10-Q 1 green10q093002.txt 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 September 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 November 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 September 30, 2002 Part I: Financial Information..................................................3 ITEM 1: FINANCIAL STATEMENTS................................................3 Consolidated Balance Sheets...............................................3 Consolidated Statements Of Operations.....................................5 Consolidated Statements Of Cash Flow......................................6 Notes To Consolidated Financial Statements................................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....................................................19 2
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 ============= =============
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Greenbriar Corporation Consolidated Balance Sheets - Continued (Amounts in thousands) September 30, December 31, Liabilities and stockholders' equity 2002 2001 (Unaudited) ------------- ------------- Current liabilities Current maturities of long-term debt $ 112 $ 4,316 Accounts payable - trade 961 1,042 Accrued expenses 1,300 1,116 Other current liabilities 724 467 ------------- ------------- Total current liabilities 3,097 6,941 Long-term debt 10,363 16,693 Financing obligations 10,815 10,815 Other long term liabilities 1,041 304 ------------- ------------- Total liabilities 25,316 34,753 Stockholders' equity Preferred stock 1 1 Common stock $.01 par value; authorized,100,000 shares; 359 shares issued and outstanding 75 75 Additional paid-in capital 56,826 56,828 Accumulated deficit (51,282) (45,268) ------------- ------------- 5,620 11,636 Less stock purchase notes receivable (Including $2,250 from related parties) (2,367) (2,367) ------------- ------------- Total stockholders' equity 3,253 9,269 ------------- ------------- $ 28,569 $ 44,022 ============= =============
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Greenbriar Corporation Consolidated Statements Of Operations (Amounts in thousands, except per share data) For The Three Month For The Nine Month Period Ended Period Ended September 30, September 30, 2002 2001 2002 2001 -------- -------- -------- -------- (Unaudited) (Unaudited) Revenue Assisted living operations $ 2,342 $ 8,186 $ 7,816 $ 27,409 -------- -------- -------- -------- 2,342 8,186 7,816 27,409 Operating expenses Assisted living community operations $ 1,404 $ 5,327 $ 4,473 $ 17,053 Lease expense 388 671 1,201 2,748 Depreciation and amortization 380 783 1,084 2,442 Corporate general and administrative 480 989 1,349 4,121 -------- -------- -------- -------- 2,652 7,770 8,107 26,364 -------- -------- -------- -------- Operating income (loss) (310) 416 (291) 1,045 Other income (expense) Interest and dividend income $ 178 $ 71 $ 408 $ 212 Interest expense (605) (1,516) (1,917) (4,190) Net gain (loss) on the sale of assets and write-downs of $1,002 in 2002 (2,422) 4,239 (2,441) 4,398 Equity in net loss of partnerships (254) -- (667) -- Minority interest (3,738) (3,880) Other (660) 48 (660) 48 -------- -------- -------- -------- (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 (4,473) (480) (5,968) (2,367) -------- -------- -------- -------- Preferred stock dividend requirement -- -- -- (160) -------- -------- -------- -------- Loss allocable to common stockholders (4,473) (480) (5,968) (2,527) ======== ======== ======== ======== Net loss per common share - basic and diluted $ (12.46) $ (0.06) $ (16.63) $ (0.30) Weighted average of common and equivalent shares outstanding 359 8,348 359 8,348
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Greenbriar Corporation Consolidated Statements Of Cash Flow (Amounts in thousands) For the nine month Period Ended September 30, 2002 2001 ----------- ----------- (Unaudited) (Unaudited) Cash flows from operating activities Net loss $ (5,968) $ (2,367) Adjustments to reconcile net loss to net cash used in operating activities Depreciation and amortization 1,084 2,404 Loss on sale of assets 2,441 (4,398) Minority interest 3,880 Loss on partnership 667 -- Changes in operating assets and liabilities Changes in Deferred Taxes 400 -- Accounts receivable (175) 47 Other current and noncurrent assets 301 (2,554) Accounts payable and other liabilities 384 (1,650) ----------- ----------- Net cash used in operating activities (866) (4,638) ----------- ----------- Cash flows used in investing activities Proceeds from sale of property 12,488 21,267 Purchase of property and equipment (209) (12,284) ----------- ----------- Net cash provided by investing activities 12,279 8,983 Cash flows from financing activities Redemption of preferred stock -- (3,375) Notes Receivable (1,238) -- Payments on debt (10,713) (14,341) Dividends on preferred stock -- (160) New borrowings 179 15,704 ----------- ----------- Net cash used in financing activities (11,772) (2,172) ----------- ----------- NET INCREASE (DECREASE) IN CASH AND (359) 2,173 CASH EQUIVALENTS Cash and cash equivalents at beginning of period 1,246 2,287 ----------- ----------- Cash and cash equivalents at end of period $ 888 $ 4,460 =========== ===========
