-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SeQIDKjeClK8yAVL8MJorgcVWndV989kJG32V8iOhOGUtQFFyfdo1gWCLkd11d0m xXkNLkBVrn6qckjJAKlj3Q== 0001010549-05-000875.txt : 20051123 0001010549-05-000875.hdr.sgml : 20051123 20051123143203 ACCESSION NUMBER: 0001010549-05-000875 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20041231 FILED AS OF DATE: 20051123 DATE AS OF CHANGE: 20051123 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CabelTel International Corp CENTRAL INDEX KEY: 0000105744 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-SKILLED NURSING CARE FACILITIES [8051] IRS NUMBER: 752399477 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-08187 FILM NUMBER: 051224431 BUSINESS ADDRESS: STREET 1: 1755 WITTINGTON PLACE STREET 2: SUITE 340 CITY: DALLAS STATE: TX ZIP: 75234 BUSINESS PHONE: 9724078400 MAIL ADDRESS: STREET 1: 1755 WITTINGTON PLACE STREET 2: SUITE 340 CITY: DALLAS STATE: TX ZIP: 75234 FORMER COMPANY: FORMER CONFORMED NAME: GREENBRIAR CORP DATE OF NAME CHANGE: 19960514 FORMER COMPANY: FORMER CONFORMED NAME: MEDICAL RESOURCE COMPANIES OF AMERICA DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: WESPAC INVESTORS TRUST DATE OF NAME CHANGE: 19900605 10-K/A 1 cabel10ka123104.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K/A AMENDMENT NUMBER 3 (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, 2004 ------------------------------------------------------- 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 - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Nevada 75-2399477 - ------------------------------- ------------------------------- (State or other jurisdiction of (IRS Employer Identification Incorporation or organization) Number) 1755 Wittington Place, Suite 340, Dallas, Texas 75234 - ----------------------------------------------- ------------------------- (Address of principal executive offices) (Zip Code) Registrant's Telephone Number, including area code (972) 407-8400 ------------------------------ Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Name of each exchange on which registered Common Stock, $0.01 par value American Stock Exchange 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] 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 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 $1,870,891 based upon a total of 400,619 shares held as of March 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 June 30, 2005, there were 977,004 shares of common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE None APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of Common Stock, as of the latest practicable date. Common Stock, $.01 par value 976,961 shares (Class) (Outstanding at November 11, 2005) ================================================================================ AMENDMENT NO. 3 TO FORM 10-K ANNUAL REPORT FOR CABELTEL INTERNATIONAL CORPORATION FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004 The undersigned Registrant hereby amends the following items, exhibits, or other portions of its Annual Report on Form 10-K for the fiscal year ended December 31, 2004, as set forth below and as reflected in the substituted pages attached hereto which replace the same numbered pages in the original filing. As a preface to the identification below, the entirety of the Report has been amended to reflect an acquisition of two U.S. entities which are not consolidated into the Company but are maintained in a separate basis; see Item I, Business - "Recent Acquisition of CableTEL AD." This change was necessitated by certain comments by the Staff of the Securities and Exchange Commission (the "SEC"), which resulted in an appeal to the Office of the Chief Accountant of the SEC. On October 25, 2005, the Office of the Chief Accountant of the SEC provided its determination of the appeal with respect to certain accounting treatment. The appeal was the result of an initial determination and comment by the Staff of the SEC during May 2005, that, in this very unique set of circumstances and in the opinion of the Staff, reverse acquisition accounting treatment may not have been the proper treatment. Management has determined based upon discussions with the Office of the Chief Accountant during such appeal that while the overall acquisition and other contingent aspects of the transaction are a single transaction, the appropriate accounting treatment at this time is recordation of the issuance of the Preferred Stock together with a recordation of a "contra asset" in the same amount for the value of the two U.S. corporations and CableTEL AD. The result is that Management of the Company filed a Form 8-K Current Report for event noted October 25, 2005, under Item 4.02, which of necessity requires certain changes in the Annual Report on Form 10-K to cover such treatment. This document includes additional items of Form 10-K which have not been amended or changed, but the items which are changed are as follows: o Page 4, Item 1 - Business. o Page 13, Item 2 - Properties. o Page 16, Item 6 - Selected Financial Data. o Page 17, Item 7 - Management's Discussion and Analysis of Results of Operation. o Page 22, Item 7(a) - Quantitative and Qualitative Disclosures About Market Risk. o Page 22, Item 8 - Financial Statements (also F-1 following). The balance of the items have not been changed from the original filing, and have accordingly not been updated to a more current date. 2 CABELTEL INTERNATIONAL CORPORATION Index to Annual Report on Form 10-K Fiscal year ended December 31, 2004 PART I.........................................................................4 Item 1. Business...........................................................4 Item 2. Properties........................................................13 Item 3. Legal Proceedings.................................................13 Item 4. Submission of Matters to a Vote of Security Holders...............14 PART II.......................................................................15 Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.................15 Item 6. Selected Financial Data...........................................16 Item 7. Management's Discussion and Analysis of Results of Operation......17 Item 7a: Quantitative And Qualitative Disclosures About Market Risk.......22 Item 8. Financial Statements..............................................22 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure..........................................22 Item 9a. Controls and Procedures...........................................23 Item 9b. Other Information.................................................23 PART III......................................................................24 Item 10. Directors and Executive Officers of the Registrant...............24 Item 11. Executive Compensation...........................................28 Item 12. Security Ownership of Certain Beneficial Owners and Management...31 Item 13. Certain Relationships and Related Transactions...................34 Item 14. Principal Accounting Fees and Services...........................35 PART IV.......................................................................38 Item 15. Exhibits and Financial Statement Schedules.......................38 SIGNATURES....................................................................41 3 PART I 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 "Risks Related to the Company" beginning on page 10. 