UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 5(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2005
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 000-08187
CabelTel International Corporation
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(Exact name of registrant as specified in its charter)
Nevada 75-2399477
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(State or other jurisdiction of (IRS Employer Identification
Incorporation or organization) Number)
1755 Wittington Place, Suite 340
Dallas, Texas 75234
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(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, including area code (972) 407-8400
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Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of each exchange on which registered
Common Stock, $0.01 par value American Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ X ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [ X ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act. Yes [ ] No [X]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12-B-2 of the Exchange Act. (Check
one): Large accelerated filer [ ] Accelerated filer[ ] Non-accelerated filer [X]
The aggregate market value of the shares of voting and non-voting common equity
held by non-affiliates of the Registrant, computed by reference to the closing
price at which the common equity was last sold which was the sales price of the
Common Stock on the American Stock Exchange as of June 30, 2005 (the last
business day of the Registrant's most recently completed second fiscal quarter)
was $1,871,000 based upon a total of 400,619 shares held as of December 31, 2005
by persons believed to be non-affiliates of the Registrant. The basis of the
calculation does not constitute a determination by the Registrant as defined in
Rule 405 of the Securities Act of 1933, as amended, such calculation, if made as
of a date within sixty days of this filing, would yield a different value.
As of March 31, 2006, there were 976,955 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
CABELTEL INTERNATIONAL CORPORATION
Index to Annual Report on Form 10-K
Fiscal year ended December 31, 2005
FORWARD-LOOKING STATEMENTS................................................ 3
PART I....................................................................... 3
ITEM 1. BUSINESS......................................................... 3
ITEM 1A. RISK FACTORS..................................................... 11
ITEM 1B. UNRESOLVED STAFF COMMENTS........................................ 12
ITEM 2. PROPERTIES....................................................... 12
ITEM 3. LEGAL PROCEEDINGS................................................ 12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............. 13
PART II...................................................................... 14
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES ............... 14
ITEM 6. SELECTED FINANCIAL DATA.......................................... 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATION..... 16
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...... 20
ITEM 8. FINANCIAL STATEMENTS............................................. 20
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE............................................. 21
ITEM 9A. CONTROLS AND PROCEDURES......................................... 21
ITEM 9B. OTHER INFORMATION............................................... 21
PART III..................................................................... 22
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.............. 22
ITEM 11. EXECUTIVE COMPENSATION.......................................... 26
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.. 28
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................. 31
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.......................... 32
PART IV...................................................................... 35
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES...................... 35
SIGNATURES................................................................... 38
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM...................... 39
EXHIBIT INDEX................................................................ 62
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FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-K are forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of
the Securities Act of 1933, and Section 21E of the Securities Exchange Act of
1934. The words "estimate", "plan", "intend", "expect", "anticipate", "believe"
and similar expressions are intended to identify forward-looking statements.
These forward-looking statements are found at various places throughout this
Report and in the documents incorporated herein by reference. CabelTel
International Corporation disclaims any intention or obligation to update or
revise any forward-looking statements, whether as a result of new information,
future events or otherwise. Although we believe that our expectations are based
upon reasonable assumptions, we can give no assurance that our goals will be
achieved. Important factors that could cause our actual results to differ from
estimates or projects contained in any forward-looking statements are described
under ITEM 1A. RISK FACTORS beginning on page - 11 -.
PART I
ITEM 1. BUSINESS
CabelTel International Corporation ("CabelTel" or the "Company" or "we" or "us")
was incorporated in Nevada on May 31, 1991, originally under the name Medical
Resource Companies of America. The Company is the successor-by-merger to Wespac
Investors Trust, a California business trust that began operating in 1982. On
March 26, 1996, the name was changed to Greenbriar Corporation; on February 8,
2005, the name of the Company was changed to CabelTel International Corporation.
Business Operations
We operate two separate distinct businesses:
o Own, lease and operate real estate through:
(i) leasing and operation of a retirement community in King City,
Oregon, with a capacity of 114 residents, and
(ii) ownership and operation of an outlet mall in Gainesville, Texas,
with approximately 315,000 square feet of retail space available
for lease; and
o Ownership of oil and gas leases in Gregg and Rusk Counties, Texas, on
which 50 producing wells were operating as of March 31, 2005.
Financial information about our segments can be found in NOTE M - SEGMENT
REPORTING in the Notes to Consolidated Financial Statements found on page 57.
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Business Strategy
In choosing investment properties, the Company's strategy is to choose a
property that can achieve and sustain a strong competitive position within its
chosen market. The Company also seeks to continue to enhance the performance of
the properties it operates directly. In its real estate properties, the Company
seeks to enhance current operations by (i) maintaining and improving occupancy
rates, (ii) opportunistically increasing rents and fees, (iii) improving
operating efficiencies and (iv) improving market positioning.
In its oil and gas properties, the Company seeks to keep producing wells
properly maintained and to recondition and, where economically feasible, bring
into production non-operating leases it owns.
Real Estate
Retirement Property
The Company leases and operates Pacific Pointe Retirement Inn ("Pacific Pointe")
in King City, Oregon. Pacific Pointe has a capacity of 114 residents and
provides community living with basic services such as meals, housekeeping,
laundry, 24/7 staffing, transportation and social and recreational activities.
These residents do not yet need assistance or support with activities of daily
living but prefer the physical and psychological comfort of a residential
community of like-minded people and access to health care and other senior
oriented services.
Pacific Pointe is not required to hold a license for its independent retirement
operation. In compliance with underlying state bond financing, rents at this
community must be approved by an agency of the State of Oregon.
At Pacific Pointe, the Company's marketing and sales efforts are undertaken at
the local level. These efforts are intended to create awareness of a community
and its services among prospective residents, their families, other key
decision-makers and professional referral sources.
Pacific Pointe has a stellar reputation in its community and has operated at or
near capacity for a number of years. However, the retirement housing market has
little barrier to entry and Pacific Pointe's present and potential competitors
have, or may have access to, greater financial, management and other resources
than those of the facility. There can be no assurance that competitive pressures
will not have a material adverse effect on the property.
Operating Community - The following table sets forth certain information with
respect to Pacific Pointe. The Company considers its community to be in good
operating condition and suitable for the purpose for which it is being used.
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Community
Care Resident Operations
Community Location Level(1) Units Capacity(2) Commenced Ownership
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Pacific Pointe Retirement Inn King City, OR S 114 114 1993 Leased (4)
Key:
(1) S basic support and supplemental services are offered.
(2) Reflects actual number of units for Independent Living.
(3) Leased from a partnership. Initial lease term is 10 years, expiring in
2012. The Company is responsible for all costs including repairs to
the community, property taxes and other direct operating costs of the
community. The lease includes clauses that allow for rent to increase
over time based on a specified schedule.
Repair and Maintenance - The Company conducts routine repairs and maintenance,
as needed, of its properties on a regular basis. The Company has no other
current plans for significant expenditures relating to its existing properties
and considers them to be in good repair and working order.
The Company has attracted and continues to seek highly dedicated and experienced
personnel. All employees are required to complete training programs which
include a core curriculum comprised of personal care basics, job related
specific training, first aid, fire safety, nutrition, infection control and
customer service. Executive Directors receive training in all of these areas,
plus marketing, community relations, healthcare management and fiscal
management. In addition to some classroom training, the Company's communities
provide new employees with on- the-job training, utilizing experienced staff as
trainers and mentors.
Outlet Shopping Mall Property
The Company's outlet mall does business as Gainesville Factory Shops ("GFS") and
is located in Gainesville, Texas. GFS has approximately 315,000 square feet of
retail space available for lease. Purchased in December 2003, GFS presented the
Company with an opportunity to make an investment at what the Company believes
was a bargain price. The Company believes that mall traffic will be enhanced by
a more aggressive marketing effort as well as development in its immediate
Gainesville, Texas area including the opening of a restaurant and a 90 unit
hotel immediately adjacent to the mall and the ongoing development and operation
of a casino four miles from the mall.
The Company's outlet mall has the advantage of being the only mall in its
immediate market area. In addition, the Company believes that the market does
not lend itself to construction of another mall in the foreseeable future. A
number of shopping alternatives are available to potential customers within a
reasonable driving distance. Further, conditions which the Company cannot
control such as highway construction, economic downturn or the high price of
gasoline can have a negative impact on traffic at GFS.
Marketing is general, market wide advertising to build overall mall traffic.
Where possible the mall coordinates this advertising with its tenant merchants'
advertising to enhance the mall as a specific destination for shoppers.
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Summary Oil Reserve Data
The following table sets forth summary information concerning the Company's
proved oil reserves on December 31, 2005, based on a report prepared by Haas
Petroleum Engineering Services, Inc., an independent consulting and engineering
firm. Reserves were determined using year-end product prices, held constant for
the life of the properties. Estimates of economically recoverable reserves and
future net revenues are based on a number of variables, which may differ from
actual results.
Proved and Developed Reserves December 31, 2005
Oil (Bbl) 251,250
Productive Wells
The following table summarizes our gross working interests and net revenue
interests in productive oil wells at December 31, 2005. All wells are in the
State of Texas.
Gross Wells Net Wells
50 37
The Company's oil wells have all been "abandoned" by the larger oil companies
and their leases have devolved to other persons or entities. The Company has 61
leases with a range of 65.7% to 80% of ownership. Individual wells produce from
70 to 360 barrels per month.
Well Operations
The Company's oil production is hauled and its wells are maintained by third
party contractors, and the entire production is sold under contract to a
subsidiary of Black Hills Corporation. This contract is renegotiated
periodically and is based on the average daily closing price of oil for the
previous month, as published by Koch Supply & Trading, plus a premium of $1.99
per barrel at March 31, 2006.
The operations of any facility gathering, transporting, processing or storing
crude oil is subject to stringent and complex laws and regulations pertaining to
health, safety and the environment. As an operator of such facilities, the
Company must comply with federal, state and local laws that relate to air and
water quality, hazardous and solid waste management and disposal and other
environmental matters. Costs of operating oil wells must incorporate compliance
with environmental laws, regulations and safety standards. Failure to comply
with these laws and regulations may trigger a variety of administrative, civil
and potentially criminal enforcement measures.
The market for oil is highly volatile but not greatly competitive. Sweet Texas
Crude Oil is constantly in high demand world wide. However, there is a high cost
to operate the low-production wells in East Texas. The Company's wells would not
be profitable if oil is sold at less than $24 per barrel.
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Insurance
The Company currently maintains property and liability insurance intended to
cover claims in its retirement community, outlet mall, corporate and oil well
operations. The provision of personal services entails an inherent risk of
liability compared to more institutional long-term care communities. Retirement
communities of the type operated by the Company offer residents a greater degree
of independence in their daily lives. This increased level of independence,
however, may subject the resident and the Company to certain risks that would be
reduced in more institutionalized settings. The number of insurance carriers who
offer retirement industry liability insurance has diminished since 1999, and the
cost of such insurance continues to escalate. The Company also carries property
insurance on each of its owned and leased properties.
Environmental Matters
Under various federal, state and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real estate may be
required to investigate and clean up hazardous or toxic substances or petroleum
product releases at the property, and may be held liable to a governmental
entity or to third parties for property damage and for investigation and clean
up costs incurred by such parties in connection with the contamination. Such
laws typically impose clean up responsibility and liability without regard to
whether the owner or operator knew of or caused the presence of the contaminants
and the liability under such laws has been interpreted to be joint and several
unless the harm is divisible and there is a reasonable basis for allocation of
responsibility. The costs of investigation, remediation or removal of such
substances may be substantial and the presence of such substances or the failure
to remediate properly such property may adversely affect the owner's ability to
sell or lease the property or to borrow using the property as collateral. In
addition, some environmental laws create a lien on the contaminated site in
favor of the government for damages and costs it incurs in connection with the
contamination. Persons who arrange for the disposal or treatment of hazardous or
toxic substances also may be liable for the costs of removal or redemption of
such substances at the disposal or treatment community, whether or not such
community is owned or operated by that person or corporation. Finally, the owner
or operator of a site may be subject to common law claims by third parties based
on damages and costs resulting from environmental contamination emanating from a
site.
The Company has conducted environmental assessments on most of its existing
owned or leased properties. These assessments have not revealed any
environmental liability that the Company believes would have a material adverse
effect on the Company's business, assets or results of operations. The Company
is not aware of any such environmental liability. The Company believes that all
of its properties are in compliance in all material respects with all federal,
state and local laws, ordinances and regulations regarding hazardous or toxic
substances or petroleum products. The Company has not been notified by any
governmental authority and is not otherwise aware of any material
non-compliance, liability or claim relating to hazardous or toxic substances or
petroleum products in connection with any of its properties.
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Employees
At December 31, 2005, the Company employed, in all segments, 61 people (24
full-time and 37 part-time). The Company believes it maintains good
relationships with its employees. None of the Company's employees are
represented by a collective bargaining group.
The Company's operations are subject to the Fair Labor Standards Act. Many of
the Company's employees are paid at rates related to the minimum wage and any
increase in the minimum wage will result in an increase in labor costs.
Management is not aware of any non-compliance by the Company as regards
applicable regulatory requirements that would have a material adverse effect on
the Company's financial condition or results of operations.
Quality Assurance
In operating a retirement community, our commitment to quality assurance is
designed to achieve a high degree of resident and family member satisfaction
with the care and services the Company provides. In addition to training and
performance reviews of all employees, the Company's quality control measures
include:
Philosophy of Management - The Company's philosophy of management is to
demonstrate by its actions and require from its employees high standards of
personal integrity, to develop a climate of openness and trust, to demonstrate
respect for human dignity in every circumstance, to be supportive in all
relationships, to promote teamwork by involving employees in the management of
their own work and to promote the free expression of ideas and opinions.
Regular Property Inspections - Property inspections are conducted by corporate
personnel. These inspections cover the appearance of the exterior and grounds,
the appearance and cleanliness of the interior, the professionalism and
friendliness of staff and notes on maintenance.
In oil production, quality is a matter of proper separation of crude oil from
saltwater. These processes are automated at each well and the Company is not
aware of any complaints as to the quality of its crude oil.
Marketing
In real estate, the Company's marketing and sales efforts are undertaken at the
local level. These are intended to create awareness of a property and its
services among prospective customers, their families and other key referral
sources. The property engages in traditional types of marketing activities such
as special events, radio spots, direct mailings, print advertising, signs and
yellow page advertising. These marketing activities and media advertisements are
directed to potential customers.
In its oil business, the Company sells its production of crude oil through a
contract as described on page - 6 -. The Company has no marketing efforts or
responsibility in this facet of its business.
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Government Regulation
Pacific Pointe is not required to hold a state license for its independent
retirement operation. Any future retirement community acquired by the Company
must be correctly licensed as required by its state and local laws and must be
in compliance with the Americans with Disabilities Act. That community must also
be in compliance with the Fair Housing Amendments Act.
In compliance with underlying state bond financing, rents at Pacific Pointe must
be approved by an agency of the State of Oregon.
The operations of any facility gathering, transporting, processing or storing
crude oil is subject to stringent and complex laws and regulations pertaining to
health, safety and the environment. As an owner or operator of these facilities,
the Company must comply with federal, state and local laws that relate to air
and water quality, hazardous and solid waste management and disposal and other
environmental matters. Costs of operating oil wells must incorporate compliance
with environmental laws, regulations and safety standards. Failure to comply
with these laws and regulations may trigger a variety of administrative, civil
and potentially criminal enforcement measures.
