993) (4,379)(10,713) (14,341)
Dividends on preferred stock -- (160)
New borrowings 179 --
------- -------15,704
----------- -----------
Net cash used in financing
activities (4,814) (4,539)
------- -------(11,772) (2,172)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND (1,288) 654(359) 2,173
CASH EQUIVALENTS
Cash and cash equivalents at beginning of period 2,3441,246 2,287
------- ------------------ -----------
Cash and cash equivalents at end of period $ 1,056888 $ 2,941
======= =======4,460
=========== ===========
6
Notes To Consolidated Financial Statements
For the Unaudited Three and SixNine Months Ended JuneSeptember 30, 2002 and 2001
Note A: Basis of Presentation
The accompanying unaudited 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. The Company records its investment in certain
affiliated partnerships using the equity method of accounting.accounting (see "Note C").
The statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and, accordingly, do not include all of the
information and footnotes required by generally accepted accounting principles.
These financial statements are unaudited but in the opinion of management, all
adjustments (consisting of normal recurring accruals) necessary for a fair
presentation of consolidated results of operations, consolidated financial
position and consolidated cash flows at the dates and for the periods indicated,
have been included.
Operating results for the three and sixnine month periods ended Juneending September 30, 2002
are not necessarily indicative of the results that may be expected for the year
ended December 31, 2002. For further information, refer to the consolidated
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 2001.
Note B: Notes Receivable from Sale of Properties
During 2001 the Company sold three assisted living communities for cash and
$6,400,000 of tax-free notes bearing interest at 9.5%. The notes mature on April
1, 2032, March 20, 2037 and August 1, 2031 respectively.
The repayment of the notes is limited to the cash flow of the respective
communities either from operations, refinance or sale. The Company has deferred
gains from the sale of the communities in the amount of $6,090,000. The deferred
gains and interest income will be recognized as cash is received.
Note C: Affiliated Partnerships
In October 2001 the Company became a limited partner in Corinthians Real Estate
Investors LP (CREI), a partnership formed to acquire two properties. The general
partner is a limited liability corporation whose controlling member is James R.
Gilley. Mr. Gilley is also CEO of the Company. The Company is a 56% limited
partner. Mr. Gilley has a 25.9% interest, the general partner has a .1%
interest, the Company's chief financial officer has a 10.5% interest, and other
employees of the Company have interests aggregating 7.5%. In October 2001 the
Partnership acquired a retirement community for approximately $9,100,000 and in
January 2002 it acquired an assisted living community for approximately
$2,800,000.
7
The Company issued a $1,600,000 note to the seller as partial payment for the
purchase of the retirement community. The balance of the purchase price was
funded by borrowings by CREI from a third party in the amount of $7,840,000,
which was guaranteed by the Company. CREI gave the Company a $1,600,000 note in
consideration for payment of that amount of the purchase price. The notes bearnote bears
interest at 8.75% and areis due DecemberOctober 30, 2003. CREI also hasincurred debt inof
$3,975,000 to acquire the amount of $3,975,000assisted living community and fund operating losses.
The debt was collateralized by the assisted living community that has
beenand guaranteed by
the Company.
As of JuneSeptember 30, 2002 Messrs Gilley and Bertcher have received cash advances
from the partnership of $195,000$275,500 and $87,000$122,700 respectively. Messrs Gilley and
Bertcher currently hold notes receivable from the Company of $1,380,000 and
$360,000 respectively. Both Messrs Gilley and Bertcher have pledged their notes
as collateral for the advances they have received. Neither the cash advances
received nor the notes receivable issued by the Company bear interest.
The Company accounts for its investment in CREI by the equity method, however
because of its debt guarantees the companyCompany records the greater of 100% of the
cash losses or 56% of the accounting losses of CREI, which were $393,000$738,000 for the
sixnine months ended JuneSeptember 30, 2002. The Company had a receivable from CREI of
$100,746$599,404 at JuneSeptember 30, 2002 resulting fromarising in the normal course of business.
This
amountOn September 27, 2002 CREI sold its two properties to an independent third party
for $14,600,000. CREI received $11,800,000, which was repaidused to payoff the
existing mortgages on the properties. The balance was paid with a note, which
includes the balance of the purchase price, a 4% fee, and one month accrued
interest. The note totals $2,944,000 is due in two years and bears interest at
12% payable monthly. In addition, CREI sold its supply inventory and vehicles
for approximately $50,000, which was paid with an 8% note due in eighteen
months.