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 28, 2005, the name of the Company was changed to CabelTel International Corporation. We operate retirement-focused real estate, own and operate an outlet shopping mall in Gainesville, Texas and own interests in producing oil and gas leases in Gregg and Rusk Counties, Texas. Business Operations We operate two separate distinct businesses: o ownership and operation of real estate through: (i) one retirement community in King City, Oregon, with a capacity of 114 residents, and leasing of a residential retirement property to a third party in Greenville, South Carolina, 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 48 producing wells were operating as of March 31, 2005 4 Financial information about our segments can be found in Note M "Segment Reporting" in the Notes to Consolidated Financial Statements found at Item 8 "Financial Statements and Supplementary Data 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 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 which offers 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, which was owned, operated and managed by the Company at March 31, 2005. The Company considers its community to be in good operating condition and suitable for the purpose for which it is being used. 5
Community Care Resident Operations Community Location Level Units Capacity(3) Commenced Ownership - --------------------------------------------------------------------------------------------------- Pacific Pointe Retirement King City, OR S 114 114 1993 Leased (4) Inn Windsor House Greenville Greenville, SC FE 31 50 1997 Owned(5)
Key: (1) S basic support and supplemental services are offered. (2) FE assisted living with additional support and supplemental services offered. (3) Reflects actual number of units for Independent Living. (4) 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 (5) Leased to an independent third party.. 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. Since purchasing the mall in December 2003 occupancy has risen from 60% to 76%. Mall traffic has been enhanced by a more aggressive marketing effort as well as development in its immediate Gainesville Texas area including the opening 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. 6 Summary Oil Reserve Data The following table sets forth summary information concerning the Company's proved oil reserves on December 31, 2004, 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, 2004 Oil (MBbl) 381.07 Productive Wells The following table summarizes our gross working interests and net revenue interests in productive oil wells at March 31, 2005. All wells are in the State of Texas. Gross Wells Net Wells 48 36 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 by 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 $3.15 per barrel at March 31, 2005. 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. 7 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 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 communities. Employees At March 31, 2005, the Company employed 56 people (20 full-time and 36 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. 8 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. Recent 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 ("CableTEL"), 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 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. CableTEL AD 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 384 employees (372 full-time and 12 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 AD, please refer to Note A in the accompanying financial statements. 9 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 written request. The Company issues Annual Reports containing audited financial statements to its common stockholders. 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 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 highly volatile. Although the Company has benefited from extremely high crude oil prices in the last two 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 very expensive and cannot 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, 10 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 March 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 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. 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 on a regular basis. These inspections cover the appearance of the exterior and grounds, the appearance and cleanliness of the interior, the professionalism and friendliness of staff, where applicable, 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 7. The Company has no marketing efforts or responsibility in this facet of its business. 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 ("ADA"). That community must also be in compliance with the Fair Housing Amendments Act. 11 In compliance with underlying state bond financing, rents at Pacific Pointe must be approved by an agency of the state. The operations of any facility gathering, transporting, processing or storing natural gas and 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. The Company is subject to the Fair Labor Standards Act, which governs such matters as minimum wage, overtime and other working conditions. Many of the Company's employees are paid at rates related to the federal minimum wage and accordingly, increases 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. 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 CIC feels that the market will not support another mall. The crude oil business has many factors, 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. Insurance 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 Company currently maintains liability insurance intended to cover such claims. However, the number of insurance carriers who offer such insurance has diminished in recent years and the costs of such insurance continues to escalate. The Company also carries property insurance on each of its properties. 