Management is not aware of any non-compliance by the Company as regards
applicable regulatory requirements that would have a material adverse effect on
the Company's financial condition or results of operations.
Competition
The retirement industry is highly competitive and will continue to become
increasingly competitive in the future. The Company competes with other
retirement companies and numerous other companies providing similar long-term
care alternatives, such as home healthcare agencies, community-based service
programs and convalescent centers (nursing homes).
The shopping mall industry is also competitive but the Company's property in
Gainesville, Texas is geographically isolated and the Company feels that the
market will not support another mall.
There are many factors in the crude oil business, described elsewhere in this
report that could cause concern. However, it is not competitive. The Company's
Texas Sweet Crude is highly sought after by the oil industry.
Acquisition of CableTEL AD
On October 12, 2004, the Company acquired, for 31,500 shares of newly-designated
2% Series J Preferred Stock, 74.8% of CableTEL AD ("CableTEL"), a Bulgarian
telecommunications company. The terms of the acquisition agreement require the
Company to present a proposal to its stockholders to approve the mandatory
exchange of all shares of Series J Preferred Stock into 8,788,500 shares of
common stock which, if approved by stockholders, would represent 90% of the
resulting total issued and outstanding shares of common stock in the Company. As
of the date of this report the exchange has not occurred.
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The acquisition agreement, as amended, provides that the stockholders of the
Company have until June 30, 2006 to approve the exchange of Series J Preferred
Stock into the Company common stock. If the exchange is not approved by June 30,
2006, the holders of the Series J Preferred Stock have the option to rescind the
entire transaction. Until the acquisition is completed, CableTEL will not be
included in the Company's consolidated financial statements and the financial
statements of the Company will include a Series J Preferred Stock contra equity
account representing the Company's interest in CableTEL.
If the stockholders of the Company approve the transaction it would effectively
give the owners of CableTEL the controlling interest in the Company. Due to the
effective change in control, by virtue of the aforementioned exchange into
common stock, this transaction will be accounted for, upon the exchange, as a
"reverse acquisition", with CableTEL being the accounting acquirer and with CIC
accounted for as if it had been acquired on the exchange date.
CableTEL is the largest cable television ("CATV") operator in the Country of
Bulgaria. In addition, CableTEL has built a fiber optic backbone (the
"backbone") consisting of three ducts around Bulgaria at a total cost of
$29,872,500. CableTEL intends to keep one duct for its own use and sell the
remaining two ducts to unrelated third parties to offset the cost of building
the ducts.
CableTEL's marketing is centralized in its Sofia, Bulgaria headquarters. Given
the acquisitions strategy of CabelTEL, the Sales and Marketing department has
developed a re-branding strategy to quickly bring new operations up to CableTEL
communication standards and preserve the overall strength of the CableTEL brand.
In addition to CATV, CableTEL provides internet service, VoIP (internet
telephony) and mobile phone services. The company is well-positioned from both a
marketing and quality approach to being a strong competitor in its markets.
CableTEL has 467 employees (457 full-time and 10 part-time) in Bulgaria. It
leases its headquarters and owns no property. The technical nature of its
business requires a high capital cost. For further information on CableTEL,
please refer to Note A in the accompanying financial statements.
Available Information
The Company maintains an internet website at http://www.cabeltel.us. The Company
has available through the website, free of charge, Annual Reports on Form 10-K,
Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, reports filed
pursuant to Section 16 of the Securities Exchange Act of 1934 (the "Exchange
Act") and amendments to those reports as soon as reasonably practicable after we
electronically file or furnish such materials to the Securities and Exchange
Commission. In addition, the Company has posted the charters for our Audit
Committee, Compensation Committee and Governance and Nominating Committee, as
well as our Code of Business Conduct and Ethics, Corporate Governance Guidelines
on Director Independence and other information on the website. These charters
and principles are not incorporated in this Report by reference. The Company
will also provide a copy of these documents free of charge to stockholders upon
request. The Company issues Annual Reports containing audited financial
statements to its common stockholders.
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ITEM 1A. RISK FACTORS
Risks Related to the Company
The retirement industry is highly competitive. Competition for residents,
employees and facilities is very keen in the retirement industry. Although the
Company's Pacific Pointe property in Oregon is not subject to federal
regulation, it must comply with State of Oregon Senior Housing Regulations which
are subject to change from time to time.
The shopping mall business is dependent on leasing space to successful tenants.
The Company's shopping mall in Gainesville, Texas is unique in its market but
must maintain good relationships with its current and future tenants as well as
generate adequate traffic for those tenants to be successful.
The price of crude oil is volatile. Although the Company has benefited from
extremely high crude oil prices in the last three years there is no guarantee
that crude oil prices will remain at record levels. The type of oil production
the Company is involved in is expensive and will not be profitable if the market
for crude oil is less than $24 per barrel.
Our governing documents contain anti-takeover provisions that may make it more
difficult for a third party to acquire control of us. Our Articles of
Incorporation contain provisions designed to discourage attempts to acquire
control of the Company by a merger, tender offer, proxy contest or removal of
incumbent management without the approval of our Board of Directors. As a
result, a transaction which otherwise might appear to be in your best interests
as a stockholder could be delayed, deferred or prevented altogether, and you may
be deprived of an opportunity to receive a premium for your shares over
prevailing market rates. The provisions contained in our Articles of
Incorporation include:
o the requirement of an 80% vote to make, adopt, alter, amend,
change or repeal our Bylaws or certain key provisions of the
Articles of Incorporation that embody, among other things, the
anti-takeover provisions,
o the so-called business combination "control act" requirements
involving the Company and a person that beneficially owns 10%
or more of the outstanding common stock except under certain
circumstances, and
o the requirement of holders of at least 80% of the outstanding
Common Stock to join together to request a special meeting of
stockholders.
As of December 31, 2005, officers, directors and affiliated entities owning more
than 5% of the Company's outstanding common stock owned approximately 59% of the
outstanding shares of common stock. In addition, a small group of individuals
and entities own all of the outstanding Series J 2% Preferred Stock, which holds
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the right to five votes per share of Series J 2% Preferred Stock voting with the
common stock. Under these circumstances, if the holders of Series J 2% Preferred
Stock and directors and affiliated entities owning more than 5% of our
outstanding common stock voted together, the group would control 64% of the
votes in any stockholder action. In light of this, these anti-takeover
provisions could help entrench the existing Board of Directors and may
effectively give our management the power to block any attempted change in
control.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
The Company's principal offices are located at 1755 Wittington Place, Dallas,
Texas 75234 in approximately 5,000 square feet of leased space. The Company
believes its leased space is presently suitable, fully utilized and will be
adequate for the foreseeable future. The Company's retirement property, outlet
mall property and mineral properties are described in detail beginning on page -
3 - under ITEM 1. BUSINESS; all of which are suitable and adequate for the
purposes to which each is devoted.
ITEM 3. LEGAL PROCEEDINGS
On December 1, 2005, Cable Partners Bulgaria, LLC ("CPB") instituted an action
in the 95th Judicial District Court of Dallas County, Texas styled Cable
Partners Bulgaria, LLC and Cable Partners Europe, LLC v. CabelTel International
Corporation f/k/a Greenbriar Corporation, Gene Phillips and Ronald C. Finley,
Cause No. 05-12021. Plaintiffs' Original Petition is also a request for an
injunction and alleged that CPB is a wholly-owned subsidiary of Cable Partners
Europe, LLC, a Delaware limited liability company ("CPE"). The complaint makes
allegations similar to an original complaint filed by CPB on January 24, 2005,
in another state district court in Dallas County, Texas (which was non-suited on
October 17, 2005), but in addition alleges that a representative of CPE talked
to Finley about CPE's possible purchase of CableTEL AD's telecommunications
systems during 2004, and that during the conversation in November 2004, told
Ronald C. Finley that CPB had an agreement to purchase Eurocom Plovdiv EOOD
("Eurocom"). The current complaint alleges that (i) the two owners of Eurocom
(who are not defendants in this action) advised CPE that they had agreed to sell
the entity to CableTEL AD and had been paid a non-refundable deposit; (ii) the
two individuals informed the CPE representative that they would complete the
sale of Eurocom to CPB only if CableTEL AD were unable to complete the purchase,
and CPB's price increased to (euro)23,000,000 with limited further due diligence
and the purchase of stock rather than assets; (iii) subsequently CPE, CableTEL
AD and the Company entered into negotiations relating to CPE's potential
acquisition of CableTEL AD, including Eurocom; (iv) the parties executed a
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"letter agreement" whereby the parties agreed that they would "engage in good
faith discussions" regarding the potential transaction, which purportedly
included an exclusivity period up to April 29, 2005, (v) in June 2005,
Plaintiffs entered into a "term sheet summary" setting forth the principle
provisions of the transaction, but the defendants continued to endeavor to sell
CableTEL AD to third party purchasers, failed to cooperate with CPE's due
diligence efforts, and refused to provide CPE with copies of certain contracts;
and (vi) Plaintiffs continued to complete the transaction and expended efforts
and funds up to November 23, 2005. Plaintiffs' complaint alleges tortuous
interference with an existing contract, breach of contract, and seeks a
temporary and permanent injunction, exemplary damages, costs and attorneys'
fees. An answer has been filed on behalf of the Company denying all of the
material allegations in the Complaint. Management intends to vigorously defend
the action which it perceives to be without merit as to the Company. Management
also believes that the action misstates or seeks to conveniently rearrange
certain facts and events central to the controversy.
During the fourth quarter of the fiscal year covered by this report, no
proceeding previously reported was terminated except a non-suit on October 17,
2005 of the original Texas state court action described in the preceding
paragraph. See also Note N to the Consolidated Financial Statements.
The ownership of property and provision of services to the public entails an
inherent risk of liability. Although the Company and its subsidiaries, from time
to time, have been and are involved in various items of litigation incidental to
and in the ordinary course of its business, in the opinion of Management, the
outcome of such litigation will not have a material adverse impact upon the
Company's financial condition, results of operations or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
An Annual Meeting of Stockholders was held on December 16, 2005, at which
meeting stockholders were asked to consider and vote upon the election of
directors. At the meeting, stockholders elected the following individuals as
directors:
Shares Voting
Director FOR ABSTAINED
Roz Campisi Beadle 606,849 530
Gene S. Bertcher 606,849 530
James E. Huffstickler 606,849 530
Dan Locklear 606,849 530
Victor L. Lund 606,849 530
There were no broker non-votes in the election of directors at the annual
meeting.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
The common stock of the Company is traded on the American Stock Exchange
("AMEX") using the symbol "GBR". The following table sets forth the high and low
sales prices as reported in the reporting system of the AMEX and other published
financial sources. (All prices have been adjusted for a 2002 stock dividend and
October 2003 stock split.)
2005 2004
High Low High Low
--------------------- ---------------------
First Quarter $6.44 $3.66 $5.39 $3.62
Second Quarter 8.08 4.63 3.98 2.80
Third Quarter 5.65 4.20 3.74 3.17
Fourth Quarter 4.15 2.70 4.73 3.00
On March 31, 2006, the closing price of the Company's common stock was $3.35 per
share. According to the Transfer Agent's records, at March 31, 2006, our common
stock was held by approximately 450 holders of record.
The Company paid no dividends on its common stock in 2004 or 2005. The Company
has not paid cash dividends on its common stock during at least the last ten
fiscal years and it has been the policy of the Board of Directors of the Company
to retain all earnings to pay down long-term debt and finance future expansion
and development of its businesses. The payment of dividends, if any, will be
determined by the Board of Directors in the future in light of conditions then
existing, including the Company's financial condition and requirements, future
prospects, restrictions in financing agreements, business conditions and other
factors deemed relevant by the Board of Directors.
Securities Authorized for Issuance under Equity Compensation Plans
We have two stock-based equity compensation plans that have been approved by our
stockholders. See Note J - Stockholders Equity for a description of the plans,
the number of shares of common stock to be issued upon exercise of outstanding
stock options, the weighted average exercise price of outstanding stock options,
and the number of shares of common stock remaining for future issuance under the
plans. We have no stock-based compensation plans which were adopted without the
approval of our stockholders.
-14-
Purchases of Equity Securities
The Board of Directors has not authorized the repurchase of any shares of its
common stock under any share repurchase program, except when stockholders owning
less than one round lot (100 shares) so request, the Company will purchase
shares at market closing on the last trading day prior to receipt of the
certificate(s). The following table represents shares repurchased during the
three months ended December 31, 2005.
Total No. of Maximum No. of
Shares Shares that May
Repurchased as Yet Be
Total No. of part of Publicly- Repurchased
Shares Weighted Average Announced Under the
Period Repurchased Price Per Share Program Program
10/01-31/2005 -0- -0- -0- -0-
11/01-30/2005 -0- -0- -0- -0-
12/01-31/2005 4 3.13 4 -0-
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data presented below are derived from the
Company's audited financial statements.
For the fiscal year ended December 31,
2005 2004 2003 2002 2001
(dollar amounts in thousands except per share data)
Operating revenue $ 5,821 $ 6,053 $ 2,935 $ 3,300 $23,568
Operating expenses 6,473 6,915 3,636 5,373 27,543
Operating profit (loss) (652) (862) (701) (2,073) (3,975)
Earnings (loss) from continuing
operations before income taxes $ (974) $ (500) $ 622 $(2,724) $ 9,559
Income tax (income) expense -- -- -- 749 2,824
Earnings (loss) from continuing
operations (974) (500) 622 (3,473) 6,735
Loss from discontinued
operations (12) (316) (400) (4,900) (317)
NET EARNINGS
(LOSS) $ (986) $ (816) $ 222 $(8,373) $ 6,418
Net earnings (loss) per common
share - basic and diluted $ (1.01) $ (0.84) $ 0.3 $(11.67) $ 15.53
Basic weighted average
common shares 977 977 706 718 806
-15-
BALANCE SHEET DATA: 2005 2004 2003 2002 2001
------- ------- ------- ------- -------
Total assets $20,080 $16,766 $18,131 $12,624 $44,022
Long-term debt 13,560 8,338 2,053 8,479 16,693
Total liabilities 19,328 15,028 15,557 11,273 34,753
Total stockholders equity $ 752 $ 1,738 $ 2,554 $ 1,351 $ 9,269
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATION
Overview
As of December 31, 2005, the Company leased one assisted living community in
Oregon, with a capacity of 114 residents. The Company also controls the leases
for 198 oil wells in East Texas and a 315,000 square foot outlet mall in
Gainesville, Texas
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 several years, the Company's business strategy has evolved into
one of focusing on the real estate component and reducing its operating
activities. The Company's objective is to become an investor in various
entities, to acquire properties and either sell, lease or enter into joint
venture agreements with third party operators with respect to these properties.
Critical Accounting Policies and Estimates
The Company's discussion and analysis of its financial condition and results of
operations are based upon the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. Certain of the Company's accounting policies require the
application of judgment in selecting the appropriate assumptions for calculating
financial estimates. By their nature, these judgments are subject to an inherent
degree of uncertainty. These judgments and estimates are based upon the
Company's historical experience, current trends and information available from
other sources that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying value of
assets and liabilities that are not readily apparent from other sources. Actual
results may differ from these estimates under different assumptions or
conditions.
The Company believes the following critical accounting policies are more
significant to the judgments and estimates used in the preparation of its
consolidated financial statements. Revisions in such estimates are recorded in
the period in which the facts that give rise to the revisions become known.