CREI recorded a gain on the subsequent month.sale of its properties of approximately $2,545,000.
In accordance with the governing accounting rules this gain has been deferred.
Following are unaudited condensed financial statements of CREI at JuneSeptember 30,
2002 and the six-monthnine-month period ended JuneSeptember 30, 2002 (in thousands):
8
Balance Sheet
Current Assets $ 243
Property and Equipment 12,03177
Notes Receivable 2,994
Other Assets 931
--------398
-------
$ 13,205
========3,469
Payable to Greenbriar Corp. $ 101599
Other Liabilities 49055
Notes Payable to Greenbriar Corp. 1,600
Mortgages Payable 11,815
--------
14,006Deferred Gain 2,545
-------
4,799
Partners' Deficit (801)
--------(1,496)
-------
$ 13,205
========
8
3,469
-----------------------------------------------------------
Statement of Operations
Revenue $ 1,4982,233
Expenses
Operating 8251,235
Depreciation 377747
General and Administrative 116142
Interest 8851,344
-------
$ 2,2033,468
-------
Net loss $ (705)$(1,235)
=======
Effective May 31 2002 the Company became a 56% limited partner in Muskogee Real
Estate Investors LP (MREI), a partnership formed to acquire two properties.properties in
Muskogee, Oklahoma. The general partner is a limited liability corporation whose
controlling member is James R. Gilley. Mr. Gilley is also CEO of the Company. The Company is a 56%
limited partner.
Mr. Gilley has a 25.9% interest, the general partner has a .1% interest, the
Company's chief financial officer has a 10.5% interest, and other employees of
the Company have interests aggregating 7.5%. In May 2002 the Partnership
acquired two assisted living communities in close proximity to one another. One
property was acquired from an independent third party for $1,600,000 and one
property was acquired from Greenbriar for a 56% limited partnership interest in
the partnership. The debt on the two properties is $4,000,000, which is
personally guaranteed by Mr. Gilley. Greenbriar recorded no gain or loss on the
exchange from ownership of one property for its 56% limited partnership interest.
9
The Company accounts for its investment in MREI by the equity method and
recorded earnings of $6,700$24,764 for the one monthfour months ended JuneSeptember 30, 2002. The
Company had a receivable frompayable to MREI of $15,500 at June$75,000 and a receivable of $12,887 as of
September 30, 2002 resulting from the normal course of business. This amount has beenThese amounts
were repaid in the subsequent month.
On September 30,2002 MREI entered into a triple net lease with an independent
third party. The lease payments are $60,000 per month for three years. The
lessee is obligated to purchase the properties during the three-year period for
$6,000,000.
Following are unaudited condensed financial statements of MREI at JuneSeptember 30,
2002 and the one-four- month period ended JuneSeptember 30, 2002 (in thousands):
9
Balance Sheet
Current Assets $ 14118
Receivable from Greenbriar 75
Property and Equipment 3,9403,944
Other Assets 37
------
$4,118
======28
-------
$ 4,065
=======
Current Liabilities $ 29(14)
Payables to Greenbriar 16Corp. 13
Other Liabilities 6156
Mortgages Payable 4,000
------
4,1063,966
-------
4,021
Partners' Equity 12
------
$4,118
======44
-------
$ 4,065
=======
--------------------------------------------------------------
Statement of Operations
Revenue $ 147542
Expenses
Operating 86336
Depreciation 1249
General and Administrative 1340
Interest 24
------73
-------
$ 135
------498
-------
Net Income $ 12
======44
=======
10
Note D: Long-Term Obligations
Long-term debt is comprised of the following (in thousands):
JuneSeptember 30, December 31,
2002 2001
------------ ------------------------- -------------
Notes payable to financial institutions maturing
through 2015; fixed and variable interest rates
ranging from 5.25% to 10.50%; collateralized by
property, fixtures, equipment and the
assignment of rents $ 9,7524,002 $ 8,947
Notes payable to individuals and companies
maturing through 2023; variable and fixed
interest rates ranging from 7% to 8.75%
collateralized by real property, personal
property, fixtures, equipment and the
assignment of rents 1,6541,653 1,655
Mortgage note payable to a financial institution
maturing in 2010; bearing interest rates ranging
from 7.5% through 14.5%; collateralized by
property and equipment -- 5,253
Notes payable to wife of Chief Executive Officer,Sylvia M. Gilley, bearing interest at
10% and maturing on July 1, 20032004 3,375 3,375
Notes payable to executive officers, non-interest
bearing at 8.5% and maturing on December 31, 2004,
net of discount of $328 and $391 respectively,
representing interest imputed at 8.5% 1,4121,445 1,349
Other 2-- 430
------------ ------------
16,195------------- -------------
10,475 21,009
Less: current maturities 3,516112 4,316
------------ ------------------------- -------------
$ 12,67910,363 $ 16,693
The Company operates two communities that are financed through sale-leaseback
obligations. At the end of the tenth year of the fifteen-year leases (March 31,
2004), the Company has options to repurchase the communities for the greater of
the sales prices at the date of the sale-leaseback which was $10,815,000 or
their current replacement costs less depreciation plus land at current fair
market values. Accordingly, these transactions have been accounted for as
financings, and the Company has recorded the proceeds from the sales as
financing obligations, classified the lease payments as interest expense and
continues to carry the communities and record depreciation.