12 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 communities. ITEM 2. PROPERTIES - ------------------- The Company's principal offices are approximately 5,000 square feet of leased space in Dallas, Texas. The Company believes its leased space 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 5. ITEM 3. LEGAL PROCEEDINGS - -------------------------- On January 24, 2005, Cable Partners Bulgaria LLC, a Colorado limited liability company, instituted an action in the District Court of Dallas County, Texas styled Cable Partners Bulgaria LLC v. Greenbriar Corporation and Ronald C. Finley, Cause No. 05-00746-L in the 193rd Judicial District Court of Dallas County, Texas. Plaintiff's original petition alleges that Cable Partners Bulgaria LLC ("CPB") was formed to acquire the assets of a cable telecommunications system located in Plovdiv, Bulgaria, known as "Eurocom", and to that end entered into a letter agreement on October 12, 2004, with two individuals on behalf of Eurocom to purchase all of the assets of Eurocom. Plaintiff's complaint alleges that the letter agreement with CPB obligates the two individuals to sell all of Eurocom's assets to CPB, and that CPB's 13 obligation to complete the purchase is conditioned upon completion of due diligence reviews and negotiation with the two individuals of a customary purchase and sale agreement and customary employment and non-competition agreements. The October 12, 2004 letter agreement provided that CPB was to "utilize commercially-reasonable efforts" for completing the due diligence and agreements by January 7, 2005. Plaintiff's complaint alleges it engaged an international accounting firm to conduct the due diligence, but the delays resulted in an extension until February 28, 2005, at a minimum. Plaintiff's complaint alleges that certain meetings occurred in December 2004 and January 2005, and alleges tortuous interference with a contract and prospective contract by the Company and Ronald Finley, seeks a temporary injunction and permanent injunction enjoining the Company and its subsidiaries from further contact with the two individuals, and a judgment against the Company in the amount of at least (euro)4.5 million plus exemplary damages and attorneys' fees and costs. Management of the Company intends to vigorously defend the action, which it perceives to be without merit. Representatives of CableTEL AD had conversations and arrangements in place with the individual stockholders of Eurocom well before either the October 12, 2004 purported letter agreement or the November/December 2004 conversations. Management also believes the action misstates or seeks to rearrange facts and events central to the controversy. The ownership of property and provision of services to the public entails an inherent risk of liability. Although the Company and its subsidiaries 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 October 20, 2004, 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 720,202 2,888 Gene S. Bertcher 713,462 2,888 James E. Huffstickler 720,200 2,888 Dan Locklear 720,200 2,888 Victor L. Lund 712,562 2,888 There were no votes or broker non-votes on the election of directors. 14 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.) 2004 2003 High Low High Low ---------------- ---------------- First Quarter $5.39 3.62 $4.25 3.62 Second Quarter 3.98 2.80 4.50 3.65 Third Quarter 3.74 3.17 4.00 2.15 Fourth Quarter 4.73 3.00 6.50 2.38 According to the Transfer Agent's records, at March 31, 2005, our Common Stock was held by approximately 463 holders of record. On March 31, 2005, the closing price of the Company's Common Stock was $6.05. The Company paid no dividends on its Common Stock in 2003 or 2004. The Company has not paid cash dividends on its Common Stock during at least the 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. 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. However, in the past when stockholders owning less than one round lot (100 shares) so request, the Company has purchased 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, 2004. 15
Total No. of Maximum No. of Shares Shares that May Repurchased as Yet Be Total No. of Weighted part of Publicly- Repurchased Shares Average Price Announced Under the Period Repurchased Per Share Program Program 10/01-31/2004 -0- -0- -0- -0- 11/01-30/2004 -0- -0- -0- -0- 12/01-31/2004 -0- -0- -0- -0- ITEM 6. SELECTED FINANCIAL DATA - -------------------------------- 2004 2003 2002 2001 2000 --------- --------- --------- --------- -------- Operating revenue $ 6,223 $ 3,047 $ 3,300 $ 23,568 $ 33,482 Operating expenses 7,130 3,636 5,373 27,543 6,378 Operating profit (loss) (907) (589) (2,073) (3,975) (10,115) Earnings (loss) from continuing operations before income taxes $ (632) $ 617 $ (2,724) $ 9,559 $ (10,115) Income tax (income) expense -- -- 749 2,824 -- Earnings (loss) from continuing operations (632) 617 (3,473) 6,735 (10,115) Loss from discontinued operations (184) (395) (4,900) (317) (508) NET EARNINGS (LOSS) $ (816) 222 (8,373) 6,418 (10,623) Net earnings (loss) applicable to Common shares - Basic and diluted $ (0.84) $ 0.31 $ (11.67) $ 15.53 $ (39.17) BALANCE SHEET DATA: 2004 2003 2002 2001 2000 Total assets $ 16,766 $ 18,131 $ 12,624 $ 44,022 $ 102,588 Long-term debt 8,338 2,053 8,479 16,693 50,887 Total liabilities 15,028 15,557 11,273 34,753 68,944 Preferred stock redemption obligation -- -- -- -- 26,988 Total stockholders' equity 1,738 2,554 1,351 9,269 6,656
16 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATION - --------------------------------------------------------------------- Overview As of March 31, 2005, the Company owns one assisted living community and leases one community in two separate states, with a total capacity of 204 residents. In addition, the Company owns one community that is operated by an independent third party with a capacity of 41 residents. The Company also controls the leases for 200 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 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 17 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, 2004, the Company had current assets of $3,703,000 and current liabilities of $6,535,000. Included in current liabilities is an obligation of principal and accrued interest to Sylvia Gilley, wife of a former President of the Company, for $2,717,000. 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 $762,000, $688,000 and $661,000 in 2004, 2003 and 2002 respectively. Net cash (used in) operating activities was ($2,166,000) in 2004, ($486,000) in 2003 and ($3,885,000) in 2002. Net cash provided by (used in) investing activities was $734,000 in 2004, ($765,000) in 2003 and $8,273,000 in 2002. 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. In 2002, the cash provided was principally from the proceeds from the sale of investments of $1,098,000 and the sale of properties of $7,460,000. Net cash provided by (used in) financing activities was $1,506,000 in 2004, $1,278,000 in 2003 and ($4,973,000) in 2002. 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. In 2002, the net use of cash was principally due to the repayment of debt on properties that were sold. Results of Operations Fiscal 2004 as Compared to Fiscal 2003 Revenues and Operating Expenses from Assisted Living Operations: Revenues were $2,736,000 in 2004, as compared to $2,597,000,000 in 2003. Community operating expenses, which consist of assisted living operations expense, lease expense and depreciation and amortization, were $2,182,000 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 $1,088,000 in 2004 and $400,000 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. 18 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 $991,000 in 2004, as compared to $498,000 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. 