The Company's allowance for doubtful accounts receivable and notes receivable is
based on an analysis of the risk of loss on specific accounts. The analysis
places particular emphasis on past due accounts. Management considers such
information as the nature and age of the receivable, the payment history of the
tenant, customer or other debtor and the financial condition of the tenant or
-16-
other debtor. Management's estimate of the required allowance, which is reviewed
on a quarterly basis, is subject to revision as these factors change.
Deferred Tax Assets
Significant management judgment is required in determining the provision for
income taxes, deferred tax assets and liabilities and any valuation allowance
recorded against net deferred tax assets. The future recoverability of the
Company's net deferred tax assets is dependent upon the generation of future
taxable income prior to the expiration of the loss carry forwards. The company
believes that it will generate future taxable income to fully utilize the net
deferred tax assets.
Liquidity and Capital Resources
At December 31, 2005, the Company had current assets of $1,474,000 and current
liabilities of $4,832,000.
Included in current liabilities is an obligation of principal and accrued
interest to an unrelated third party for $2,943,000. The terms of this
obligation are similar to that of preferred stock whereby the Company can only
pay this obligation out of available earned surplus.
On December 31, of each year cash and cash equivalents totaled $650,000,
$762,000 and $688,000 in 2005, 2004 and 2003 respectively. CabelTel's principal
sources of cash have been and will continue to be property and oil well
operations, proceeds from property sales and refinancing of debt. Management
anticipates that in 2006 CabelTel will generate excess cash from operations.
However, if excess cash from operations does not prove to be sufficient to
satisfy all of CabelTel's obligations, as they mature, when necessary,
management may also selectively sell income producing properties, refinance
properties and/or incur additional borrowings secured by real estate to meet
cash requirements.
Net cash provided by (used in) operating activities was $355,000 in 2005,
($2,166,000) in 2004 and ($486.000) in 2003.
Net cash provided by (used in) investing activities was $3,560,000 in 2005,
$734,000 in 2004 and ($765,000) in 2003. In 2005 the cash provided was
principally from the sale of two assisted living facilities. In 2004, the cash
provided was from the collection of existing notes receivable of $1,579,000 less
the purchase of $845,000 in property and equipment principally at the
Gainesville outlet mall. In 2003, the cash used was principally from the
collection of existing notes receivable of $334,000 less the purchase of
$1,225,000 in property and equipment principally at the Gainesville Outlet Mall.
Net cash provided by (used in) financing activities was ($4,027,000) in 2005,
$1,506,000 in 2004 and $1,278,000 in 2003. In 2005 the cash used was principally
form the repayment of the mortgage obligations on two assisted living facilities
that were sold. In 2004, the cash provided was principally from the refinancing
of the Gainesville Outlet Mall and the cash provided in 2003 was from the
issuance of additional common stock as well as net proceeds from borrowings.
-17-
Results of Operations
Fiscal 2005 as Compared to Fiscal 2004
Revenues and Operating Expenses from operations of a retirement facility:
Revenues were $2,597,000 in 2005, as compared to $2,566,000 in 2004. Retirement
operating expenses, which consist of assisted living operations expense, lease
expense and depreciation and amortization, were $2,006,000 in 2005 as compared
to $1,967,000 in 2004.
Revenues and Operating Expenses from the Gainesville outlet mall: In 2005,
revenues were $1,501,000 and operating expenses were $1,845,000. In 2004
revenues were $2,077,000 and operating expenses were $2,013,000. The decrease in
revenue is due to the net reduction in occupancy and rent adjustments for
several tenants. The reduction in expenses is due to better cost control
throughout the operation. The Company acquired the mall on December 10, 2003.
Revenues and Operating Expense from Oil & Gas Operations: Revenues were
$1,723,000 in 2005 and $1,410,000 in 2004. Operating expenses were $1,349,000 in
2005 and $1,111,000 in 2004. The increase in revenue is due to the increase in
price of oil, over which the Company has no control. The increase in expenses is
principally due to certain repairs and upgrades of equipment in 2005. The
Company acquired its oil & gas operations effective August 1, 2003.
Corporate General and Administrative Expense: These expenses were $1,191,000 in
2005 as compared to $1,715,000 in 2004. During 2004 the Company incurred legal
fees related to a dispute with the IRS and overall professional fees with regard
to it's acquisition of the CableTEL AD. These expenses did not occur in 2005.
Interest and Dividend Income: Interest and dividend income was $700,000 in 2005
and $213,000 in 2004. During the fourth quarter of 2004 and continuing through
2005 the Company borrowed a total of $7,200,000 which it has advanced to
CabelTEL AD for operations and acquisitions in Bulgaria. The Company has a
receivable from CableTEL AD for principal and interest which is equivalent to
the amounts the Company has incurred.
Interest Expense: Interest expense was $1,189,000 in 2005 as compared to
$904,000 in 2004. The net increase in interest expense is primarily due to two
specific items. The Company acquired the Gainesville Outlet Mall in December
2003. When the Company acquired the mall, it was initially financed with a short
term note with interest rates escalating from 3% to 15%. These notes were
refinanced in August 2004 through a five year note with interest at 5.85%. The
additional interest that was incurred through August 2004 was not incurred in
2005. During the fourth quarter of 2004 and continuing through 2005 the Company
borrowed a total of $7,200,000 which it has advanced to CabelTEL AD for
operations and acquisitions in Bulgaria. The additional interest in 2005
represents the interest on this debt. The Company has a receivable from CableTEL
AD for principal and interest which is equivalent to the amounts the Company has
incurred.
Loss on Sale of Assets: The loss on sale of assets was $118,000 in 2005. The
Company sold certain leases held by Gaywood Oil & Gas during 2005 and recorded a
loss of $79,000. These leases held shut in wells and were located in areas in
which the Company was unlikely to ever operate. The balance of the loss was
incurred when the Company sold it's assisted living facility in South Carolina.
Other Income (Expense): Other income was $285,000 in 2005 which principally
represents the collection of certain receivables that were previously written
off.
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Discontinued Operations: During 2005 the Company disposed of an assisted living
community in South Carolina. During 2004, the Company disposed of an assisted
living community in Georgia and entered into a contract to sell a second
assisted living community in North Carolina, which was sold in January 2005.
These were reflected as assets held for sale. Revenue for the properties was
$34,000 in 2005, $1,011,000 in 2004 and $2,098,000 in 2003, respectively. The
net loss from operations for the two properties was $184,000 and $395,000 in
2004 and 2003, respectively.
Fiscal 2004 as Compared to Fiscal 2003
Revenues and Operating Expenses from Assisted Living Operations: Revenues were
$2,566,000 in 2004, as compared to $2,485,000 in 2003. Community operating
expenses, which consist of assisted living operations expense, lease expense and
depreciation and amortization, were $1,967,000 in 2004, as compared to
$1,890,000 in 2003. The increase in revenue is principally due to increased
occupancy during 2004. The increase in expenses is chiefly the write down of
fixed assets at one of the facilities.
Revenues and Operating Expenses from the Gainesville outlet mall: In 2004
revenues were $2,077,000 and operating expenses were $1,836,000. The Company
acquired the mall on December 10, 2003. Revenue and expenses for 2003 were both
$121,000.
Revenues and Operating Expense from Oil & Gas Operations: Revenues were
$1,410,000 in 2004 and $449,000 in 2003. Operating expenses were $1,111,000 in
2004 and $441,000 in 2003. The Company acquired its oil & gas operations
effective August 1, 2003. In addition, the price of oil was higher in 2004 than
in the prior year.
Corporate General and Administrative Expense: These expenses were $1,721,000 in
2004, as compared to $1,111,000 in 2003. The increase in the corporate general
and administrative expenses is primarily a result of increased expenses due to
the addition of the Gainesville outlet mall and Gaywood. In addition, the
Company incurred additional legal fees in conjunction with our dispute with the
Internal Revenue Service, which was settled in August 2004.
Interest and Dividend Income: Interest and dividend income was $213,000 in 2004,
as compared to $304,000 in 2003. The decrease in interest and dividend income is
a result of a reduction in notes receivable held by the Company
Interest Expense: Interest expense was $904,000 in 2004, as compared to $413,000
in 2003. The increase in interest expense is primarily due to the acquisition of
the Gainesville outlet mall. When the Company acquired the mall, it was
initially financed with a short term note with interest rates escalating from 3%
to 15%. These notes were refinanced in August 2004 through a five year note with
interest at 5.85%.
Gain on Sale of Assets: In 2004, the gain on sale of assets was $1,456,000. In
October 2001, the Company became a 56% limited partner in Corinthians Real
Estate Investors, LP ("CREI"), a partnership formed to acquire two properties.
In September 2002, CREI sold its two properties for cash and notes and paid off
its third party debt. As part of the proceeds, CREI received a note for
$1,600,000 due September 30, 2004, which was transferred to the Company in
satisfaction of its $1,600,000 note receivable from CREI.
-19-
The Company deferred recognition of its $740,000 share of the gain because of
the aforementioned guaranty. In addition, CREI had deferred a gain to be
recognized both by the partnership and the Company on the installment method
when payment is received.
In September 2004, the notes were paid in full and the Company recorded a gain
of $1,232,000.
The Company owned a property in Ellensburg, Washington. The property's book
value was $202,000 less than its debt. In July 2004, the Company sold the
property to an unrelated third party, who assumed the debt, and recorded a gain
of $177,000 net of expenses.
Other Income (Expense): Other expense was $403,000 in 2004 and other income was
$374,000 in 2003. In 2002, the Company sold a property in California and was
required to establish an escrow fund for certain repairs to the building. The
escrowed amounts were written off when the building was sold. Included in other
income for 2004 is $125,000, which represents the return of a portion of escrow
funds in excess of the amount required. Due to a reduction in the corporate
staff, the Company needed less space than it was occupying and reached a
settlement with the owner of the building, in the third quarter, whereby the
Company made a one time payment of $472,000 to settle all obligations and to
terminate the lease early. Also included in 2004 is a $216,000 expense to
provide for the settlement of the Company's dispute with the IRS.
Other income in 2003 includes reimbursement of a prior year insurance claim, the
settlement of a lawsuit and settlements for certain prior year accounts payable.
Discontinued Operations: During 2004, the Company disposed of an assisted living
community in Georgia and entered into a contract to sell a second assisted
living community in North Carolina. These have been reflected as assets held for
sale. Revenue for the two properties was $841,000 and $1,986,000 in 2004 and
2003, respectively. The net loss from operations for the two properties was
$184,000 and $395,000 in 2004 and 2003, respectively
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Nearly all of the Company's debt is financed at fixed rates of interest.
Therefore, the Company has minimal risk from exposure to changes in interest
rates.
ITEM 8. FINANCIAL STATEMENTS
The financial statements required by this Item begin at page 39 of this report.
-20-
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
The Company's internal control over financial reporting is designed to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
Generally Accepted Accounting Principles in the United States of America
("GAAP"). Because of the inherent limitations of internal control over financial
reporting, including the possibility of human error and the circumvention or
overriding of controls, material misstatements may not be prevented or detected
on a timely basis. Accordingly, even internal controls determined to be
effective can provide only reasonable assurance that information required to be
disclosed in reports filed under the Securities Exchange Act of 1934 is
recorded, processed, summarized and represented within the time periods
required. Furthermore, projections of any evaluation of the effectiveness as to
future periods are subject to the risk that such controls may become inadequate
due to changes in conditions, or that the degree of compliance with the policies
or procedures may deteriorate.
Evaluation of Disclosure Controls and Procedures
Management, under the supervision of the Chief Executive Officer and Chief
Financial Officer, evaluated the effectiveness of the Company's disclosure
controls and procedures as of December 31, 2005. Based upon that most recent
evaluation, which was completed as of the end of the period covered by this Form
10-K, the Chief Executive Officer and Chief Financial Officer have concluded
that the Company's disclosure controls and procedures were effective at December
31, 2005, to ensure that information required to be disclosed in reports that
the Company files or submits under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time period specified in
Securities Exchange Commission rules and forms.
Changes in Internal Control Over Financial Reporting
There have been no changes in the Registrant's internal control over financial
reporting during the quarter ended December 31, 2005 that have materially
affected, or are reasonably likely to materially affect, the Registrant's
internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
Not applicable.
-21-
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors
The affairs of the Company are managed by the Board of Directors. The directors
are elected at the Annual Meeting of Stockholders or appointed by the incumbent
Board and serve until the next Annual Meeting of Stockholders, until a successor
has been elected or approved, or until earlier resignation, removal or death.
After December 31, 2003 changes occurred involving the creation of Board
Committees, the adoption of Committee charters, the adoption of a Code of Ethics
for Senior Financial Officers and the adoption of Guidelines for Director
Independence. Also, following the acquisition of two U.S. entities in October
2004, and following the Annual Meeting of Stockholders held on October 20, 2004,
Ronald C. Finley, Chief Executive Officer of CableTEL AD was elected a director,
Chairman of the Board and Chief Executive Officer of the Company.;
It is the Board's objective that a majority of the Board consists of independent
directors. For a director to be considered "independent", the Board must
determine that the director does not have any direct or indirect material
relationship with the Company. The Board has established guidelines to assist it
in determining director independence, which conform to, or are more exacting
than, the independence requirements in the American Stock Exchange listing
rules. The independence guidelines are set forth in the Company's "Corporate
Governance Guidelines". The text of this document has been posted on the
Company's internet website at http://www.cabeltel.us, and is available in print
to any stockholder who requests it. In addition to applying these guidelines,
the Board will consider all relevant facts and circumstances in making an
independent determination.
The Company has adopted a code of conduct that applies to all directors,
officers and employees, including our principal executive officer, principal
financial officer and principal accounting officer. Stockholders may find our
Code of Conduct on our internet website address at http://www.cabeltel.us. We
will post any amendments to the Code of Conduct as well as any waivers that are
required to be disclosed by the rules of the SEC or the AMEX on our website.
Our Board of Directors has adopted charters for our Audit, Compensation and
Governance and Nominating Committees of the Board of Directors. Stockholders may
find these documents on our website by going to the website address
http://www.cabeltel.us. Stockholders may also obtain a printed copy of the
materials referred to by contacting us at the following address:
CabelTel International Corporation
Attn: Investor Relations
1755 Wittington Place, Suite 340
Dallas, Texas 75234
972-407-8400 (Telephone)
-22-
The Audit Committee of the Board of Directors is an "audit committee" for the
purposes of Section 3(a)(58) of the Exchange Act. The members of that Committee
are Dan Locklear (Chairman), James Huffstickler and Victor Lund. Mr. Locklear is
qualified as an "audit committee financial expert" within the meaning of SEC
regulations and the Board has determined that he has the accounting and related
financial management expertise within the meaning of the listing standards of
the AMEX. All of the members of the Audit Committee meet the independence and
experience requirements of the listing standards of the AMEX.
All members of the Audit Committee, Compensation Committee and the Governance
and Nominating Committee must be independent directors. Members of the Audit
Committee must also satisfy additional independence requirements which provide
(i) that they may not accept, directly or indirectly, any consulting, advisory
or compensatory fee from the Company or any of its subsidiaries other than their
director's compensation (other than in their capacity as a member of the Audit
Committee, the Board of Directors or any other Committee of the Board), and (ii)
no member of the Audit Committee may be an "affiliated person" of the Company or
any of its subsidiaries, as defined by the Securities and Exchange Commission.