11
Note E: Contingencies
Lifestyles Matter:Senior Housing Managers, LLC
In 1995 Lifestyles Senior Housing Managers, LLC (Lifestyles) entered into a
contract to manage an assisted living community in Seaside, OR, which is leased
by Neawanna by the Sea, LP (Neawanna) from a REIT. In 1996 the Company acquired
its interest in
the lease for Neawanna. In March 2000 Lifestyles organized and held a meeting
with the executive director of Neawanna for the purpose of offering her the
position of manager of an assisted living community not affiliated with
Greenbriar. Greenbriar believes the action of Lifestyles represented a breach of
their fiduciary duty as the manager and terminated the management contract.
Lifestyles contended their termination was unjustified. The matter was taken to
arbitration and on April 9, 2001 the Company was notified that the arbitration
panel had awarded Lifestyles $498,000 for damages plus expenses.
One of the terms of the Neawanna lease is that any unsatisfied debt exceeding
$250,000 is an event of default. Rather than lose the lease on Neawanna, on July
12, 2001 Villa Del Rey - Seaside, Inc. and Neawanna By The Sea LP filed for
Chapter 11 bankruptcy protection in the United States Bankruptcy Court for The
District of Nevada. In addition Villa del Rey - Roswell LP (Roswell) filed for Chapter 11
in the same court. Although unrelated to the Lifestyles matter Villa Del Rey -
Roswell LP has a lease for an assisted living community, which is
cross-collateralized with the lease held by Neawanna by the Sea, LP.
The Company has entered into an agreement to sell its interest in VDR Roswell to
an independent third party. This same group has purchased Lifestyles' claim
regarding Neawanna. The Company is attemptingcurrently negotiating the sale of Neawanna to
work outthat group. These properties were written down in September 2002 by $902,000 to
reflect anticipated net realizable value.
Internal Revenue Service Examination
In 1991 the Company sold four nursing homes to a settlement with Lifestyles but has thus
far been unsuccessful. Concurrentlynot for profit entity who used
tax-free bonds to finance the entities inpurchase. On September 18, 2002 the bankruptcyCompany was
notified by the Internal Revenue Service (IRS) that they have presented a planinitiated an
examination under Section 6700 of reorganizationthe Internal Revenue Code as it relates to the
court.Company's activities in connection with the issuance and sale of such bonds.
The IRS examination is focused on whether the tax-free bonds were issued
inappropriately and whether certain inappropriate statements were made or
furnished with respect to the excludability of income or the securing of other
tax benefits. If so, the IRS is reviewing whether the Company was involved.
The Company did sell the properties and receive tax-free bonds. The Company
subsequently sold the bonds. The Company believes that it did nothing
inappropriate. Both Lifestlyesthe issuance of tax-free bonds and their subsequent sale are
a highly technical area and the REIT
have filed objections toCompany relied on the plan. The Company's net book value inadvice and reports of
investment bankers, appraisers, attorneys, and outside certified public
accountants.
12
Other than the Neawanna
and Roswell is approximately $4,700,000.