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 $342,000 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. 19 Discontinued Operations: 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 have either been disposed of or are 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 and entered into a contract to sell a second assisted living community. 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 Fiscal 2003 as Compared to Fiscal 2002 Revenues and Operating Expenses from Real Estate Operations: Revenues from our retirement facilities were $2,598,000 in 2003, as compared to $2,378,000 in 2002. Community operating expenses, which consist of retirement operations, lease expense and depreciation and amortization, were $1,890,000 in 2003, as compared to $1,745,000 in 2002. The increases in revenue and expenses in 2003 are primarily due to increased occupancy. The Company also received revenue from fees and incurred costs for managing facilities for other third party entities. These fees and costs have been included in real estate revenue and operating expenses. Revenues and Operating Expenses from Oil & Gas Operations: The Company acquired its oil & gas operations effective August 1, 2003. Revenues were $449,000, operating expenses were $400,000 and depletion and depreciation was $41,000. Corporate General and Administrative Expenses: These expenses were $1,111,000 in 2003, as compared to $2,329,000 in 2002. The decrease in the corporate general and administrative expenses is primarily a result of a decrease in salaries and related payroll expenses. Due to a significant reduction in the number of retirement communities operated by the Company, the number of employees on the corporate staff was reduced. The downsizing also resulted in an overall decrease in almost all general and administrative cost categories. Write-off of Impaired Assets and Related Expenses: During 2002, the Company wrote down the recorded value of a property it was attempting to sell. Interest and Dividend Income: Interest and dividend income was $304,000 in 2003, as compared to $412,000 in 2002. The decrease in interest and dividend income is a result of a reduction in the notes receivable held by the Company. Interest Expenses: These expenses decreased to $498,000 in 2003, as compared to $840,000 in 2002. The decrease is due primarily to the reduction in the number of retirement communities. 20 Gain on Sale of Assets: In 2001, the Company sold a property and received proceeds of both cash and a bond bearing interest at 9.5%. The payment of both principal and interest on the bond was based exclusively on the cash flow from the property sold. For financial statement purposes the bond was valued at zero. In August 2003, the Company exchanged the bond for 100% of Gaywood Oil and Gas, LLC ("Gaywood"). Gaywood was valued by independent engineers as having a fair market value of $1,169,000, which was recorded as a gain by the Company. In September 2003, the Company sold land it was holding for $125,000 cash and recorded a loss of $111,000 on the sale. In November 2002, the Company sold its 56% interest in Muskogee Real Estate Investors, LP to Sylvia M. Gilley in exchange for a reduction of $1,120,000 owed to Ms. Gilley and a one year extension on the remaining portion of the note due her of $2,255,000. The Company recorded income of $930,000. Other Income( Expenses): Other income was $342,000 in 2003 and a negative $1,153,000 in 2002. 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. In September 2002, the Company entered into a venture with a third party to secure partnership interests in future acquisitions of assisted living communities. The agreement required the Company to pay $660,000 over the next twelve months to fund the cost of the due diligence for these acquisitions. There could be no assurance that this venture would be successful so the Company charged the entire cost to expense. The Company recorded its 56% investment CREI by the equity method of accounting. The Company's share of the operating losses of this partnership was $621,000. On September 30, 2002, CREI sold its two properties to a third party for a gain of $2,315,000. The Company has deferred recognition of its 56% participation in the gain. Discontinued Operations: In October 2001, the Financial Accounting Standard Board issued Statement of Financial Accounting Standards #144, :Accounting for the Impairment or Disposal of Long Lived Assets". ("SFAS #144"). The Company adopted SFAS #144 effective January 1, 2002, which resulted in a presentation of the net operating results of qualifying properties sold in 2002 as a (loss) from discontinued operations for all periods presented. During 2002, the Company disposed of six properties. Revenue for the six properties was approximately $4,698,000 in 2002. Operating expenses for the six properties were approximately $5,325,000 in 2002. The loss on sale of these six properties was $3,729,000, which includes income tax expense of $440,000. During 2004, the Company disposed of an assisted living community and entered into a contract to sell a second assisted living community, which has been reflected as an asset held for sale. Revenue for the two properties was $ $1,986,000, and $1,122,000 in 2003 and 2002, respectively. The net loss from operations for the two properties were $395,000 and $272,000 in 2003 and 2002, respectively Effect of Inflation The Company's principal sources of revenue are from rents in a retirement community, an outlet shopping mall and its oil and gas operations. The operation of the real estate entities is affected by rental rates that are highly dependent upon market conditions and the competitive environment in the areas where the properties are located. Worldwide consumption patterns seem to preclude competition in the oil business in the foreseeable future. Compensation 21 to employees and maintenance are the principal cost elements relative to the operations of the entities. Although the Company has not historically experienced any adverse effects of inflation on salaries or other operating expenses, there can be no assurance that such trends will continue or that, should inflationary pressures arise, the Company will be able to offset such costs by increasing rental rates in its real estate properties. The price of oil is dictated by market conditions and the Company could not arbitrarily increase the price of its oil. Forward Looking Statements "Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995: A number of the matters and subject areas discussed in this filing that are not historical or current facts deal with potential future circumstances, operations and prospects. The discussion of such matters and subject areas is qualified by the inherent risks and uncertainties surrounding future expectations generally, and also may materially differ from the Company's actual future experience involving any one or more of such matters and subject areas relating to interest rate fluctuations, ability to obtain adequate debt and equity financing, demand, pricing, competition, construction, licensing, permitting, construction delays on new developments contractual and licensure, and other delays on the disposition, transition, or restructuring of currently or previously owned, leased or managed communities in the Company's portfolio, and the ability of the Company to continue managing its costs and cash flow while maintaining high occupancy rates and market rate assisted living charges in its assisted living communities. The Company has attempted to identify, in context, certain of the factors that it currently believes may cause actual future experience and results to differ from The Company's current expectations regarding the relevant matter or subject area. These and other risks and uncertainties are detailed in the Company's reports filed with the Securities and Exchange Commission ("SEC"), including The Company's Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q. 