The current directors of the Company are listed below, together with their ages,
terms of service, all positions and offices with the Company, their principal
occupations, business experience and directorships with other companies during
the last five years or more. The designation "affiliated", when used below with
respect to a director, means that the director is an officer or employee of the
Company or one of its subsidiaries. The designation "independent", when used
below with respect to a director, means that the director is neither an officer
of the Company nor a director, officer or employee of a subsidiary of the
Company, although the Company may have certain business or professional
relationships with the director as discussed in ITEM 13. CERTAIN RELATIONSHIPS
AND RELATED TRANSACTIONS.
Roz Campisi Beadle, age 49, (Independent) Director since December 2003
Ms. Beadle is Executive Vice President of Unified Housing Foundation and a
licensed realtor. She has a background in public relations and marketing. Ms.
Beadle is also extremely active in various civic and community services and is
currently working with the Congressional Medal of Honor Society and on the Medal
of Honor Host City Committee in Gainesville, Texas.
Gene S. Bertcher, age 57 (Affiliated) Director November 1989 to September 1996
and since June 1999
Mr. Bertcher was elected President and Chief Financial Officer effective
November 1, 2004. From January 3, 2003 until that date he was also Chief
Executive Officer. Mr. Bertcher has been Chief Financial Officer and Treasurer
of the Company since November 1989 and Executive Vice President from November
1989 until he was elected President. He has been a certified public accountant
since 1973.
Ronald C. Finley, age 56, (Affiliated) Director since November 1, 2004
Mr. Finley became a Director and Chairman of the Board and Chief Executive
Officer of the Company on November 1, 2004. He is also President and Chief
Executive Officer of CableTEL AD, the Company's largest subsidiary. Mr. Finley
-23-
is also Chairman or Managing Partner with the following entities: Global
Communication Technologies, Inc., a company specializing in switch system
integration, sales and maintenance of switching systems; Global Communication
Group, Inc., a company that maintains a fiber optic network that provides a
private international long distance service for the hotel/resort industry in
Bulgaria; World Trade Company, LTD, a company specializing in investment
privatization opportunities in Bulgaria and Eastern Europe; and The Pinnacle
Property, Inc. and Ellis Development Company, Inc., which are vertically
integrated, full-service real estate companies specializing in the ownership,
management and leasing of retail shopping centers located throughout the
southwestern United States. Mr. Finley is a graduate of the University of
Shippensburg with a degree in business administration.
James E. Huffstickler, age 63, (Independent) Director since December 2003
Mr. Huffstickler has been Chief Financial Officer of Sunchase America, Ltd., a
multi-state property management company, for more than five years. He is a
graduate of the University of South Carolina and was formerly employed by
Southmark Management, Inc., a nationwide real estate management company. Mr.
Huffstickler has been a certified public accountant since 1976.
Dan Locklear, age 54, (Independent) Director since December 2003
Mr. Locklear has been Chief Financial Officer of Sunridge Management Group, a
real estate management company, for more than five years. Mr. Locklear was
formerly employed by Johnstown Management Company, Inc. and Trammel Crow
Company. Mr. Locklear has been a certified public accountant since 1981 and a
licensed real estate broker in the State of Texas since 1978.
Victor L. Lund, age 77, (Independent) Director since March 1996
Mr. Lund founded Wedgwood Retirement Inns, Inc. ("Wedgwood") in 1977, which
became a wholly owned subsidiary of the Company in 1996. For most of Wedgwood's
existence, Mr. Lund was Chairman of the Board, President and Chief Executive
Officer, positions he held until Wedgwood was acquired by the Company. Mr. Lund
is President and Chief Executive Officer of Wedgwood Services, Inc., a
construction services company not affiliated with the Company.
Board Committees
The Board of Directors held five meetings during 2005 and acted by unanimous
consent two times. For such year, no incumbent director attended fewer than 75%
of the aggregate of (i) the total number of meetings held by the Board during
the period for which he or she had been a director, and (ii) the total number of
meetings held by all Committees of the Board on which he or she served during
the period that he or she served.
The Board of Directors has standing Audit, Compensation and Governance and
Nominating Committees. The Audit Committee was formed on December 12, 2003, and
its function is to review the Company's operating and accounting procedures. A
Charter of the Audit Committee has been adopted by the Board. The current
members of the Audit Committee, all of whom are independent within the SEC
regulations, the listing standards of the AMEX and the Company's Corporate
Governance Guidelines are Messrs. Locklear (Chairman), Huffstickler and Lund.
-24-
Mr. Dan Locklear is qualified as an Audit Committee financial expert within the
meaning of SEC regulations, and the Board has determined that he has the
accounting and related financial management expertise within the meaning of the
listing standards of the AMEX.
The Governance and Nominating Committee is responsible for developing and
implementing policies and practices relating to the corporate governance,
including reviewing and monitoring implementation of the Company's Corporate
Governance Guidelines. In addition, the Committee develops and reviews
background information on candidates for the Board and makes recommendations to
the Board regarding such candidates. The Committee also prepares and supervises
the Board's annual review of director independence and the Board's performance
and self-evaluation. The Charter of the Governance and Nominating Committee was
adopted on October 20, 2004. The members of the Committee are Messrs.
Huffstickler (Chairman), Lund and Ms. Beadle.
The Board has also formed a Compensation Committee of the Board of Directors,
adopted a Charter for the Compensation Committee on October 20, 2004, and
selected Ms. Beadle (Chairman) and Messrs. Huffstickler and Locklear as members
of that Committee.
The members of the Board of Directors at the date of this Report and the
Committees of the Board on which they serve are identified below:
- ----------------------- --------------- --------------------- ------------------
Governance and
Audit Nominating Compensation
Director Committee Committee Committee
Roz Campisi Beadle |X| Chairman
Gene S. Bertcher
Ronald C. Finley
James E. Huffstickler |X| Chairman |X|
Dan Locklear Chairman |X|
Victor L. Lund |X| |X|
- ----------------------- --------------- --------------------- ------------------
Executive Officers
The following persons currently serve as executive officers of the Company:
Ronald C. Finley, Chairman of the Board and Chief Executive Officer; Gene S.
Bertcher, President and Chief Financial Officer; and Oscar Smith, Vice President
and Secretary. Their positions with the Company are not subject to a vote of
stockholders. Their ages, terms of service and all positions and offices with
the Company, other principal occupations, business experience and directorships
with other companies during the last five years or more are listed below. For
information relating to Messrs. Finley and Bertcher, see the descriptions under
the caption "Directors" above.
Oscar Smith, age 63, Secretary (since December 2001), Vice President (since
1994)
Mr. Smith has been Secretary of the Company since December 2001. He has been
Vice President of the Company since June 1994. Prior to joining the Company he
owned and operated a multi-unit retail and manufacturing business in Norfolk,
Virginia.
-25-
In addition to the foregoing officers, the Company has other officers not listed
herein who are not considered executive officers.
Code of Ethics
The Board of Directors has adopted a code of ethics entitled "Code of Business
Conduct and Ethics" that applies to all directors, officers and employees of the
Company and its subsidiaries. In addition, the Company has adopted a code of
ethics entitled "Code of Ethics for Senior Financial Officers" that applies to
the principal executive officer, president, principal financial officer, chief
financial officer, principal accounting officer and controller. The text of
these documents is posted on the Company's internet website address at
http://www.cabeltel.us and is available in print to any stockholder who requests
them.
Section 16(a) Beneficial Ownership Reporting Compliance
Based solely upon a review of Forms 3, 4 and 5 furnished to the Company pursuant
to Rule 16a-3(e) promulgated under the Securities Exchange Act of 1934 (the
""Exchange Act"), or upon written representations received by the Company, the
Company is not aware of any failure by any director, officer or beneficial owner
of more than 10% of the Company's common stock to file with the Securities and
Exchange Commission on a timely basis.
ITEM 11. EXECUTIVE COMPENSATION
The following tables set forth the compensation paid by the Company for services
rendered during the fiscal years ended December 31, 2005, 2004 and 2003 to the
Chief Executive Officer of the Company and to the other executive officers of
the Company whose total annual salary in 2004 exceeded $100,000, the number of
options granted to any of such persons during 2005 and the value of the
unexercised options held by any of such persons on December 31, 2005.
Summary Compensation Table
Long Term
Compensation-
Number of Shares
Annual of Common Stock
Compensation- Underlying All Other
Name and Principal Position Year Salary Options Compensation(1)
- ------------------------------------------------------------------------------------
Gene S. Bertcher, President 2005 $ 186,000 $ -- $ --
& Chief Financial Officer 2004 137,000 -- --
2003 134,000 -- 6,500
Ronald C. Finley, Chairman 2005 $ 448,340 (2) $ -- $ 74,600
& Chief Executive Officer 2004 447,790 -- 74,723
(1) Constitutes directors' fees paid by the Company to the named
individuals.
(2) Represents Mr. Finley's compensation from CableTEL AD under the terms
of a contract which expires March 30, 2009. The terms of the contract
provide that the contract is terminable by either party with 90 days
notice. All amounts shown for Mr. Finley are accrued and unpaid. The
dollar amounts in the table above are based on the average Euro
exchange rate for the year presented.
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Option Grants Table
(Option Grants in Last Fiscal Year)
Number of Percent of
Securities Total Options Exercise or
Underlying Granted to Employees in Base Price
Options Fiscal Year Per Share Expiration
Name Granted Date
- --------------------------------------------------------------------------------
NONE
Aggregated Option Exercises in Last Fiscal
Year and FY-End Option Values
Value of Unexercised
Number of Securities In-the-Money
Shares Underlying Unexercised Options at 2002
Acquired Value Options at 2002 FY-End FY-End
Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- -------------------------------------------------------------------------------------------
NONE
Stock Option Plan
The Board of Directors administers the Company's 1997 Stock Option Plan (the
"1997 Plan") and the 2000 Stock Option Plan (the "2000 Plan"), each of 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
and consultants. Under the two Plans, 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 stockholder value. Currently, none of the Plans has a pre-set
formula or criteria for determining the number of options that may be granted.
The exercise price for an option granted is determined by the Compensation
Committee, in an amount not less than 100% of the fair market value of the
Company's common stock on the date of grant. The Compensation 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's stock plans
total 50,000 shares of common stock under the 1997 Plan and 50,000 shares of
common stock under the 2000 Plan. Options have been granted for all shares
reserved under the 1997 Plan and 10,000 shares for the 2000 Plan.
Compensation of Directors
The Company pays each non-employee director a fee of $2,500 per year, plus a
meeting fee of $2,000 for each board meeting attended. Company employee
directors serve with no fees being paid. CableTEL AD pays each of its three
directors $6,200 per month.
-27-
Performance Graph
The following graph compares the cumulative total return on a $100 investment in
the company's common stock on December 31, 2001 through December 31, 2005, based
on the company's closing stock price on December 31 for each of those years. The
same information is provided using the Standard & Poor 500 index and the Dow
Jones Total Market Index.
12/31/2001 12/31/2002 12/31/2003 12/31/2004 12/31/2005
---------- ---------- ---------- ---------- ----------
CableTEL AD 100 71.54 81.03 93.48 63.24
S&P 500 100 76.68 98.49 108.50 113.37
Industry Peer Group 100 76.63 96.85 105.56 108.73
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of December 31, 2005, certain information with
respect to all stockholders known by the company to own beneficially more than
5% of the outstanding common stock, which is the only outstanding class of
securities of the company, except for Series J 2% Preferred Stock and Series B
Preferred Stock (the ownership of which is immaterial), as well as information
with respect to the Company's Common Stock owned beneficially by each director,
director nominee and current executive officers whose compensation from the
company in 2005 exceeded $100,000, and by all directors and executive officers
as a group. Unless otherwise indicated, each of these stockholders has sole
voting and investment power with respect to the shares beneficially owned.
-28-
Common Stock
-----------------------------------
Name of Beneficial Owner No. of Shares Percent of Class*
- --------------------------------------------------------------------------------
HKS Investment Corp. (1) 108,994 11.16%
Gene S. Bertcher(2) 71,811 7.35%
Roz Campisi Beadle 100 **
Ronald C. Finley(8) - -
James E. Huffstickler - -
Dan Locklear - -
JRG Investment Company, Inc.(3)(5) 156,884 16.06%
TacCo Financial, Inc.(3)(4)(6) 228,726 23.41%
International Health Products, Inc.(3)(7) 9,770 1.02%
All executive officers and directors as a
group (six persons) 180,905 18.52%
- -----------------------
* Based on 976,955 shares of common stock outstanding at March 31, 2006.
** Less than 1%.
(1) Consists of 108,994 shares of common stock owned by HKS
Investment Corporation ("HKS"). According to an original
statement on Schedule 13D dated January 9, 2006, the group
consists of HKS Investment Corporation, David Hensel, John
Kellar and Marshall Stagg, each of whom are deemed to be the
beneficial owner of all 108,994 shares. Hensel is stated to be
a shareholder, director and president of HKS; Kellar is a
shareholder, director and vice president and treasurer of HKS
and Stagg is a shareholder, director and secretary of HKS.
(2) Consists of 71,811 shares of common stock owned by Mr.
Bertcher.
(3) Based on a Schedule 13D, amended December 14, 2004, filed by
each of these entities and by Gene E. Phillips, an individual;
each of these entities owns of record the number of shares set
forth for such entity in the table. The amended Schedule 13D
indicates that these entities, Mr. Phillips and Basic Capital
Management, Inc., collectively, may be deemed a "Person"
within the meaning of Section 13D of the Securities Exchange
Act of 1934.
(4) Consists of 228,726 shares of common stock (which does not
include 156,884 shares held by JRG Investment Company, Inc. or
an option to 40,000 shares of common stock at an exercise
price of $2.60 per share). TacCo Financial, Inc. also holds a
Warrant to purchase 170,000 shares at $3.58 per share
exercisable only after stockholder approval to exchange the
Company's Series J 2% Preferred Stock for common stock before
October 1, 2005, and not exercisable if such approval does not
occur.
(5) Officers and Directors of JRG Investment Co., Inc. ("JRG") are
J. T. Tackett, Director, President and Treasurer and E. Wayne
Starr, Director, Chairman and Chief Executive Officer. JRG is
a wholly owned subsidiary of TacCo Financial, Inc.
(6) Officers and Directors of TacCo Financial, Inc. ("TFI") are
J.T. Tackett, Director, Chairman and CEO; J.T. Tackett,
Director, President and Treasurer and Mary K. Willett, Vice
president and Secretary. TFI's stock is owned by Electrical
Networks, Inc. (75%) and Starr Investments (25%).
(7) Officers and Directors of International Health Products, Inc.
("IHPI") are Ken L. Joines, Director, President and Treasurer;
Bradford A. Phillips, Vice President and Jamie Cobb,
Secretary. IHPI is wholly owned by a trust for the benefit of
the wife and children of Gene E. Phillips.
(8) It is anticipated that approval will occur for the owners of
the Series J 2% Preferred Stock to exchange their preferred
shares for shares of common stock. Mr. Finley owns 14,175
shares of Series J 2% Preferred Stock which if, as anticipated
by the Company, exchanged for common stock would be 3,954,825
shares, or approximately 40.5% of the then outstanding common
stock.