Insurance:
Due to the escalating costs of liability insurance in the assisted living
industryinitial notice the Company is currently self-insured at three ofhas not been contacted by the Communities that
it owns and operates. The Company is continuing to seek out insurance coverage.
12
IRS
regarding this matter.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION -----------------------------------------------------------
AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS
--------------------------------------
Overview
The Company owns and manages assisted living communities that provide housing,
healthcare, hospitality and personal services to seniors.
As of July 31,September 30, 2002 the Company operates 13four communities in seventhree states
with a capacity of 1,160352 residents, consisting of two communities that are owned
fourand two that are leased,
four that are managed for affiliated partnerships, and three that are managed
under contract to one of the Company's subsidiaries for third party owners.leased. In addition the Company has three Communitiesowns two communities that are
operated by independent third parties.
Since 1996 the Company has owned, leased and operated assisted living and
retirement communities throughout the United States. During that period of time
the Company has both acquired and sold over seventy communities. The acquiring
and disposing of its real estate assets has been an integral part of the
Company's business.
During the past year the Company's business strategy has evolved into one of
focusing on the real estate component and reducing its operating activities. The
Company objective is to become an investor in various entities, principally
partnerships, whose intent is to acquire properties and either sell, lease or
enter into joint venture agreements with third party operators with respect to
these properties
In October 2001 the company became a 56% limited partner in a partnership,
Corinthian Real Estate Investors LP (CREI), which acquired two assisted living
communities in Carrollton, TX. In September 2002 the partnership sold its two
properties for cash sufficient to pay off its debt plus a note for $1,335,000.
The note is due in two years with interest of 12% payable monthly.
In January 2002 the Company became a 56% limited partner in a partnership,
Muskogee Real Estate Investors (MREI), which acquired two assisted living
communities in Muskogee, OK. In September 2002 the partnership leased the two
Communities to a third party for three years. The lease will generate positive
cash flow during the three-year lease period. The lessee has committed to
purchase the two properties sometime during the three-year period for
$6,000,000. The current debt on the property is $4,000,000.
It is the Company's intention to focus on these types of transactions.
In September 2002 the Company entered into an agreement with an independent
third party to jointly acquire properties in the future. The third party entity
is affiliated with the various entities that acquired or leased the properties
from CREI and MREI mentioned above. Affiliates of this group also purchased
properties in Harlingen, TX and Sherman, TX from the Company and it is
anticipated that they will acquire the Company's interest in Neawanna and VDR
Roswell.
The agreement provides that partnerships formed by the Company will be allowed
to participate in the acquisition of twelve assisted living communities and
receive a 50% partnership interest. The Company has agreed to pay $660,000 over
the next twelve months to cover the due diligence expenses incurred by its
partner in these ventures. The agreement further provides that at any time
13
during the twenty-four months subsequent to the formation of a partnership and
the acquisition of properties the third party can purchase the Company's
partnership interest for $750,000 each.
Three and sixnine month periods ended JuneSeptember 30, 2002 compared to three and
six-monthnine-month periods ended JuneSeptember 30, 2001.
Revenues and Operating Expenses from Assisted Living Operations
Revenues were $2,549,000$2,342,000 and $5,474,000$7,816,000 for the three and sixnine months ended
JuneSeptember 30, 2002 as compared to $9,247,000$8,186,000 and $19,223,000$27,409,000 for the three and
sixnine months ended JuneSeptember 30, 2001. Community operating expenses, which
consist of assisted living community operations, lease expense and depreciation
and amortization, were $2,219,000$2,172,000 and $4,586,000$6,758,000 for the three and sixnine months
ended JuneSeptember 30, 2002 as compared to $7,439,000$6,781,000 and $15,462,000$22,243,000 for the three
and sixnine months ended JuneSeptember 30, 2001.
During the last six months of 2001 the Company disposed of 11 Communities as
part of redemption of its Series E and F Preferred Stock. The Company also sold
three Communities to not for profit organizations and retained long term
management contracts. The Company also sold one Community and leased one
Community to independent third parties. In addition the Company entered into a
sub-management contract for three properties whereby the sub-manager is
retaining the revenue and paying the expenses as their fee for being a
sub-manager. The sub-manager also has an agreementoption to acquire the communities upon
approval of the third party lenders. For reporting purposes the Company no
longer records the revenue and operating expenses of the three Communities. In
May 2002 one of the properties with a sub-management contract was sold.