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 F-1 of this report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND - -------------------------------------------------------------------------------- FINANCIAL DISCLOSURE -------------------- Effective February 9, 2004, the Audit Committee of the Board of Directors of the Company engaged the Plano, Texas accounting firm of Farmer, Fuqua & Huff, P.C. as the independent accountants to audit the Company's financial statements for the fiscal year ended December 31, 2003. During the Company's two most recent fiscal years and any subsequent interim period, the Company had not consulted with Farmer, Fuqua & Huff, P.C. or any of its members about the application of accounting principles to any specified transaction or any other matter. The decision to change accountants was approved by the Audit Committee of the Board of Directors of the Company. Audit Committee members are Dan Locklear, James Huffstickler and Victor Lund. 22 The engagement, effective February 9, 2004, of Farmer, Fuqua & Huff, P.C. as the new independent accountants for the Company necessarily resulted in the termination or dismissal of the principal accountant which audited the Company's financial statements for the two fiscal years ended December 31, 2002, Grant Thornton LLP. Grant Thornton LLP's reports dated March 28, 2002 and March 18, 2003 did not contain any adverse opinion or disclaimer of opinion, nor were the qualified or modified as to uncertainty, audit scope or accounting principles. During the Company's two most recent fiscal years and subsequent interim period through February 9, 2004, there were no disagreements between the Company and Grant Thornton LLP concerning any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure which disagreements, if not resolved to Grant Thornton LLP's satisfaction, would have caused them to make reference to the subject matter of the disagreement in connection with their report; there were no reportable events described in Item 304(a)(1)(v) of Regulation S-K. ITEM 9A. CONTROLS AND PROCEDURES - --------------------------------- As required by Rule 13a-15(b), the Company's management, including the principal executive officer, chief financial officer and principal accounting officer, conducted an evaluation as of the end of the period covered by this report of the effectiveness of the Company's disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e). Based on that evaluation, the chief executive officer and the chief financial officer concluded that the Company's disclosure controls and procedures were effective as of the end of the period covered by this report. As required by Rule 13(a)-15(d), the Company's management, including the chief executive officer, chief financial officer and principal accounting officer, also conducted an evaluation of the Company's internal controls over financial reporting to determine whether any changes occurred in the fourth fiscal quarter that materially affected, or are reasonably like to materially effect, the Company's internal control over financial reporting. Based on that evaluation, there has been no such change during the fourth fiscal quarter. It should be noted that any system of controls, however well designed and operated, can only provide reasonable and not absolute assurance that the objectives of the system will be met. In addition, the design of any control system is based in part on certain assumptions about the likelihood of future events. ITEM 9B. OTHER INFORMATION - -------------------------- Not applicable. 23 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 or until a successor has been elected or approved. 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 (formerly Greenbriar Corporation) Attn: Investor Relations 1755 Wittington Place, Suite 340 Dallas, Texas 75234 972-407-8400 (Telephone) 24 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, a member of the Audit Committee, 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 or 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 48, (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 56 (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 Executive Vice President, Chief Financial Officer and Treasurer of the Company since November 1989. He has been a certified public accountant since 1973. Ronald C. Finley, age 55, (Affiliated) Director since November 1, 2004 Mr. Finley became a Director and Chairman 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 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 25 service for the hotel/resort industry in Bulgaria; World Trade Company, LTD, 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 62, (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 the past 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 52 (Independent) Director since December 2003 Mr. Locklear has been chief financial officer of Sunridge Management Group, a real estate management company, for more than the past 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 76 (Independent) Director since March 1996 Mr. Lund founded Wedgwood Retirement Inns, Inc. 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 two meetings during 2004 and acted by unanimous consent one time. 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. 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 26 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) and 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 such 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| - ----------------------- ---------------- ----------------- --------------------- During October 2004, the Board adopted its Corporate Governance Guidelines. The Guidelines adopted by the Board meet or exceed the new listing standards adopted during the year by the AMEX. Pursuant to the Guidelines, the Board undertook its annual review of director independence, and during this review, the Board considered transactions and relationships between each director or any member of his or her immediate family and the Company and its subsidiaries and affiliates, including those reported under Certain Relationships and Related Transactions below. The Board also examined transactions and relationships between directors or their affiliates and members of the Company's senior management or their affiliates. As provided in the Guidelines, the purpose of such review was to determine whether such relationships or transactions were inconsistent with the determination that the director is independent. 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 62, 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. 27 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 has been posted on the Company's internet website address at http://www.cabeltel.us and are 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, 2004, 2003 and 2002 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 2004 and the value of the unexercised options held by any of such persons on December 31, 2004. 28