On October 12, 2004, the Company entered into an Acquisition Agreement with four
individuals, Ronald C. Finley, Jeffrey A. Finley, Bradford A. Phillips and Gene
E. Phillips, pursuant to which the Company acquired in a stock-for-stock
exchange all of the issued and outstanding equity interests of two
privately-held U.S. corporations, Finley Equities, Inc., a Texas corporation
("FEINC"), and American Realty Management, Inc., a Nevada corporation ("ARM"),
in exchange for the issuance of 31,500 shares of the Company's newly-designated
Series J 2% Preferred Stock, liquidation value $1,000 per share. FEINC and ARM
-29-
each owned an undivided one-half of the equity interest in Tacaruna B.V., a
Netherlands company, which in turn directly owned 30% of CableTEL AD. Tacaruna
B.V. also owned 64% of the equity of Narisma Holdings, Ltd., a Cyprus company,
which in turn owns the balance of 70% of CableTEL AD. Prior to this transaction,
the Company had no material relationship with Ronald C. Finley, Jeffrey A.
Finley or Bradford A. Phillips. Bradford A. Phillips is the son of Gene E.
Phillips. Gene E. Phillips is an individual who has significant contact with and
influence upon matters handled by Basic Capital Management, Inc., a Nevada
corporation ("BCM"), International Health Products, Inc., a Nevada corporation
("IHPI"), TacCo Financial, Inc., a Nevada corporation ("TFI"), and its
wholly-owned subsidiary, JRG Investment Co., Inc., a Nevada corporation ("JRG").
Reference is made to the preceding table for the common stock ownership of such
entities.
The consideration given by the Company for the assets received was an aggregate
of 31,500 shares of the Company's newly-designated Series J 2% Preferred Stock,
liquidation value $1,000 per share. Such Series J 2% Preferred Stock has the
right to receive cumulative cash dividends of $20 per share per annum, payable
quarterly, payment of $1,000 per share in the event of dissolution, liquidation
or winding-up of the Company before any distribution is made by the Company to
its common stockholders, optional redemption at any time after September 30,
2006 at a price of $1,000 per share plus cumulative dividends, no initial right
of conversion into any other securities of the Company and voting rights
consisting of five votes per share voting together with all other classes of
stock. Subsequently, on February 16, 2005, Gene E. Phillips contributed all
12,600 shares of Series J 2% Preferred Stock to CIC Investment LLC, a Nevada
limited liability company, of which Gene E. Phillips is the sole member. Also on
February 15, 2005, Bradford A. Phillips sold and transferred 1,575 shares of
Series J 2% Preferred Stock to PS II Management LLC, a Texas limited liability
company, which is indirectly owned by a trust for the benefit of the children of
Bradford A. Phillips. Bradford A. Phillips retained the other 1,575 shares of
Series J 2% Preferred Stock.
The Acquisition Agreement contained customary representations, warranties and
covenants by the parties, but also required that as soon as reasonably
practicable and in no event later than June 30, 2006, that the Company present
the transaction represented by the Acquisition Agreement, together with a
proposed mandatory exchange of Series J 2% Preferred Stock for common stock to
its current stockholders in accordance with the applicable requirements of the
Securities and Exchange Commission and the AMEX for a vote (or written consent
by the requisite number) of stockholders to approve the transaction, including a
mandatory exchange of all shares of Series J 2% Preferred Stock for shares of
the Company's common stock on the basis of 279 shares of common stock for each
share of Series J 2% Preferred Stock, which would result in an aggregate of
8,788,500 shares of common stock being issued to the four individuals or their
transferees, which would then constitute at least 89% of the total issued and
outstanding shares of common stock of the Company, all subject to the listing
requirements with the AMEX. If the proposal is ultimately approved by the
requisite number of votes of stockholders, it would result in the following
individuals or entities owning the number of shares of common stock of the
Company set forth opposite their respective names below by virtue of the
exchange of the shares of Series J 2% Preferred Stock for common stock, which,
based upon a new total number of shares of Common Stock then to be outstanding
of 9,765,504 shares, would result in such individuals or entities owning the
then percentage of the total outstanding shares of common stock set forth
opposite the number of shares in the following table:
-30-
Anticipated
No. of Shares of Percentage of Then
Series J 2% Assumed Exchange Outstanding Shares
Preferred Stock of Common Stock of Common Stock
Name of Stockholder Owned No. of Shares Owned After Exchange
Jeffrey A. Finley 1,575 439,425 4.50%
Ronald C. Finley 14,175 3,954,825 40.50%
Bradford A. Phillips 1,575 439,425 4.50%
CIC Investment LLC 12,600 3,515,400 36.00%
PS II Management LLC 1,575 439,425 4.50%
Assuming the proposal is ultimately approved by the requisite number of votes, a
change in control of the Company would occur. As a result of such exchange, Gene
E. Phillips, the sole member of CIC Investment LLC, would beneficially own
3,515,400 shares of common stock, constituting 36% of the then issued and
outstanding shares of common stock, and three corporations, TFI, JRG and IHPI
would also own in the aggregate 395,380 shares of common stock of the Company,
or approximately 4.05% of the then issued and outstanding shares of common
stock. Also, Ronald C. Finley, Chairman of the Board and Chief Executive Officer
of the Company, would beneficially own 3,954,825 shares of common stock of the
Company, or approximately 40.5% of the then issued and outstanding shares of
common stock.
If the proposal does not ultimately receive the approval of the requisite number
of votes of stockholders prior to June 30, 2006, then at any time thereafter
until June 30, 2007, the holders of the shares of Series J 2% Preferred Stock
have the option exercisable by all of them to either:
o rescind in full and revoke the transaction covered by the
Acquisition Agreement by returning all 31,500 shares of Series
J 2% Preferred Stock to the Company, upon which the Company
shall be obligated to deliver back to such holders all equity
securities of any entity owning all of the ordinary shares and
other securities of Tacaruna B.V. or CableTEL AD, or
o deliver to the Company all 31,500 shares of Series J 2%
Preferred Stock and receive in exchange therefor all of the
ordinary shares and other securities of Tacaruna B.V.
outstanding and owned by the Company such that such holders
will become the owners and holders of all of the issued and
outstanding securities of Tacaruna B.V., which in turn
continues to own shares of CableTEL AD and shares of Narisma
Holdings, Ltd.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In October 2004, the Company issued Series J 2% Preferred Stock to acquire 74.8%
of CableTEL AD. Certain of the holders of the Series J 2% Preferred Stock are
deemed to be related parties with the Company. See ITEM 12 above for a
description of the Acquisition Agreement and continuing requirements upon the
Company to submit certain matters to the stockholders for approval.
-31-
The Company, through subsidiaries, owns 30% of CableTEL AD directly and owns 64%
of Narisma Holdings, Ltd. which owns the remaining 70% of CableTEL AD.
Collectively, the Company has effective ownership of 74.8% of CableTEL AD. In
January 2005, Envicon Development Corporation, a company indirectly owned by
Gene E. Phillips, acquired the 36% of Narisma Holdings Ltd. which represents
25.2% of CableTEL AD.
It is the policy of the Company that all transactions between the Company and
any officer or director, or any of their affiliates, must be approved by
non-management members of the Board of Directors of the Company. All of the
transactions described above were so approved.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The following table sets forth the aggregate fees for professional services
rendered to the Company for the years 2004 and 2003 by the Company's principal
accounting firms, Grant Thornton LLP (January 2003 through January 2004) and
Farmer, Fuqua & Huff, P.C. (February 9, 2004 through December 31, 2005):
Type of Fees 2005 (a) 2004 (b)
Audit Fees $72,062 $166,110
Audit Related Fees -- 4,701
Tax Fees 9,973 3,000
All Other Fees -- --
Total Fees $82,035 $173,811
(a) The amount of audit fees paid in 2005 was $68,151 to Farmer
Fuqua & Huff PC and $3,911 to Grant Thornton . The tax fees
paid in 2005 were to Farmer, Fuqua & Huff PC.
(b) The amount of audit fees paid to Farmer, Fuqua & Huff, P.C.
for January 2004 through December 2004 was $166,110; the
amount of audit fees paid to Grant Thornton LLP in 2004 was
$4,701. The amount of tax fees paid to Farmer, Fuqua & Huff,
P.C. for January 2004 through December 2004 was $8,625; the
amount of tax fees paid to Grant Thornton for January 2004
through December 2004 was $3,000.
All services rendered by the principal auditors are permissible under applicable
laws and regulations and were pre-approved by either of the Board of Directors
or the Audit Committee, as required by law. The fees paid to principal auditors
for services described in the above table fall under the categories listed
below:
Audit Fees: These are fees for professional services performed by the
principal auditor for the audit of the Company's annual financial
statements and review of financial statements included in the Company's
Form 10-Q filings and services that are normally provided in connection
with statutory and regulatory filings or engagements.
-32-
Audit-Related Fees: These are fees for assurance and related services
performed by the principal auditor that are reasonably related to the
performance of the audit or review of the Company's financial
statements. These services include attestation by the principal auditor
that is not required by statute or regulation and consulting on
financial accounting/reporting standards.
Tax Fees: These are fees for professional services performed by the
principal auditor with respect to tax compliance, tax planning, tax
consultation, returns preparation and reviews of returns. The review of
tax returns includes the Company and its consolidated subsidiaries.
All Other Fees: These are fees for other permissible work performed by
the principal auditor that does not meet the above category
descriptions.
These services are actively monitored (as to both spending level and work
content) by the Audit Committee to maintain the appropriate objectivity and
independence in the principal auditor's core work, which is the audit of the
Company's consolidated financial statements.
Financial Information Systems Design and Implementation Fees
Farmer, Fuqua & Huff, P.C. did not render any professional services to the
Company in 2005 with respect to financial information systems design and
implementation.
Under the Sarbanes-Oxley Act of 2002 (the "SO Act"), and the rules of the
Securities and Exchange Commission (the "SEC"), the Audit Committee of the Board
of Directors is responsible for the appointment, compensation and oversight of
the work of the independent auditor. The purpose of the provisions of the SO Act
and the SEC rules for the Audit Committee's role in retaining the independent
auditor is two-fold. First, the authority and responsibility for the
appointment, compensation and oversight of the auditors should be with directors
who are independent of management. Second, any non-audit work performed by the
auditors should be reviewed and approved by these same independent directors to
ensure that any non-audit services performed by the auditor do not impair the
independence of the independent auditor. To implement the provisions of the SO
Act, the SEC issued rules specifying the types of services that an independent
may not provide to its audit client, and governing the Audit Committee's
administration of the engagement of the independent auditor. As part of this
responsibility, the Audit Committee is required to pre-approve the audit and
non-audit services performed by the independent auditor in order to assure that
they do not impair the auditor's independence. Accordingly, the Audit Committee
has adopted a pre-approval policy of audit and non-audit services (the
"Policy"), which sets forth the procedures and conditions pursuant to which
services to be performed by the independent auditor are to be pre-approved.
Consistent with the SEC rules establishing two different approaches to
pre-approving non-prohibited services, the Policy of the Audit Committee covers
pre-approval of audit services, audit-related services, international
administration tax services, non-U.S. income tax compliance services, pension
and benefit plan consulting and compliance services, and U.S. tax compliance and
-33-
planning. At the beginning of each fiscal year, the Audit Committee will
evaluate other known potential engagements of the independent auditor, including
the scope of work proposed to be performed and the proposed fees, and the
approve or reject each service, taking into account whether services are
permissible under applicable law and the possible impact of each non-audit
service on the independent auditor's independence from management. Typically, in
addition to the generally pre-approved services, other services would include
due diligence for an acquisition that may or may not have been known at the
beginning of the year. The Audit Committee has also delegated to any member of
the Audit Committee designated by the Board or the financial expert member of
the Audit Committee responsibilities to pre-approve services to be performed by
the independent auditor not exceeding $25,000 in value or cost per engagement of
audit and non-audit services, and such authority may only be exercised when the
Audit Committee is not in session.
-34-
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as a part of this report:
(1) FINANCIAL STATEMENTS: The following financial statements of
the Registrant and the Report of Independent Public
Accountants therein are filed as part of this Report on Form
10-K:
Report of Farmer, Fuqua & Huff, P.C.........................39
Consolidated Balance Sheets.................................40
Consolidated Statement of Operations........................42
Consolidated Statements of Cash Flows.......................43
Consolidated Statement of Changes in Stockholders' Equity...45
Notes to Consolidated Financial Statements..................46
(2) FINANCIAL STATEMENT SCHEDULES: Other financial statement
schedules have been omitted because the information required
to be set forth therein is not applicable, is immaterial or is
shown in the consolidated financial statements or notes
thereto.
(3) EXHIBITS
The following documents are filed as exhibits (or are incorporated by reference
as indicated) into this Report:
Exhibit
Designation Exhibit Description
3.1 Articles of Incorporation of Medical Resource Companies of America
(incorporated by reference to Exhibit 3.1 to Registrant's Form S-4
Registration Statement No. 333-55968 dated December 21, 1992)
3.2 Amendment to the Articles of Incorporation of Medical Resource
Companies of America (incorporated by reference to Exhibit 3.5 to
Registrant's Form 8-K dated April 1, 1993)
3.3 Restated Articles of Incorporation of Greenbriar Corporation
(incorporated by reference to Exhibit 3.1.1 to Registrant's Form
10-K dated December 31, 1995)
-35-
3.4 Amendment to the Articles of Incorporation of Medical Resource
Companies of America (incorporated by reference to Exhibit to
Registrant's PRES 14-C dated February 27, 1996)
3.5 Bylaws of Registrant (incorporated by reference to Exhibit 3.2 to
Registrant's Form S-4 Registration Statement No. 333-55968 dated
December 21, 1992)
3.6 Amendment to Section 3.1 of Bylaws of Registrant adopted October 9,
2003 (incorporated by reference to Exhibit 3.2.1 to Registrant's
Form S-4 Registration Statement No. 333-55968 dated December 21,
1992)
3.7 Certificate of Decrease in Authorized and Issued Shares effective
November 30, 2001 (incorporated by reference to Exhibit 2.1.7 to
Registrant's Form 10-K dated December 31, 2002)
3.8 Certificate of Designations, Preferences and Rights of Preferred
Stock dated May 7, 1993 relating to Registrant's Series B Preferred
Stock (incorporated by reference to Exhibit 4.1.2 to Registrant's
Form S-3 Registration Statement No. 333-64840 dated June 22, 1993)
3.9 Certificate of Voting Powers, Designations, Preferences and Rights
of Registrant's Series F Senior Convertible Preferred Stock dated
December 31, 1997 (incorporated by reference to Exhibit 2.2.2 of
Registrant's Form 10-KSB for the fiscal year ended December 31,
1997)
3.10 Certificate of Voting Powers, Designations, Preferences and Rights
of Registrant's Series G Senior Non-Voting Convertible Preferred
Stock dated December 31, 1997 (incorporated by reference to Exhibit
2.2.3 of Registrant's Form 10-KSB for the fiscal year ended December
31, 1997)
3.11 Certificate of Designations dated October 12, 2004 as filed with the
Secretary of State of Nevada on October 13, 2004 (incorporated by
reference to Exhibit 3.4 of Registrant's Current Report on Form 8-K
for event occurring October 12, 2004)
3.12 Certificate of Amendment to Articles of Incorporation effective
February 8, 2005 (incorporated by reference to Exhibit 3.5 of
Registrant's Current Report on Form 8-K for event occurring February
8, 2005)
10.1 Registrant's 1997 Stock Option Plan (filed as Exhibit 4.1 to
Registrant's Form S-8 Registration Statement, Registration No.