During the first quarter of 2002 leases held by the company for the operation of
two properties were not renewed. As of May 31, 2002 one property was contributed
to a partnership thatin which the Company has a 56% limited partnership interest.
The partnership is accounted for using the equity method of accounting.
In October 2001 and May 2002 the Company obtained 56% limited partnership
interests in two partnerships which own four Communities.communities. These Communitiescommunities are
accounted for using the equity method of accounting and therefore the Company
does not record the revenue and expenses of the Communities.
13
communities.
Overall the Company recorded revenue and expenses for 22 fewer Communitiescommunities
during the three and sixnine months ended JuneSeptember 30, 2002 than the comparable
periods in the prior year. On a "same store basis" revenue for the three and
sixnine months ended JuneSeptember 30, 2001 would have been $2,407,000$2,176,000 and $5,059,000$7,235,000
respectively compared to $2,342,000 and $7,816,000 for the three and nine months
ended September 30, 2002. Community operating expenses for the three and sixnine
months ended JuneSeptember 30, 20022001 would have been $2,048,000$2,074,000 and $4,244,000 respectively.$6,316,000
respectively compared to $2,172,000 and $6,758,000 for the three and nine months
ended September 30, 2002. On a same store basis the increase in revenue is due
to an increase in both census and the average rate charged per resident. The
increase in expenses is due to the additional costs associated with additional
residents.
14
Corporate General and Administrative Expenses
General and administrative expenses were $438,000$480,000 and $869,000$1,349,000 for the three
and sixnine months ended JuneSeptember 30, 2002 as compared to $1,948,000$989,000 and $3,132,000$4,121,000
for the three and sixnine months ended JuneSeptember 30, 2001. The decrease in the
corporate general and administrative expenses is primarily a result of a
decrease in salaries and related payroll expenses. Due to a significant
reduction in the number of Communities operated by the Company the number of
employees on the corporate staff was reduced. In addition salaries for members
of senior management hashave been reduced. Also during the three and sixnine months
ended JuneSeptember 30, 2001 the Company was incurring legal and professional fees
with respect to a lawsuit with a preferred shareholder. Legal fees decreased by
$142,500$926,752 and $285,000$1,211,755 for the three and sixnine months ended JuneSeptember 30, 2002
when compared to the comparable periods in 2001.
Interest and Dividend Income
Interest and dividend income for the three and sixnine months ended JuneSeptember 30,
2002 was $66,000$178,000 and $230,000$408,000 compared to $64,000$71,000 and $141,000$212,000 for the
comparable periods in 2001. The increase in interest and dividend income for
both the three and sixnine month periods isare a result of interest recorded on a
$1,600,000 note receivable related to the Company's investment in the Corinthian
Real Estate Investors L.P. in November 2001.
Interest Expense
Interest expense for the three and sixnine months ended JuneSeptember 30, 2002 was
$684,000$605,000 and $1,312,000$1,917,000 as compared to $1,252,000$1,516,000 and $2,674,000$4,190,000 for the
comparable periods in 2001. Due to the reduction in the number of Communities
the company's long-term debt has been reduced significantly. The interest
expense on a "same store basis" for the three and sixnine months ended JuneSeptember
30, 2001 would have been $610,000$412,000 and $1,094,000 respectively.$1,506,000 respectively compared to
$605,000 and $1,917,000 for the three and nine months ended September 30, 2002.
The increase in interest expense on a "same store basis" is due principally to
higher interest rates on existing borrowings when compared to the previous year.
Net Gain (Loss) on the Sale of Assets
The net gain (loss) on the sale of assets for the three and sixnine months ended
JuneSeptember 30, 2001 was $(222,000)$4,239,000 and $159,000$4,398,000 respectively and was
$(19,000)($2,422,000) and ($2,441,000) for the sixthree and nine months ended JuneSeptember 30,
2002.
1415
The Company sold its corporate office building in 2001 which resulted in a gain
of $406,000. In addition, certain garden homes and related property that were
adjacent to Camelot Retirement were sold in 2001 resulting in a loss of
$296,000. In 2001 the Company also exercised purchase options on two leased
communities in Fort Worth, Texas, Palm House and Oak Park Retirement, and
simultaneously sold both of the two communities to unrelated third parties. The
gains on the sales of assets generated from these two transactions were $49,000.