6 Notes To Consolidated Financial Statements For the Unaudited Three and Nine Months Ended September 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 (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 nine month periods ending 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 note bears interest at 8.75% and is due October 30, 2003. CREI also incurred debt of $3,975,000 to acquire the assisted living community and fund operating losses. The debt was collateralized by the assisted living community and guaranteed by the Company. As of September 30, 2002 Messrs Gilley and Bertcher have received cash advances from the partnership of $275,500 and $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 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 Company records the greater of 100% of the cash losses or 56% of the accounting losses of CREI, which were $738,000 for the nine months ended September 30, 2002. The Company had a receivable from CREI of $599,404 at September 30, 2002 arising in the normal course of business. On September 27, 2002 CREI sold its two properties to an independent third party for $14,600,000. CREI received $11,800,000, which was used 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 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 September 30, 2002 and nine-month period ended September 30, 2002 (in thousands): 8 Balance Sheet Current Assets $ 77 Notes Receivable 2,994 Other Assets 398 ------- $ 3,469 Payable to Greenbriar Corp. $ 599 Other Liabilities 55 Notes Payable to Greenbriar Corp. 1,600 Deferred Gain 2,545 ------- 4,799 Partners' Deficit (1,496) ------- $ 3,469 ----------------------------------------------------------- Statement of Operations Revenue $ 2,233 Expenses Operating 1,235 Depreciation 747 General and Administrative 142 Interest 1,344 ------- $ 3,468 ------- Net loss $(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 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. 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 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 $24,764 for the four months ended September 30, 2002. The Company had a payable to MREI of $75,000 and a receivable of $12,887 as of September 30, 2002 resulting from the normal course of business. These 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 September 30, 2002 and the four- month period ended September 30, 2002 (in thousands): Balance Sheet Current Assets $ 18 Receivable from Greenbriar 75 Property and Equipment 3,944 Other Assets 28 ------- $ 4,065 ======= Current Liabilities $ (14) Payables to Greenbriar Corp. 13 Other Liabilities 56 Mortgages Payable 3,966 ------- 4,021 Partners' Equity 44 ------- $ 4,065 ======= -------------------------------------------------------------- Statement of Operations Revenue $ 542 Expenses Operating 336 Depreciation 49 General and Administrative 40 Interest 73 ------- $ 498 ------- Net Income $ 44 ======= 10
Note D: Long-Term Obligations Long-term debt is comprised of the following (in thousands): September 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 $ 4,002 $ 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 1,653 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 Sylvia M. Gilley, bearing interest at 10% and maturing on July 1, 2004 3,375 3,375 Notes payable to executive officers, non-interest bearing and maturing on December 31, 2004, net of discount of $328 and $391 respectively, representing interest imputed at 8.5% 1,445 1,349 Other -- 430 ------------- ------------- 10,475 21,009 Less: current maturities 112 4,316 ------------- ------------- $ 10,363 $ 16,693
11 Note E: Contingencies Lifestyles 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 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 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 currently negotiating the sale of Neawanna to that 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 not for profit entity who used tax-free bonds to finance the purchase. On September 18, 2002 the Company was notified by the Internal Revenue Service (IRS) that they have initiated an examination under Section 6700 of the Internal Revenue Code as it relates to the 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 the issuance of tax-free bonds and their subsequent sale are a highly technical area and the Company relied on the advice and reports of investment bankers, appraisers, attorneys, and outside certified public accountants. 12 Other than the initial notice the Company has not been contacted by the IRS regarding this matter. ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS -------------------------------------------------------------------------------- OF OPERATIONS ------------- Overview As of September 30, 2002 the Company operates four communities in three states with a capacity of 352 residents, consisting of two communities that are owned and two that are leased. In addition the Company owns 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 nine month periods ended September 30, 2002 compared to three and nine-month periods ended September 30, 2001. Revenues and Operating Expenses from Assisted Living Operations Revenues were $2,342,000 and $7,816,000 for the three and nine months ended September 30, 2002 as compared to $8,186,000 and $27,409,000 for the three and nine months ended September 30, 2001. Community operating expenses, which consist of assisted living community operations, lease expense and depreciation and amortization, were $2,172,000 and $6,758,000 for the three and nine months ended September 30, 2002 as compared to $6,781,000 and $22,243,000 for the three and nine months ended September 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 option 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 in 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. These communities are accounted for using the equity method of accounting and therefore the Company does not record the revenue and expenses of the communities. Overall the Company recorded revenue and expenses for 22 fewer communities during the three and nine months ended September 30, 2002 than the comparable periods in the prior year. On a "same store basis" revenue for the three and nine months ended September 30, 2001 would have been $2,176,000 and $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 nine months ended September 30, 2001 would have been $2,074,000 and $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 $480,000 and $1,349,000 for the three and nine months ended September 30, 2002 as compared to $989,000 and $4,121,000 for the three and nine months ended September 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 have been reduced. Also during the three and nine months ended September 30, 2001 the Company was incurring legal and professional fees with respect to a lawsuit with a preferred shareholder. Legal fees decreased by $926,752 and $1,211,755 for the three and nine months ended September 30, 2002 when compared to the comparable periods in 2001. Interest and Dividend Income Interest and dividend income for the three and nine months ended September 30, 2002 was $178,000 and $408,000 compared to $71,000 and $212,000 for the comparable periods in 2001. The increase in interest and dividend income for both the three and nine month periods are 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 nine months ended September 30, 2002 was $605,000 and $1,917,000 as compared to $1,516,000 and $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 nine months ended September 30, 2001 would have been $412,000 and $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 nine months ended September 30, 2001 was $4,239,000 and $4,398,000 respectively and was ($2,422,000) and ($2,441,000) for the three and nine months ended September 30, 2002. 15 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. In August 2001 the Company 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 $14,371,068 of cash. There was a 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 investors in Crown Pointe. In September 2002 the Company sold a community it owned in Sherman Texas, The Willows at Sherman, and a community in Harlingen Texas, Camelot Retirement. There was a 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 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 September 30, 2002 the Company had current assets of $3,668,000 and current liabilities of $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. Subsequent to September 30, 2002 the Company has negotiated agreements with certain note holders whose debt was coming due in 2003. These agreements provide that the note holders accept certain long-term third party notes receivable and partnership interests held by the Company in exchange for their debt obligations from the 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 have 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 to various affiliated entities. The Company agreed to loan the buyers a portion of the proceeds received from the sales. The loan was to assist the buyers with the costs of financing the purchase as well as closing costs. The loan was for $1,238,000 is 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 may 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. The Company may decide to engage third party management companies. Future acquisitions by the Company are dependent upon obtaining capital and financing through various means, including financing obtained from loans, sale/leaseback transactions, long-term state bond financing, debt or equity offerings and, to the extent available, cash generated from operations. There can be no assurance that the Company will be able to obtain adequate capital to finance its projected growth. 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. 17 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 PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 B) REPORTS ON FORM 8-K: A 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: November 18, 2002 By: /s/ Gene S. Bertcher -------------------------- Executive Vice President & Chief Financial Officer 19