333-33985 and incorporated herein by this reference).
-36-
10.2 Registrant's 2000 Stock Option Plan (filed as Exhibit 4.1 to
Registrant's Form S-8 Registration Statement, Registration No.
333-50868 and incorporated herein by this reference)
10.3 Form of Umbrella Agreement between Greenbriar Corporation, James R.
Gilley and Jon Harder, Sunwest Management, Inc. et al
10.4 Form of Acquisition Agreement between Greenbriar Corporation, Ronald
Finley, Jeffery A. Finley, Bradford A. Phillips and Gene E. Phillips
dated October 12, 2004 (incorporated by reference to Exhibit 10.1 of
Registrant's Current Report on Form 8-K for event occurring October
12, 2004)
10.5 Amendment No. 1 to Acquisition Agreement effective July 29, 2005
among CabelTel International Corporation, Ronald C. Finley, Jeffrey
A. Finley, Bradford A. Phillips, Gene E. Phillips, joined by CIC
Investment, LLC and PSII Management, LLC (incorporated by reference
to Exhibit 10.2 of registrants current report on Form 8-K for event
occurring July 29, 2005)
10.6 Warrant to Purchase 20,000 shares of Common Stock issued October 20,
2004 (incorporated by reference to Exhibit 10.5 of registrants
annual report of Form 10-K for the fiscal year ended December 31,
2004)
10.7 Warrant to Purchase 170,000 shares of Common Stock issued October
20, 2004 (incorporated by reference to Exhibit 10.5 of registrants
annual report of Form 10-K for the fiscal year ended December 31,
2004)
14.0 Code of Ethics for Senior Financial Officers (incorporated by
reference to Exhibit 14.0 to Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 2003)
21.1* Subsidiaries of the Registrant
23.1* Consent of Farmer, Fuqua & Hunt, P.C.
31.1* Rule 13a-14(a) Certification by Chief Executive Officer
31.2* Rule 13a-14(a) Certification by Chief Financial Officer
32.1* Certification of Chief Executive Officer and Chief Financial Officer
pursuant to 18 U.S.C. ss.1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
*Filed herewith.
-37-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized
CABELTEL INTERNATIONAL CORPORATION
April 13, 2006 by: /s/ Gene S. Bertcher
-------------------------------------
Gene S. Bertcher
President and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons in the capacities and
on the dates indicated.
Signature Title Date
/s/ Ronald C. Finley Chairman, Chief Executive April 13, 2006
- ----------------------- Officer and Director
Ronald C. Finley
/s/ Gene S. Bertcher President, Chief Financial April 13, 2006
- ----------------------- Officer and Director
Gene S. Bertcher
/s/ Roz Campisi Beadle Director April 13, 2006
- -----------------------
Roz Campisi Beadle
/s/ James Huffstickler Director April 13, 2006
- -----------------------
James Huffstickler
/s/ Dan Locklear Director April 13, 2006
- -----------------------
Dan Locklear
/s/ Victor Lund Director April 13, 2006
- -----------------------
Victor Lund
-38-
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
Cabeltel International Corporation, formerly Greenbriar Corporation
We have audited the accompanying consolidated balance sheets of Cabeltel
International Corporation, formerly Greenbriar Corporation, and subsidiaries as
of December 31, 2005, and 2004, and the related consolidated statements of
income, shareholders' equity and cash flows for each of the three years in the
period ended December 31, 2005. These consolidated financial statements are the
responsibility of the company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits include consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion of the effectiveness of the company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Cabeltel
International Corporation, formerly Greenbriar Corporation, and subsidiaries as
of December 31, 2005, and 2004, and the consolidated results of their operations
and their cash flows for each of the three years in the period ended December
31, 2005 in conformity with accounting principles generally accepted in the
United States of America.
/s/ FARMER FUQUA & HUFF, P.C.
Plano, Texas
April 7, 2006
-39-
CabelTel International Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
December 31,
-----------------------
2005 2004
---------- ----------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 650 $ 762
Accounts receivable - trade 339 222
Notes receivable 306 856
Property held for sale -- 1,760
Other current assets, net 179 103
---------- ----------
Total Current Assets 1,474 3,703
NOTES RECEIVABLE, net of deferred income 309 309
PROPERTY AND EQUIPMENT, AT COST
Land and improvements 2,232 2,232
Buildings and improvements 5,298 6,987
Equipment and furnishings 292 273
Proven oil and gas properties (full cost method) 1,401 1,479
---------- ----------
9,223 10,971
Less accumulated depreciation, depletion, and amortization 963 (1,090)
---------- ----------
8,260 9,881
DEFERRED INCOME TAX BENEFIT 1,161 1,161
DUE FROM CABLETEL AD 8,004 951
DEPOSITS 129 36
OTHER ASSETS, NET 743 725
---------- ----------
Total Assets $ 20,080 $ 16,766
========== ==========
The accompanying notes are an integral part of this statement.
-40-
CabelTel International Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS - CONTINUED
(Amounts in thousands, except share amounts)
December 31,
------------------------
2005 2004
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 2,383 $ 4,780
Current notes payable -- 240
Accounts payable - trade 842 687
Accrued expenses 1,236 828
Other current liabilities 371 --
---------- ----------
Total Current Liabilities 4,832 6,535
LONG-TERM DEBT (including amounts to related parties
of $7,347) 13,560 8,338
OTHER NON-CURRENT LIABILITIES (including
amounts to related parties of $591) 936 155
---------- ----------
Total Liabilities 19,328 15,028
STOCKHOLDERS' EQUITY
Preferred stock, Series B 1 1
Preferred stock, Series J 2% 3,150 3,150
Preferred stock, Series J contra equity (3,150) (3,150)
Common stock, $.01 par value; authorized, 4,000,000
shares; issued and outstanding, 976,955 shares 10 10
Additional paid-in capital 55,966 55,966
Accumulated deficit (55,225) (54,239)
---------- ----------
752 1,738
---------- ----------
Total liabilities & equity $ 20,080 $ 16,766
========== ==========
The accompanying notes are an integral part of this statement.
-41-
CabelTel International Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share amounts)
Year Ended
--------------------------------
December 31,
--------------------------------
2005 2004 2003
-------- -------- --------
Revenue
Real estate operations $ 4,098 $ 4,643 $ 2,486
Oil and gas operations 1,723 1,410 449
-------- -------- --------
5,821 6,053 2,935
-------- -------- --------
Operating expenses
Real estate operations 3,001 3,172 1,115
Oil and gas operations 1,349 1,111 441
Lease expense 932 917 969
General and administrative 1,191 1,715 1,111
-------- -------- --------
6,473 6,915 3,636
-------- -------- --------
Operating loss (652) (862) (701)
Other income (expense)
Interest income 700 213 304
Interest expense (1,189) (904) (413)
Gain (loss) on sale of assets, net (118) 1,456 1,058
Other income (expense), net 285 (403) 374
-------- -------- --------
(322) 362 1,323
-------- -------- --------
Earnings (loss) from continuing operations (974) (500) 622
Discontinued operations
Profit from operations 22 (316) (400)
Other expense (34) -- --
-------- -------- --------
Loss from discontinued operations (12) (316) (400)
-------- -------- --------
Net earnings (loss) (986) (816) 222
Preferred dividend requirement -- -- --
-------- -------- --------
Net earnings (loss) applicable to common shares $ (986) $ (816) $ 222
======== ======== ========
Earnings (loss) per share - basic
Continuing operations $ (1.00) $ (0.51) $ 0.88
Discontinued operations (0.01) (0.32) (0.57)
-------- -------- --------
Net earnings (loss) per share $ (1.01) $ (0.84) $ 0.31
Basic weighted average common shares 977 977 706
The accompanying notes are an integral part of this statement.
-42-
CabelTel International Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
Year ended December 31,
2005 2004 2003
-------- -------- --------
Cash flows from operating activities
Net earnings (loss) $ (986) $ (816) $ 222
Adjustments to reconcile net earnings (loss) to net
cash provided by (used in) operating activities
Depreciation and amortization 475 355 160
Depreciation from assets classified as
discontinued operations 18 215 170
(Gain) loss from affiliates -- (1,247) (131)
Loss on sale of assets 118 (209) (1,058)
Write-down of impaired assets -- 147 --
Changes in operating assets and liabilities
Accounts receivable - trade (117) (122) (45)
Other current and non-current assets (299) (132) 174
Accounts payable and other liabilities 1,146 (357) 22
-------- -------- --------
Net cash provided (used) in operating activities 355 (2,166) (486)
Cash flows from investing activities
Purchase of property and equipment, net (47) (845) (1,225)
Net repayment of notes receivable 550 1,579 334
Proceeds from sale of other real estate 1,147 -- --
Proceeds from sale of properties 1,910 -- 126
-------- -------- --------
Net cash provided by investing activities 3,560 734 (765)
-------- -------- --------
Cash flows from financing activities
Proceeds from common stock issuance -- -- 792
Proceeds from borrowings -- 6,500 500
Payments on debt (3,831) (5,591) (90)
Distributions from equity partnerships'
financing cash flow -- 507 85
Repurchase of common stock -- -- (9)
Net advances from affiliates (196) 90 --
-------- -------- --------
Net cash provided by (used in)
financing activities (4,027) 1,506 1,278
-------- -------- --------
Net increase (decrease) in cash
and cash equivalents (112) 74 27
Cash and cash equivalents at beginning of year 762 688 661
-------- -------- --------
Cash and cash equivalents at end of year $ 650 $ 762 $ 688
The accompanying notes are an integral part of this statement.
-43-
CabelTel International Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(Amounts in thousands)
Year ended December 31,
2005 2004 2003
Supplemental information on cash flows is as follows:
Interest paid $ 370 $ 705 $ 515
Non-cash investing and financing activities:
Notes given in connection with purchase of property -- -- 5,905
Common stock issued in connection with satisfaction
of note to executive officer -- -- 198
Disposal of property to satisfy debt -- 935 --
Notes payable agreed by buyer upon sale of real estate -- 906 --
The accompanying notes are an integral part of this statement.
-44-
CabelTel International Corporation and Subsidiaries
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Amounts in thousands)
Series J
Series B Series J Preferred Stock
Preferred stock Preferred stock Contra Equity
------------------------ ------------------------ -------------------------
Shares Amount Shares Amount Shares Amount
---------- ---------- ---------- ---------- ---------- ----------
Balance at January 1, 2003 1 1 -- -- -- --
Conversion of obligation to -- -- -- -- -- --
common stock
Common stock acquired -- -- -- -- -- --
Common stock issued -- -- -- -- -- --
Net earnings -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 2003 1 1 -- -- -- --
Net loss
Issuance of Series J
preferred stock -- -- 32 3,150 (32) (3,150)
Net loss -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 2004 1 1 32 3,150 (32) (3,150)
Net loss
---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 2005 1 1 32 3,150 (32) (3,150)
========== ========== ========== ========== ========== ==========
Common
Stock Additional Accum-
------------------------ paid in ulated
Shares Amount capital deficit Total
---------- ---------- ---------- ---------- ----------
Balance at January 1, 2003 688 7 53,645 (53,645) 1,351
Conversion of obligation to 23 -- -- -- --
common stock
Common stock acquired (5) -- (9) -- (9)
Common stock issued 271 3 987 -- 990
Net earnings -- -- -- 222 222
---------- ---------- ---------- ---------- ----------
Balance at December 31, 2003 977 10 54,623 (53,423) 2,554
Net loss
Issuance of Series J -- -- -- -- --
preferred stock
Net loss -- -- -- (816) (816)
---------- ---------- ---------- ---------- ----------
Balance at December 31, 2004 977 10 55,966 (54,239) 1,738
Net loss (986) (986)
---------- ---------- ---------- ---------- ----------
Balance at December 31, 2005 977 10 55,966 (55,225) 752
========== ========== ========== ========== ==========
* The Company does not have any Other Comprehensive Income.
The accompanying notes are an integral part of this statement.
-45-
CabelTel International Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
The accompanying Consolidated Financial Statements of CabelTel International
Corporation and consolidated entities were prepared in conformity with
accounting principles generally accepted in the United States of America, the
most significant of which are described in NOTE B. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES. The Notes to Consolidated Financial Statements are an
integral part of these Consolidated Financial Statements. The data presented in
the Notes to Consolidated Financial Statements are as of December 31, of each
year and for the year then ended, unless otherwise indicated. Dollar amounts in
tables are in thousands, except per share amounts.
Certain balances for 2004 and 2003 have been reclassified to conform to the 2005
presentation.
NOTE A - BUSINESS DESCRIPTION AND PRESENTATION
Name Change
- -----------
On February 10, 2005, Greenbriar Corporation changed its name to CabelTel
International Corporation (which is referred throughout this report as " the
Company" or "CIC").
Acquisition of CableTEL AD
- --------------------------
On October 12, 2004, CIC acquired, for 31,500 shares of newly-designated 2%
Series J Preferred Stock, 74.8% of CableTEL AD, a Bulgarian telecommunications
company. The terms of the acquisition agreement require CIC to present a
proposal to its stockholders to approve the mandatory exchange of all shares of
Series J Preferred Stock into 8,788,500 shares of common stock which, if
approved by stockholders, would represent 90% of the resulting total issued and
outstanding shares of common stock in CIC. As of the date of this report the
exchange has not occurred.
The acquisition agreement, as amended, provides that the stockholders of CIC
have until June 30, 2006 to approve the exchange of Series J Preferred Stock
into CIC common stock. If the exchange is not approved by June 30, 2006 the
holders of the Series J Preferred Stock have the option to rescind the entire
transaction. Until the acquisition is completed, CableTEL AD will not be
included in CIC's consolidated financial statements and the financial statements
of CIC will include a Series J Preferred Stock contra equity account
representing the Company's interest in CableTEL AD.
If the stockholders of CIC approve the transaction it would effectively give the
owners of the CableTEL AD the controlling interest in CIC. Due to the effective
change in control, by virtue of the aforementioned exchange into common stock,
this transaction will be accounted for, upon the exchange, as a "reverse
acquisition," with CableTEL AD being the accounting acquirer and with CIC
accounted for as if it had been acquired on the exchange date.
Nature of Operations
- --------------------
As of December 31, 2005, the Company leases and operates a retirement community,
in King City Oregon, with a capacity of 114 residents. The Company owns an
outlet shopping mall in Gainesville, Texas with approximately 315,000 square
feet of retail space available for lease. In addition the Company owns the
leases for approximately 198 oil wells in East Texas. These are low production
wells with maximum production limits of 20 barrels of oil per day. As of March
30, 2005, there are 50 wells in operation.
-46-
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 CabelTel
International Corporation and its majority-owned subsidiaries (collectively, the
"Company" or "CIC") and are prepared on the basis of accounting principles
generally accepted in the United States of America. All significant intercompany
transactions and accounts have been eliminated.
Depreciation
- ------------
Depreciation is provided for in amounts sufficient to relate the cost of
property and equipment to operations over their estimated service lives, ranging
from 3 to 40 years. Depreciation is computed by the straight-line method.
Depreciation expense, included in operations expenses, was $493,000 and $355,000
for 2005 and 2004, respectively
Accounting for Leases
- ---------------------
Leases of property, plant and equipment where the Company assumes substantially
all the benefits and risks of ownership are classified as finance leases.