Summary Compensation Table - --------------------------------- --------- ---------------- ----------------- ------------------- Long Term Compensation- Number of Shares of Common Stock Name and Annual Underlying All Principal Compensation- Options Other Position Year Salary Compensation(1) - --------------------------------- --------- ---------------- ----------------- ------------------- Gene S. Bertcher, 2004 $137,000 President, Chief Financial 2003 134,000 -- $ -- Officer and until 11/1/04, 2002 14,000 -- 6,500 Chairman and Chief Executive 6,500 Officer Ronald C. Finley, 2004 Chairman and Chief Executive Officer since 11/1/04
(1) Constitutes directors' fees paid by the Company to the named individuals. Option Grants Table (Option Grants in Last Fiscal Year) Number of Percent of Securities Total Options Underlying Granted to Exercise or Options Employees in Base Price Expiration Name Granted Fiscal Year Per Share Date - --------- ------------- ------------------- ------------- ------------ NONE 29 Aggregated Option Exercises in Last Fiscal Year and FY-End Option Values - ------- -------------- ---------- ------------------------ --------------------- Value of Unexercised Number of Securities In-the-Money Underlying Unexercised Options at 2002 Shares Options at 2002 FY-End FY-End Acquired Value Exercisable Exercisable Name on Exercise Realized Unexercisable 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 percent 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. 30 Performance Graph The following graph compares the cumulative total return on a $100 investment in the company's common stock on December 31, 2000 through December 31, 2004, 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. [GRAPHIC OMITTED] ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - ------------------------------------------------------------------------ The following table sets forth as of March 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 2004 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. Common Stock ------------------------------------ Name of Beneficial Owner No. of Shares Percent of Class* - ------------------------------------------- ---------------- ------------------- Victor L. Lund(1) 108,994 11.16% Gene S. Bertcher(2) 71,811 7.35% Roz Campisi Beadle 100 ** 31 Common Stock ------------------------------------ Name of Beneficial Owner No. of Shares Percent of Class* - ------------------------------------------- ---------------- ------------------- Ronald C. Finley(8) - - James E. Huffstickler - - Dan Locklear - - JRG Investments, 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 977,004 shares of common stock outstanding at March 31, 2005. ** less than 1% (1) Consists of 108,994 shares of common stock owned by Mr. Lund. (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 Form 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 Investments, 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 CEO. 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 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, 32 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 September 30, 2005, 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: 33
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 September 30, 2005, then at any time thereafter until September 30, 2006, 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 BV 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 BV 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 BV, 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. 34 The Company, through subsidiaries, owns 30% of CableTEL AD directly and owns 64% of Narisma Holdings, Ltd., a Cyprus company that 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, 2004): Type of Fees 2004 (a) 2003 (b) Audit Fees $166,110 $ 94,259 Audit Related Fees 4,701 Tax Fees 3,000 42,524 All Other Fees -- -- Total Fees $173,811 $136,783 (a) The am ount of audit fees paid to Farmer, Fuqua & Huff, P.C. for January 2004 throug h December 2004 was $30,000; 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. (b) The amount of audit fees paid to Grant Thornton LLP for January 2003 through December 2003 was $50,620. 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. 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 are not required by statute or regulation and consulting on financial accounting/reporting standards. 35 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 did not render any professional services to the Company in 2004 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 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 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 36 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. 37 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 filled as part of this Report on Form 10-K: Report of Farmer, Fuqua & Huff, P.C......................F-1 Report of Grant Thornton LLP.............................F-2 Consolidated Balance Sheets..............................F-3 Consolidated Statement of Operations.....................F-5 Consolidated Statements of Cash Flows....................F-6 Consolidated Statement of Changes in Stockholders' Equity.....................................F-8 Notes to Consolidated Financial Statements...............F-9 (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) 38 Exhibit Designation Exhibit Description 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). 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) 39 Exhibit Designation Exhibit Description 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 Warrant to Purchase 20,000 shares of Common Stock issued October 20, 2004 10.6 Warrant to Purchase 170,000 shares of Common Stock issued October 20, 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) 21.0* Subsidiaries of the Registrant 23.0* Consent of Farmer, Fuqua & Hunt, P.C. 23.2* Consent of Grant Thornton LLP 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 99.1* Audited financial statements of CableTEL AD *Filed herewith. 