Other Income (Expense)
Other Income (Expense) forIn August 2001 the threeCompany sold Crown Pointe Retirement, a community that it
owned sixty percent of in Corona California. Per the terms of this sale the
Company retained a fifteen-year management agreement with the new owners. The
gross proceeds from the sale were $3,950,000 of notes and six months ended June 30, 2001$14,371,068 of cash.
There was ($61,000) and ($142,000) respectively. The expenses for 2001 area gain on the sale of assets recorded from this transaction of
$4,239,000. Greenbriar's portion of the gain was $537,500 with the balance being
allocated to the minority interestinvestors in Crown Pointe.
In September 2002 the Company sold a Community.community it owned in Sherman Texas, The
CommunityWillows at Sherman, and a community in Harlingen Texas, Camelot Retirement.
There was solda net loss on the sale of these two properties of $1,520,000. In
September 2002 when it entered into an agreement to sell VDR Roswell in August 2001.New
Mexico and Neawanna by the Sea by the Sea in Oregon the Company wrote the assets
down by $902,000 to reflect the anticipated net realizable value.
Other Expenses:
In September 2002 the Company entered into a venture with a third party to
secure partnership interests in future acquisitions of assisted living
communities. The agreement required the Company to pay $660,000 over the next
twelve months to fund the cost of the due diligence for these acquisitions.
There can be no assurance that this venture will be successful and the Company
has therefore set up a reserve for it's entire investment.
Liquidity and Capital Resources
At JuneSeptember 30, 2002 the Company had current assets of $2,245,000$3,668,000 and current
liabilities of $5,740,000.
Included in current liabilities is a $3,360,000 mortgage for an assisted living
community, which matures in October 2002. The Company intends to either sell the
Community or refinance the mortgage prior to its maturity date.$3,097,000.
During 2001 the Company reduced its long-term debt from $50,887,000 to
$16,693,000. During the first nine months of 2002 the Company further reduced
its long-term debt to $10,363,000. The reduction was due to the sale of
properties and the repayment of the mortgages related to the properties.
In January 1997Subsequent to September 30, 2002 the Company has negotiated employment contractsagreements with
certain note holders whose debt was coming due in 2003. These agreements provide
that the Chief
Executive Officer (CEO)note holders accept certain long-term third party notes receivable and
Chief Financial Officer (CFO) of the Company. Both
individuals had been employedpartnership interests held by the Company since 1989. The employment
contracts calledin exchange for combined salaries of $640,000 per year and provided that iftheir debt obligations
from the contracts were terminated or amended the individuals would be entitled to
cash payment of three years salary for the CEO and two years salary for the CFO.
In light of the reduced size of the Company the independent directors and the
officers in October 2001 agreed to modify the employment agreements with the two
officers. The two officers have each agreed to continue their roles in the
Company for $12,000 per year for three years. The revisions in the contracts
triggered the contract termination payments requiring the Company to immediately
pay the two officers $1,740,000. However, the two officers agreed to accept
non-interest-bearing notes due December 31, 2004. These notes have certain
acceleration provisions if the Company violates the terms of the revised
contracts.
In the future the two officers will participate with the Company in partnerships
or other entities formed to acquire and sell real estate properties during the
period of their contracts. The Company believes that this arrangement will allow
it to maintain experienced senior management at a cost that will not overburden
its resources while at the same time allowing it to realize significant profits
through management fees, operating profits and the ultimate sale of the
properties.
15
Company. It is anticipated that these transactions will be completed in
November 2002. The result will be to further reduce the Company's long- term
debt by $2,720,000.
16
After the above transactions are completed the Company will acquire additionalhave long-term debt
of approximately $7,643,000 with the earliest maturity date being July 2004.
In September 2002 the Company as well as Corinthian Real Estate Investors LP (a
partnership in which the Company is a 56% limited partner) sold four properties
through
investments in third party entities, which for the most part, will be
partnerships.to various affiliated entities. The Company may or may not beagreed to loan the controlling partybuyers a portion
of the proceeds received from the sales. The loan was to assist the buyers with
respect
to these investments. Itthe costs of financing the purchase as well as closing costs. The loan was for
$1,238,000 is anticipated that the two senior officers will bring
potential acquisitions and financing to Greenbriar. The Company has no
obligation to participate.due September 30, 2003 with 12% interest payable monthly.