Finance leases are capitalized at the estimated present value of the underlying
lease payments. Each lease payment is allocated between the liability and
finance charges so as to achieve a constant rate on the finance balance
outstanding. The corresponding rental obligations, net of finance charges, are
included in other long-term payables. The interest element of the finance charge
is charged to the income statement over the lease period. The property, plant
and equipment acquired under finance leasing contracts is depreciated over the
useful life of the asset.
Leases of assets under which all the risks and benefits of ownership are
effectively retained by the lessor are classified as operating leases. Payments
made under operating leases are charged to the income statement on a
straight-line basis over the period of the lease. When an operating lease is
terminated before the lease period has expired, any payment required to be made
to the lessor by way of penalty is recognized as an expense in the period in
which termination takes place.
Revenue Recognition
- -------------------
Crude oil and natural gas revenues are recorded at the time of delivery of such
products to pipelines for the account of the purchaser or at the time of
physical transfer of such products to the purchaser. Revenues from the sale of
crude oil and natural gas are recorded using the sales method. Under such
method, the Company recognizes revenue from the sale of crude oil and natural
gas production from its leases, based on the actual volumes the Company sold
during the period.
Rental income for commercial property leases is recognized on a straight-line
basis over the respective lease terms. Rental income for residential property
leases is recorded when due from residents and is recognized monthly as it is
earned, which is not materially different than on a straight-line basis as lease
terms are generally for periods of one year or less.
Use of Estimates
- ----------------
In preparing financial statements in conformity with accounting principles
generally accepted in the United States of America, 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.
-47-
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Cash Equivalents
- ----------------
The Company considers all short-term deposits and money market investments with
a maturity of less than three months to be cash equivalents.
Other Intangible Assets
- -----------------------
The cost of acquired patents, trademarks and licenses is capitalized and
amortized using the straight-line method over their useful lives. The carrying
amount of each intangible asset is reviewed annually and adjusted for permanent
impairment where it is considered necessary.
Impairment of Notes Receivable
- ------------------------------
Notes receivable are identified as impaired when it is probable that interest
and principal will not be collected according to the contractual terms of the
note agreements. 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. No notes were deemed to be impaired at December 31, 2005 and
2004.
Impairment of Long-Lived Assets
- -------------------------------
The Company reviews its long-lived assets and certain identifiable intangibles
for impairment when events or changes in circumstances indicate that the
carrying amount of the assets may not be recoverable. In reviewing
recoverability, the Company estimates the future cash flows expected to result
from use of the assets and eventually disposing of them. If the sum of the
expected future cash flows (undiscounted and without interest charges) is less
than the carrying amount of the asset, an impairment loss is recognized based on
the asset's fair value.
The Company determines the fair value of assets to be disposed of and records
the asset at the lower of fair value less disposal costs or carrying value.
Assets are not depreciated while held for disposal.
Stock Options
- -------------
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) in its primary financial
statements and has provided supplemental disclosures required by Statement of
Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based
Compensation" and by Statement of Financial Accounting Standards No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure an
Amendment of SFAS No. 123."
Options for 140,000 shares of the Company's common stock were granted at market
by Cabeltel International Corporation during 2003. These options were
exercisable immediately and expire 5 years from the date they were granted.
190,000 warrants were issued at market by Cabeltel International Corporation
during 2004. The ability to exercise such warrants is contingent upon the
conversion of the Series J 2% Preferred stock to common stock. Because of the
contingent nature as to the timing and the ability to exercise these warrants,
no value has been ascribed to such warrants.
SFAS 123 requires disclosure of pro forma net earnings (loss) and pro forma net
earnings (loss) per share as if the fair value method had been applied in
measuring compensation cost for stock-based awards.
-48-
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Reported and pro forma net earnings (loss) and net earnings (loss) per share
amounts are set forth below (in thousands, except per share data):
2005 2004 2003
--------------------------------
Net earnings (loss) allocable to common stockholders
As reported $ (986) $ (816) $ 222
Deduct: total stock-based compensation under
fair value based method for all awards -- -- (43)
Pro forma $ (986) $ (816) $ 179
Net earnings (loss) per share
As reported $ (1.01) $ (0.84) $ 0.31
Pro forma $ (1.01) $ (0.84) $ 0.25
The fair value of these options was estimated at the date of grant during 2003
using the Black-Scholes option pricing model with the following weighted-average
assumptions: no dividends; expected volatility of 20 percent; risk-free interest
rates of 4.24 percent; and weighted average expected lives of 5 years.
Earnings (Loss) Per Common Share
- --------------------------------
Basic earnings (loss) per common share is based on the weighted average number
of common shares outstanding. Diluted earnings (loss) per share is computed
based on the weighted average number of common shares outstanding plus the
number of additional common shares that would have been outstanding if dilutive
potential common shares had been issued. In 2003, stock options for
approximately 140,000 shares were excluded from diluted shares outstanding
because their effect was anti-dilutive. In 2004, warrants for approximately
190,000 shares were excluded from diluted shares outstanding because their
effect was anti-dilutive.
Sales of Real Estate
- --------------------
Gains on sales of real estate are recognized to the extent permitted by SFAS No.
66, "Accounting for Sales of Real Estate." Until the requirements of SFAS No. 66
have been met for full profit recognition, sales are accounted for by the
installment or cost recovery method, whichever is appropriate.
Real Estate Held for Sale
- -------------------------
SFAS No. 144 requires that properties held for sale be reported at the lower of
carrying amount or fair value less costs of sale. If a reduction in a held for
sale property's carrying amount to fair value less costs of sale is required, a
provision for loss is recognized by a charge against earnings. Subsequent
revisions, either upward or downward, to a held for sale property's estimated
fair value less costs of sale are recorded as an adjustment to the property's
carrying amount, but not in excess of the property's carrying amount when
originally classified as held for sale. A corresponding charge against or credit
to earnings is recognized. Properties held for sale are not depreciated.
-49-
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
New Accounting Pronouncements
- -----------------------------
SFAS No. 123--In December 2004, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, Share-Based Payment,
revised ("SFAS No. 123R"). SFAS No. 123R addresses the accounting for
share-based payments to employees, including grants of employee stock options.
Under the new standard, companies will no longer be able to account for
share-based compensation transactions using the intrinsic method in accordance
with APB Opinion No. 25, Accounting for Stock Issued to Employees. Instead,
companies will be required to account for such transactions using a fair-value
method and recognize the expense in the consolidated statement of income. SFAS
No. 123R will be effective for periods beginning after June 15, 2005 and allows,
but does not require, companies to restate the full fiscal year of 2005 to
reflect the impact of expensing share-based payments under SFAS No. 123R. The
Company has not yet determined which fair-value method and transitional
provision it will follow. The adoption of SFAS No. 123R is not expected to have
a material impact on the Company's consolidated financial position or results of
operations. See Stock-Based Employee Compensation for the pro forma impact on
net income and net income per share from calculating stock-based compensation
costs under the fair value alternative of SFAS No. 123.
In June 2005, the FASB ratified the consensus in EITF Issue No. 04-5,
"Determining Whether a General Partner, or the General Partners as a Group,
Controls a Limited Partnership or Similar Entity When the Limited Partners Have
Certain Rights" ("Issue 04-5"), which provides guidance in determining whether a
general partner controls a limited partnership. Issue 04-5 states that the
general partner in a limited partnership is presumed to control that limited
partnership. The presumption may be overcome if the limited partners have either
(1) the substantive ability to dissolve the limited partnership or otherwise
remove the general partner without cause or (2) substantive participating
rights, which provide the limited partners with the ability to effectively
participate in significant decisions that would be expected to be made in the
ordinary course of the limited partnership's business and thereby preclude the
general partner from exercising unilateral control over the partnership. The
adoption of Issue 04-5 by us for new or modified limited partnership
arrangements is effective June 30, 2005 and for existing limited partnership
arrangements effective January 1, 2006. We do not expect that we will be
required to consolidate our current unconsolidated joint venture investments nor
do we expect Issue 04-5 to have a material effect on our consolidated financial
statements.
In May 2005, the FASB issued Statement No. 154, "Accounting Changes and Error
Corrections" ("Statement No. 154"). Statement No. 154, which replaces APB
Opinion No. 20, "Accounting Changes" and FASB Statement No. 3, "Reporting
Accounting Changes in Interim Financial Statements", changes the requirements
for the accounting for and reporting of a change in accounting principle. The
statement requires retrospective application of changes in accounting principle
to prior periods' financial statements unless it is impracticable to determine
the period-specific effects or the cumulative effect of the change. Statement
No. 154 is effective for accounting changes and corrections of errors made in
fiscal years beginning after December 15, 2005. The adoption of Statement No.
154 is not expected to have a material impact on our consolidated financial
position, results of operations or cash flows of IORI.
NOTE C - NOTES RECEIVABLE
As a result of the sale of two assisted living communities in 2001, the Company
holds two tax-exempt notes for a total of $4,030,000, bearing interest at 9.5%.
The notes mature on April 1, 2032 and August 1, 2031.
The repayment of the notes and interest thereon is limited to the cash flow of
the respective properties either from operations, refinancing or sale. The
Company has deferred gains in the amount of $3,721,000 as well as unpaid
interest, which will be recognized as cash is received or the receivables are
sold.
The net of the notes receivable and deferred gains discussed above is $309,000
which is shown on the Balance Sheet as `Notes receivable, net of deferred
income.'
-50-
NOTE D - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate
values at December 31, 2005 and 2004:
Cash and cash equivalents - The carrying amount approximates fair value because
of the short maturity of these instruments.
Long-term debt - The fair value of the Company's long-term debt is estimated
based on market rates for the same or similar issues. The carrying value of
long-term debt approximates its fair value.
Notes receivable-- The fair value of the note receivable from an affiliate
partnership is estimated to approximate fair value based on its short maturity.
It is not practical to estimate the fair value of notes receivable from sale of
properties because no quoted market exists and there are no comparable debt
instruments to provide a basis for valuation.
NOTE E - NOTES PAYABLE
LONG TERM DEBT
Long-term debt is comprised of the following (in thousands):
December 31,
2005 2004
Notes payable to financial institutions maturing
through 2018; fixed and variable interest rates
ranging from 5.75% to 11% collateralized by real
property, fixtures, equipment (with a carrying
value of $6,918 at December 31, 2005) and the
assignment of rents 6,341 7,627
Notes payable to individuals and companies
maturing through 2023; variable and fixed
interest rates ranging from 10% to 18%;
collateralized by real property, personal property,
fixtures, equipment and the assignment of rents 2,255 4,590
Notes payable to related parties bearing interest
at rates ranging From 15% to 18% (funds re-
advanced to CableTEL AD) 7,347 901
---------------------
15,943 13,118
Less current maturities 2,383 4,780
=====================
13,560 8,338
=====================
-51-
NOTE E - NOTES PAYABLE - Continued
Aggregate annual principal maturities of long-term debt at December 31, 2004 are
as follows (in thousands):
2006 2,383
2007 7,481
2008 143
2009 5,936
2009 --
2010 --
Thereafter --
--------
$ 15,943
========
NOTE F - OPERATING LEASES
The Company leases a retirement community under an operating lease in which the
basic term expires December 31, 2011, and has operating leases for equipment and
office space. The leases generally provide that the Company pay property taxes,
insurance and maintenance.
Future minimum payments following December 31, 2005, are as follows (in
thousands):
2006 $ 898
2007 914
2008 866
2009 870
2010 888
Thereafter 1,829
--------
$ 6,265
========
Lease expense in 2005, 2004 and 2003 was $932, $917, and $969, respectively.
NOTE G - AFFILIATED PARTNERSHIP
In October 2001, the Company became a 56% limited partner in Corinthians Real
Estate Investors, LP ("CREI"), a partnership formed to acquire two properties.
In October 2001, CREI acquired a retirement community for approximately
$9,100,000 and in January 2002, it acquired an assisted living community for
approximately $2,800,000.
The Company issued a $1,600,000 note to the seller in 2001 as partial payment
for the purchase of the retirement community. CREI gave the Company a $1,600,000
note in consideration for payment of that amount of the purchase price. The
notes bore interest at 8.75% and were due December 30, 2003. The balance of the
purchase price was funded by borrowings of CREI from a third party in the amount
of $7,840,000, which was guaranteed by the Company.
In September 2002, CREI sold its two properties for cash and notes and paid off
its third party debt. As part of the proceeds, CREI received a note for
$1,600,000, which was transferred to the Company in satisfaction of its
$1,600,000 note receivable from CREI.
-52-
NOTE G - AFFILIATED PARTNERSHIP - Continued
The Company transferred the $1,600,000 note it received in 2002 to the original
owner of the retirement community in payment of the Company's $1,600,000 debt.
The Company guaranteed payment of the $1,600,000 note.
CREI recognized a gain on sale in the amount of $1,322,000. The Company has
deferred recognition of its $740,000 share of the gain because of the
aforementioned guaranty. In addition CREI has deferred a gain on sale in the
amount $994,000 that will be recognized on the installment method.
In 2004, the purchaser of the CREI paid off the remaining notes, including the
$1,600,000 note guaranteed by the Company. The Company realized its deferred
gain of $740,000 as well as $492,000, representing its 56% share of the proceeds
received by CREI on its outstanding note net of partnership expenses.
NOTE H - EARNINGS PER SHARE
The following table sets forth the computations of pro forma basic and diluted
earnings per share from continuing operations (in thousands, except per share
data):
Year ended December 31,
-----------------------
2005 2004 2003
Numerator:
Net income (loss) from continuing operations $(986) $(632) $ 617
Denominator:
Shares used in basic earnings per share calculation 977 977 706
Effect of diluted securities:
Employee stock options -- -- 80
Pro forma basic earnings per share $(1.01) $(0.84) $0.31
Pro forma diluted earnings per share $(1.01) $(0.84) $0.31
Shares used in diluted earnings per share
calculations 977 977 706
-53-
NOTE I - INCOME TAXES
At December 31, 2004, the Company had net operating loss carry forwards of
approximately $23,600,000, which expire between 2012 and 2024.
Deferred tax assets and liabilities were comprised of the following (in
thousands):
Year ended
December 31,
2005 2004
--------------------
Deferred tax assets:
Net operating loss carryforwards $ 8,043 $ 7,869
Alternative minimum tax carryforwards 324 324
Other 496 386
Total deferred tax assets 8,863 8,579
Valuation allowance (7,702) (7,418)
--------------------
Net deferred tax asset $ 1,161 $ 1,161
Following is a reconciliation of income tax expense attributable to continuing
operations with the amount of tax computed at the federal statutory rate of 34%
(in thousands):
Year ended
December 31,
2005 2004 2003
-----------------------------
Tax expense (benefit) at the statutory rate $ (331) $ (216) $ 75
Change in deferred tax asset valuation allowance,
attributable to continuing operations (331) (216) 75
-----------------------------
Tax expense $ -- $ -- $ --
-----------------------------
Changes in the deferred tax valuation allowance result from assessments made by
the Company each year of its expected future taxable income available to absorb
its carryforwards. The Company believes that it is more likely than not that the
net deferred tax asset at December 31, 2005, of $1,161,000 will be realized.
However, this evaluation is inherently subjective as it requires estimates that
are susceptible to significant revision as more information becomes available.
Accordingly, the ultimate realization of the net deferred tax asset could be
less than the carrying amount.