40 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 November 18, 2005 by: /s/ Gene S. Bertcher ----------------------------------------------- Gene S. Bertcher, President and Chief Financial Officer 41 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, 2004, and 2003, and the related consolidated statements of income, shareholders' equity and cash flows for the years then ended. 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, 2004, and 2003, and the consolidated results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. /s/ FARMER FUQUA & HUFF, P.C. Plano, Texas April 15, 2005 F-1 Report of Independent Registered Public Accounting Firm Board of Directors and Stockholders Cabeltel International Corporation We have audited the accompanying consolidated statements of operations, changes in stockholders' equity and cash flows of Cabeltel International Corporation (formerly Greenbriar Corporation) and subsidiaries for the year ended December 31, 2002. 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 audit. We conducted our audit 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 audit includes 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 audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated results of operations and the consolidated cash flows of Cabeltel International Corporation and subsidiaries for the year ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. As discussed in Note O to the consolidated financial statements, on January 1, 2002, the Company adopted the provisions of Statement of Financial Accounting Standards No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets." GRANT THORNTON LLP Dallas, Texas March 28, 2003 F-2
CabelTel International Corporation and Subsidiaries CONSOLIDATED BALANCE SHEETS (Amounts in thousands) December 31, ASSETS 2004 2003 ---------- ---------- CURRENT ASSETS Cash and cash equivalents $ 762 $ 688 Accounts receivable - trade 222 100 Notes receivable 856 2,435 Property held for sale 1,760 1,859 Other current assets, net 103 198 ---------- ---------- Total Current Assets 3,703 5,280 NOTES RECEIVABLE, net of deferred income 309 387 PROPERTY AND EQUIPTMENT, AT COST Land and improvements 2,232 2,446 Buildings and improvements 6,987 7,276 Equipment and furnishings 273 951 Proven oil and gas properties (full cost method) 1,479 1,361 ---------- ---------- 10,971 12,034 Less accumulated depreciation, depletion, and amortization (1,090) (1,280) ---------- ---------- 9,881 10,754 DEFERRED INCOME TAX BENEFIT 1,161 1,161 DUE FROM CABLETEL AD 951 DEPOSITS 36 232 OTHER ASSETS, NET 725 317 ---------- ---------- Total Assets $ 16,766 $ 18,131 ========== ==========
The accompanying notes are an integral part of this statement. F-3
CabelTel International Corporation and Subsidiaries CONSOLIDATED BALANCE SHEETS - CONTINUED (Amounts in thousands, except share amounts) December 31, LIABILITIES AND STOCKHOLDERS' EQUITY 2004 2003 ---------- ---------- CURRENT LIABILITIES Current maturities of long-term debt, including amounts to related parties of $901 $ 4,780 $ 4,690 Current notes payable 240 5,571 Accounts payable - trade 687 503 Accrued expenses 828 633 Other current liabilities -- 931 ---------- ---------- Total Current Liabilities 6,535 12,328 LONG-TERM DEBT 8,338 2,053 OTHER NON-CURRENT LIABILITIES 155 -- DEFERRED GAIN -- 740 OTHER LONG-TERM LIABILITIES -- 456 ---------- ---------- Total Liabilities 15,028 15,577 STOCKHOLDERS' EQUITY Preferred stock, Series B 1 1 Preferred stock, Series J 2% 3,150 -- Preferred stock, Series J contra equity (3,150) -- Common stock, $.01 par value; authorized, 4,000,000 shares; issued and outstanding, 977,000 shares 10 10 Additional paid-in capital 55,966 55,966 Accumulated deficit (54,239) (53,423) ---------- ---------- 1,738 2,554 ---------- ---------- Total liabilities & equity 16,766 18,131 ========== ==========
The accompanying notes are an integral part of this statement. F-4
CabelTel International Corporation and Subsidiaries CONSOLIDATED STATEMENTS OF OPERATIONS (Amounts in thousands, except per share amounts) Year ended December 31, 2004 2003 2002 ---------- ---------- ---------- Revenue Real estate operations $ 4,813 $ 2,598 $ 3,300 Oil and gas operations 1,410 449 -- ---------- ---------- ---------- 6,223 3,047 3,300 ---------- ---------- ---------- Operating expenses Real estate operations 2,925 996 1,366 Oil and gas operations 1,003 400 -- Lease expense 917 969 1,112 Depreciation, depletion, and amortization 570 160 300 General and administrative 1,715 1,111 2,329 Write-down of assets -- -- 266 ---------- ---------- ---------- 7,130 3,636 5,373 ---------- ---------- ---------- Operating loss (907) (589) (2,073) Other income (expense) Interest income 213 304 412 Interest expense (991) (498) (840) Gain on sale of assets, net 1,456 1,058 930 Other income (expense), net (403) 342 (1,153) ---------- ---------- ---------- 275 1,206 (651) ---------- ---------- ---------- Earnings (loss) from continuing operations before income taxes (632) 617 (2,724) Income tax expense -- -- 749 Earnings (loss) from continuing operations (632) 617 (3,473) ---------- ---------- ---------- Discontinued operations Loss from operations (184) (395) (899) Loss on disposal, (including taxes of $440 in 2002) -- -- (4,001) ---------- ---------- ---------- Loss from discontinued operations (184) (395) (4,900) ---------- ---------- ---------- Net earnings (loss) (816) 222 (8,373) Preferred dividend requirement -- -- (4) ---------- ---------- ---------- Net earnings (loss) applicable to common shares $ (816) $ 222 $ (8,377) ========== ========== ========== Earnings (loss) per share - basic Continuing operations $ (0.65) $ 0.87 $ (4.84) Discontinued operations (0.19) (0.56) (6.83) ---------- ---------- ---------- Net earnings (loss) per share $ (0.84) $ 0.31 $ (11.67) Basic weighted average common shares 977 706 718
The accompanying notes are an integral part of this statement. F-5
CabelTel International Corporation and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands) Year ended December 31, 2004 2003 2002 ---------- ---------- ---------- Cash flows from operating activities Net earnings (loss) $ (816) $ 222 $ (8,373) Adjustments to reconcile net earnings (loss) to net Cash provided by (used in) operating activities Depreciation and amortization 570 160 300 Depreciation from assets classified as discontinued operations -- 170 21 (Gain) loss from affiliates (1,247) (131) 612 (Gain) loss on sale of properties (209) (1,058) 3,561 Write-down of impaired assets 147 -- 266 Deferred income taxes -- -- 1,189 Changes in operating assets and liabilities Accounts receivable - trade (122) (45) 395 Other current and non-current assets (132) 174 (927) Accounts payable and other liabilities (357) 22 (929) ---------- ---------- ---------- Net cash provided by (used in) operating activities (2,166) (486) (3,885) Cash flows from investing activities Purchase of property and equipment (845) (1,225) (285) Net repayment of notes receivable 1,579 334 -- Proceeds from sale of investments -- -- 1,098 Proceeds from sale of properties -- 126 7,460 ---------- ---------- ---------- Net cash provided