The Company conducts its property management operations through its subsidiary
Senior Living Management, Inc (SLM). SLM expects tomay manage properties, which are owned
or leased by the Company or are owned by partnerships or other entities where
Greenbriar is an investor, for a fee. To a far lesser degree SLM will
manage properties for independentThe Company may decide to engage third
parties.party management companies.
Future acquisitions by of the Company are dependent upon obtaining capital and
financing through various means, including financing obtained from loans,
sale/leaseback transactions, long-term state bond financing, debt or equity
offerings and, to the extent available, cash generated from operations. There
can be no assurance that the Company will be able to obtain adequate capital to
finance its projected growth.
Forward Looking Statements
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of
1995: A number of the matters and subject areas discussed in this form 10Q that
are not historical or current facts deal with potential future circumstances,
operations, and prospects. The discussion of such matters and subject areas is
qualified by the inherent risks and uncertainties surrounding future
expectations generally, and also may materially differ from Greenbriar
Corporation's actual future experience involving any one or more of such matters
and subject areas relating to interest rate fluctuations, ability to obtain
adequate debt and equity financing, demand, pricing, competition, construction,
licensing, permitting, construction delays on new developments contractual and
licensure, and other delays on the disposition, transition, or restructuring of
currently or previously owned, leased or managed communities in the Company's
portfolio, and the ability of the Company to continue managing its costs and
cash flow while maintaining high occupancy rates and market rate assisted living
charges in its assisted living communities. Greenbriar Corporation has attempted
to identify, in context, certain of the factors that they currently believe may
cause actual future experience and results to differ from Greenbriar
Corporation's current expectations regarding the relevant matter of subject
area. These and other risks and uncertainties are detailed in the Company's
reports filed with the Securities and Exchange Commission (SEC), including
Greenbriar Corporation's Annual Reports on Form 10-K and Quarterly Reports on
Form 10-Q.
1617
Item 4: Controls and Procedures
The Company's management, including its Chief Executive Office and Chief
Financial Officer, after evaluating the effectiveness of the Company's
disclosure controls and procedures (as defined in rules 13a-14( c ) and15-d-14(
c ) under the Securities and Exchange Act of 1934) as of a date (the Evaluation
Date) which was within 90 days of this quarterly report on Form 10Q, have
concluded in their judgment that , as of the Evaluation Date, the Company's
disclosure controls and procedures were adequate and designed to ensure that
material information relating to the Company and its subsidiaries would be made
known to them.
There were no significant changes in the Company's internal controls or, to its
knowledge, in other factors that could significantly affect its disclosure and
procedures subsequent to the Evaluation Date.
18
PART II: OTHER INFORMATION
ITEMS 1-5: ARE NOT APPLICABLE
- ------------------------------
ITEM 6: EXHIBITS AND REPORT ON FORM 8-K
- ---------------------------------------
A) EXHIBITS:
10.4: UMBRELLA AGREEMENT BETWEEN BY AND BETWEEN CERTAIN AFFILIATES
OF GREENBRIAR CORPORATION, JAMES R. GILLEY, AND GREENBRIAR
CORPORATION AND JON HARDER, SUNWEST MANAGEMENT, INC. ET AL.
99.1: CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
99.2: CERTIFICATION OF THE CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY
ACT OF 2002
B) REPORTS ON FORM 8-K:
NONE
17
SignaturesA REPORT ON FORM 8K DATED SEPTEMBER 30, 2002 WAS FILED ON OCTOBER14,
2002 RELATED TO THE SALE OF TWO OF THE COMPANY'S ASSISTED LIVING
COMMUNITIES AND THE SALE OF TWO ASSISTED LIVING COMMUNITIES BY A
PARTNERSHIP INWHICH THE COMPANY OWNS A 56 LIMITED PARTNERSHIP INTEREST
Signature
Pursuant to the requirements of the Securities and Exchange Act of 1934,
registrant has duly caused this report to be signed on its behalf by
undersigned, thereunto duly authorized.
Greenbriar Corporation
Date: August 14,November 18, 2002 By: /s/ Gene S. Bertcher
--------------------------------------------------
Executive Vice President &
Chief Financial Officer
1819