NOTE J - STOCKHOLDERS' EQUITY
Outstanding Preferred Stock
- ---------------------------
Preferred stock consists of the following (amounts in thousands):
Year ended
December 31,
2005 2004
------ ------
Series B cumulative convertible preferred stock, $.10 par value; liquidation
value of $100; authorized, 100 shares; issued and outstanding, 1 share $ 1 $ 1
====== ======
Series J cumulative non-convertible preferred stock, $.10 par value; liquidation
value of $1,000; authorized, 31,500 shares; issued and outstanding 31,500 shares $3,150 $3,150
====== ======
The Series B preferred stock has a liquidation value of $100 per share and is
convertible into common stock over a ten-year period at prices escalating from
$500 per share in 1993 to $1,111 per share by 2002. The right to convert expired
April 30, 2003. Dividends at a rate of 6% are payable in cash or preferred
shares at the option of the Company.
-54-
The Series J stock is non-convertible, however, the Company has agreed to hold a
shareholder vote to require the Series J shareholders to exchange their 31,500
shares of preferred into 8,788,000 shares of the Company's common stock (See
Note A).
Stock Options
In 1997, the Company established a long-term incentive plan (the "1997 Plan")
for the benefit of certain key employees. Options granted to employees under the
1997 Plan become exercisable over a period as determined by the Company and may
be exercised up to a maximum of 5 years from date of grant. The 1997 Plan
allowed up to 50,000 shares of the Company's common stock to be reserved for
issuance. In 2000, the Company adopted the 2000 Stock Option Plan, under which
up to 50,000 shares of the Company's common stock are reserved for issuance.
The Company granted options to two officers during 1996 through 2001,
aggregating 80,000 shares not covered by either plan. These options were granted
at market, were exercisable immediately and expire 10 years from date of grant.
-55-
NOTE J - STOCKHOLDERS' EQUITY - Continued
Information with respect to stock option activity is as follows:
Weighted
Average
exercise
Shares price
--------- --------
Outstanding at January 1, 2003 155,800 78.00
Granted 60,000 2.60
Cancelled, rescinded or annulled (70,800) 109.27
Expired (3,000) 112.50
Outstanding at December 31, 2003 ,2004 and 2005 142,000 $ 30.27
========= ========
Options exercisable at December 31, 2003 , 2004 and 2005 142,000 $ 30.27
========= ========
Weighted average fair value per share of options granted during 2003 was $0.71
and $7.60, respectively.
Additional information about stock options outstanding at December 31, 2005, is
summarized as follows:
Options outstanding and exercisable
----------------------------------------------------
Weighted average
Number remaining Weighted average
Range of exercise prices outstanding contractual life exercise price
- ------------------------ ----------- ------------------ ----------------
$2.60 60,000 4.0 $ 2.60
$3.75 to $6.90 60,000 6.0 5.68
$100.00 to $150.39 2,000 1.0 150.39
$175.00 20,000 3.0 175.00
NOTE K - OTHER INCOME (EXPENSE)
Other income (expenses) consists of the following: (amounts in thousands)
Year ended December 31,
2005 2004 2003
------ ------ ------
Equity in earnings of CREI -- -- 131
Property acquisition due diligence expense -- -- --
Write off start up costs in projects not completed -- (167) --
Accrued tenant revenue -- -- 121
Collection of previously deferred receivables 145 -- --
Other 140 (236) 90
------ ------ ------
$ 285 $ (403) $ 342
====== ====== ======
-56-
NOTE L - DISCONTINUED OPERATIONS AND SALES OF REAL ESTATE
In October 2001, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supersedes FASB
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" and the accounting and reporting provisions
for disposals of a segment of a business as addressed in APB Opinion No. 30,
"Reporting the Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions". SFAS No. 144 establishes a single accounting model for
long-lived assets to be disposed of by sale and addresses various implementation
issues of SFAS No. 121. In addition, SFAS No. 144 extends the reporting
requirements of discontinued operations to include components of an entity that
has either been disposed of or is classified as held for sale. The Company
adopted SFAS No. 144 as of January 1, 2002.
During 2004, the Company disposed of an assisted living community in North
Carolina and entered into a contract to sell a assisted living community in
South Carolina. The operations of these two facilities have been reflected as an
assets held for sale. Revenue for the two properties was $841,000, and
$1,986,000 in 2004, and 2003 respectively. The net loss for the two properties
was $184,000, and $395,000 in 2004, and 2003 respectively.
The South Carolina facility was sold in May 2005. Revenue and net income were
$40,610 and $(11,640) respectively for 2005.
NOTE M - SEGMENT REPORTING
The Company and its subsidiaries are principally engaged in the business of
acquiring, enhancing and selling real estate properties. From 1996 until 2003
those activities almost exclusively involved assisted living facilities.
Effective August 1, 2003, the Company acquired 100% of the stock in Gaywood Oil
& Gas, LLC ("Gaywood"), a limited liability company that owns working interests
in certain oil-producing wells. The acquisition was done for investment purposes
and substantially all costs associated with the oil and gas operations are
operating expenses incurred directly by Gaywood. The Company continues to
allocate all of its corporate overhead expenses to its core real estate
operation.
Segment information and reconciliation to income (loss) from operations are as
follows:
Twelve months ended December 31, 2005 (amounts in thousands)
Real Estate Oil & Gas
Operations Operations Consolidated
------------ ------------ ------------
Revenue $ 4,098 $ 1,723 $ 5,821
Depletion, depreciation and amortization 389 104 493
Net earnings (loss) from continuing
operations (1,349) 375 (974)
Total Assets $ 18,679 $ 1,401 $ 20,080
-57-
NOTE N - LIQUIDITY
Included in current liabilities is an obligation of principal and accrued
interest to a third party for $2,943,000. The terms of this obligation are
similar to that of preferred stock whereby the Company can only pay this
obligation out of available earned surplus. Although management anticipates that
the Company may generate excess cash from property operations in 2006, such
excess, however, will not be sufficient to discharge all of this obligation and
in accordance with the debt instrument, the amount due will not be paid until
such surplus cash is available.
NOTE O - CONTINGENCIES
Cable Partners Bulgaria LLC vs. Greenbriar Corporation and Ronald C. Finley
- ---------------------------------------------------------------------------
On December 1, 2005, Cable Partners Bulgaria, LLC ("CPB") instituted an action
in the 95th Judicial District Court of Dallas County, Texas styled Cable
Partners Bulgaria, LLC and Cable Partners Europe, LLC v. CabelTel International
Corporation f/k/a Greenbriar Corporation, Gene Phillips and Ronald C. Finley,
Cause No. 05-12021. Plaintiffs' Original Petition is also a request for an
injunction and alleged that CPB is a wholly-owned subsidiary of Cable Partners
Europe, LLC, a Delaware limited liability company ("CPE"). The complaint makes
allegations similar to an original complaint filed by CPB on January 24, 2005,
in another state district court in Dallas County, Texas (which was non-suited on
October 17, 2005), but in addition alleges that a representative of CPE talked
to Finley about CPE's possible purchase of CableTEL AD's telecommunications
systems during 2004, and that during the conversation in November 2004, told
Ronald C. Finley that CPB had an agreement to purchase Eurocom Plovdiv EOOD
("Eurocom"). The current complaint alleges that (i) the two owners of Eurocom
(who are not defendants in this action) advised CPE that they had agreed to sell
the entity to CableTEL AD and had been paid a non-refundable deposit, (ii) the
two individuals informed the CPE representative that they would complete the
sale of Eurocom to CPB only if CableTEL AD were unable to complete the purchase,
and CPB's price increased to (euro)23,000,000 with limited further due diligence
and the purchase of stock rather than assets, (iii) subsequently CPE, CableTEL
AD and the Company entered into negotiations relating to CPE's potential
acquisition of CableTEL AD, including Eurocom, (iv) the parties executed a
"letter agreement" whereby the parties agreed that they would "engage in good
faith discussions" regarding the potential transaction, which purportedly
included an exclusivity period up to April 29, 2005, (v) in June 2005,
Plaintiffs entered into a "term sheet summary" setting forth the principle
provisions of the transaction, but the defendants continued to endeavor to sell
CableTEL AD to third party purchasers, failed to cooperate with CPE's due
diligence efforts, and refused to provide CPE with copies of certain contracts,
and (vi) Plaintiffs continued to complete the transaction and expended efforts
and funds up to November 23, 2005. Plaintiffs' complaint alleges tortious
interference with an existing contract, breach of contract, and seeks a
temporary and permanent injunction, exemplary damages, costs and attorneys'
fees. An answer has been filed on behalf of the Company denying all of the
material allegations in the Complaint. Management intends to vigorously defend
the action which it perceives to be without merit as to the Company. Management
also believes that the action misstates or seeks to conveniently rearrange
certain facts and events central to the controversy.
Other
- -----
The Company has been named as a defendant in other lawsuits in the ordinary
course of business. Management is of the opinion that these lawsuits will not
have a material effect on the financial condition, results of operations or cash
flows of the Company.
-58-
NOTE P - QUARTERLY DATA (UNAUDITED)
The table below reflects the Company's selected quarterly information for the
years ended December 31, 2005 and 2004. Certain 2004 amounts have been
reclassified to conform to the current presentation of discontinued operations.
All amounts shown are in thousands.
First Second Third Fourth
Year ended December 31, 2005 Quarter Quarter Quarter Quarter
------- ------- ------- -------
Revenue $ 1,514 $ 1,532 $ 1,441 $ 1,334
Operating Expense 1,475 1,588 1,633 1,777
Other income (expense) net (181) (87) (102) 48
Net income (loss) from continuing operations 39 (56) (192) (443)
Other income (expense) net (181) (87) (102) 48
Gain (loss) from discontinued operations 5 (17) -- --
Income (loss) allocable to common shareholders (137) (160) (294) (395)
Income (loss) per common share -
basic and diluted $ 0.14 $ (0.16) $ (0.28) $ (0.71)
First Second Third Fourth
Year ended December 31, 2004 Quarter Quarter Quarter Quarter
------- ------- ------- -------
Revenue $ 1,539 $ 1,439 $ 1,645 $ 1,430
Operating Expense 1,466 1,563 1,458 2,428
Operating income (loss) 73 (124) 187 (998)
Other income (expense) net (182) (47) 426 165
Gain (loss) from discontinued operations (66) (34) 10 (226)
Income (loss) allocable to common shareholders (175) (205) 623 (1,059)
Income (loss) per common share -
basic and diluted $ (0.18) $ (0.21) $ 0.64 $ (1.09)
NOTE Q - SUPPLEMENTAL RESERVE INFORMATION (UNAUDITED)
The Company's net proved oil and natural gas reserves as of December 31, 2005
and 2004, have been estimated by Company personnel in accordance with guidelines
established by the Securities and Exchange Commission. Accordingly, the
following reserve estimates were based on existing economic and operating
conditions. Oil and gas prices in effect at December 31, of each year were used.
Operating costs, production and ad valorem taxes and future development costs
were based on current costs with no escalation.
There are numerous uncertainties inherent in estimating quantities of proved
reserves and in projecting the future rates of production and timing of
development expenditures. The following reserve data represents estimates only
and should not be construed as being exact. Moreover, the present values should
not be construed as the current market value of the Company's oil and gas
reserves or the costs that would be incurred to obtain equivalent reserves.
-59-
NOTE Q - SUPPLEMENTAL RESERVE INFORMATION (UNAUDITED) - Continued
Changes in Estimated Quantities of Proved Oil and Gas Reserves (Unaudited):
Crude Oil Natural Gas
Quantities of Proved Reserves: Bbls Mcf
- -------------------------------------- ----------- -----------
Balance December 31, 2003 510,890 --
Revisions of previous estimates (82,971) 38,870
Production (46,849)
----------- -----------
Balance December 31, 2004 381,070 38,870
Revisions of previous estimates (88,522) (12,070)
Production (41,298)
----------- -----------
Balance December 31, 2005 381,070 38,870
=========== ===========
Proved Developed Reserves:
- --------------------------
Balance December 31, 2004 381,070 38,870
Balance December 31, 2005 251,250 26,800
Standardized Measure of Discounted Future Net Cash Flows and Changes Therein
Relating to Proved Oil and Gas Reserves (Unaudited)
The Standardized Measure of Discounted Future Net Cash Flows and Changes Therein
Relating to Proved Oil and Gas Reserves ("Standardized Measures") does not
purport to present the fair market value of a company's oil and gas properties.
An estimate of such value should consider, among other factors, anticipated
future prices of oil and gas, the probability of recoveries in excess of
existing proved reserves, the value of probable reserves and acreage prospects,
and perhaps different discount rates. It should be noted that estimates of
reserve quantities, especially from new discoveries, are inherently imprecise
and subject to substantial revision.
Reserve estimates were prepared in accordance with standard Security and
Exchange Commission guidelines. The future net cash flow was computed using
year-end 2004, oil and gas prices. Lease operating costs, compression,
dehydration, transportation, ad valorem taxes, severance taxes and federal
income taxes were deducted. Costs and prices were held constant and were not
escalated over the life of the properties. No deduction has been made for
interest or general corporate overhead. The annual discount of estimated future
cash flows is defined, for use herein, as future cash flows discounted at 10%
per year, over the expected period of realization.
Proved Developed Reserves were calculated based on Decline Curve Analysis on 22
operating wells and 15 non-operated wells.
During 2005, the Company continued to operate the producing wells it acquired in
2003. The Company controls approximately 198 wells but only had 50 wells in
production on December 31, 2005.
The Company controls 68 leases which were abandoned by larger oil and gas
companies in the past due to low production. The Company's operating wells
average from 70 to 360 barrels per month. Due to low production and relatively
high overhead the Company estimates that its production would be unprofitable if
the price of oil fell below $24 per barrel.
-60-
NOTE Q - SUPPLEMENTAL RESERVE INFORMATION (UNAUDITED) - Continued
Standardized measure of discounted future net cash flows related to proved
reserves:
Year Ended December 31,
--------------------------
2005 2004
----------- -----------
Future production revenue $14,985,000 $16,420,000
Future development costs 20,000 83,000
Future production costs 10,874,000 11,394,000
----------- -----------
Future net cash flow before federal
income tax 4,091,000 4,943,000
Federal income tax 1,391,000 1,680,000
----------- -----------
Future net cash flows 2,700,000 3,263,000
Effect of 10% annual discounting 972,000 1,304,000
----------- -----------
Standardized measure of
Discounted net cash flows $ 1,728,000 $ 1,959,000
=========== ===========
Changes in the standardized measure of discounted future net cash flows:
Year Ended December 31,
---------------------------
2005 2004
----------- -----------
Beginning of the year $ 1,959,000 $ 1,361,000
Oil and gas sales, net of
production costs (478,000) (407,000)
Net change in prices, net of
production costs 2,645,000 2,670,000
Changes in production rates, timing and other
Revisions of quantity estimate (2,436,000) (1,815,000)
Effect of income tax (71,000) (291,000)
Accretion of discount 109,000 441,000
----------- -----------
Standardized measure of
Discounted net cash flows $ 1,728,000 $ 1,959,000
=========== ===========
-61-
EXHIBIT INDEX
Exhibit No. Exhibit
21.1 Subsidiaries of the Registrant
23.1 Consent of Farmer, Fuqua & Hunt, P.C.
31.1 Rule 13a-14(a) Certification by Chief Executive Officer
31.2 Rule 13a-14(a) Certification by Chief Financial Officer
32.1 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. ss.1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
-62-