by (used in) investing activities 734 (765) 8,273 ---------- ---------- ---------- Cash flows from financing activities Proceeds from common stock issuance -- 792 -- Proceeds from borrowings 6,500 500 1,730 Payments on debt (5,591) (90) (6,699) Distributions from equity partnerships' financing cash flow 507 85 -- Dividends on preferred stock -- -- (4) Repurchase of common stock -- (9) -- Net advances from affiliates 90 -- -- ---------- ---------- ---------- Net cash provided by (used in) financing activities 1,506 1,278 (4,973) ---------- ---------- ---------- Net increase (decrease) in cash and cash equivalents 74 27 (585) Cash and cash equivalents at beginning of year 688 661 1,246 ---------- ---------- ---------- Cash and cash equivalents at end of year $ 762 $ 688 $ 661 The accompanying notes are an integral part of this statement. F-6 CabelTel International Corporation and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED (Amounts in thousands) Supplemental information on cash flows is as follows: Interest paid $ 705 $ 515 $ 2,215 Income taxes paid -- -- 129 Non-cash investing and financing activities: Notes received from sale of assets -- -- 1,050 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. F-7
CabelTel International Corporation and Subsidiaries CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (Amounts in thousands) Series J Series B Series J Preferred stock Common Preferred stock Preferred stock Contra Equity Stock ----------------- ----------------- ------------------ ------------------ Shares Amount Shares Amount Shares Amount Shares Amount ------- ------- ------- ------- ------- ------- ------- ------- Balance at January 1, 2002 1 1 -- -- -- -- 718 7 Write--off of stock purchase notes receivable -- -- -- -- -- -- (30) -- Dividend on preferred stock -- -- -- -- -- -- -- -- Other -- -- -- -- -- -- -- -- Stock purchase notes receivable reclassified as a reduction of related party debt -- -- -- -- -- -- -- -- Netloss -- -- -- -- -- -- -- -- ------- ------- ------- ------- ------- ------- ------- ------- Balance at December 31, 2002 1 1 -- -- -- -- 688 7 Dividend on preferred stock -- -- -- -- -- -- -- -- Conversion of obligation to -- -- -- -- -- -- 23 -- common stock Common stock acquired -- -- -- -- -- -- (5) -- Common stock issued -- -- -- -- -- -- 271 3 Net earnings -- -- -- -- -- -- -- -- ------- ------- ------- ------- ------- ------- ------- ------- Balance at December 31, 2003 1 1 -- -- -- -- 977 10 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) 977 10 ======= ======= ======= ======= ======= ======= ======= ======= Stock Additional Accum- Purchase paid in ulated Notes capital deficit Receivable Total ---------- ------- ---------- ------- Balance at January 1, 2002 56,896 (45,268) (2,367) 9,269 Write--off of stock purchase notes receivable (1,908) -- 1,905 (3) Dividend on preferred stock -- (4) -- (4) Other -- -- 12 12 Stock purchase notes receivable reclassified as a reduction of related party debt -- -- 450 450 Netloss -- (8,373) -- (8,373) ---------- ------- ---------- ------- Balance at December 31, 2002 54,988 (53,645) -- 1,351 Dividend on preferred stock -- -- -- -- Conversion of obligation to -- -- -- -- common stock Common stock acquired (9) -- -- (9) Common stock issued 987 -- -- 990 Net earnings -- 222 -- 222 ---------- ------- ---------- ------- Balance at December 31, 2003 55,966 (53,423) -- 2,554 Net loss Issuance of Series J preferred stock -- -- -- -- Net loss -- (816) -- (816) ---------- ------- ---------- ------- Balance at December 31, 2004 55,966 (54,239) -- 1,738 ========== ======= ========== =======
The accompanying notes are an integral part of this statement. F-8 CabelTel International Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2004 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 "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, 2004, the Company controls three retirement communities in three states. The Company operates two of the retirement communities with a capacity of 162 residents and leases one community to a third party. 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 200 oil wells in East Texas. These are low production wells with maximum production limits of 20 barrels of oil per day. As of March 31, 2005, there are 48 wells in operation. F-9 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. 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. F-10 NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued 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. 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, 2004 and 2003. 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 were granted at market by Cabeltel International Corporation during 2003, are exercisable immediately, and expire 5 years from date of grant. F-11
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued 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 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 at December 31, 2004. 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. Reported and pro forma net earnings (loss) and net earnings (loss) per share amounts are set forth below (in thousands, except per share data): 2004 2003 2002 --------- --------- --------- Net earnings (loss) allocable to common stockholders As reported $ (816) $ 222 $ (8,377) Deduct: total stock-based compensation under fair value based method for all awards -- (43) (464) Pro forma $ (816) $ 179 $ (8,841) Net earnings (loss) per share As reported $ (0.84) $ 0.31 $ (23.33) Pro forma $ (0.84) $ 0.25 $ (24.63)
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 2004, 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. F-12 NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued 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. New Accounting Pronouncements ----------------------------- SFAS No. 151--In November 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 151, "Inventory Costs, an Amendment of ARB No. 43, Chapter 4" ("SFAS No.151"). SFAS No. 151 amends ARB 43, Chapter 4, to clarify that abnormal amounts of idle facility expense, freight, handling costs and wasted materials (spoilage) be recognized as current period charges. It also requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS No. 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The adoption of SFAS No. 151 is not expected to have a material impact on the consolidated financial position or results of operations of CIC. SFAS No. 152--In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 152, "Accounting for Real Estate Time-Sharing Transactions" ("SFAS No. 152"). SFAS No. 152 amends FASB Statement No. 66, Accounting for Sales of Real Estate, to reference the financial accounting and reporting guidance for real estate time-sharing transactions that is provided in AICPA Statement of Position 04-2, Accounting for Real Estate Time-SharingTransactions ("SOP 04-2"). This Statement also amends FASB Statement No. 67, Accounting for Costs and Initial Rental Operations of Real Estate Projects, to state that the guidance for (a) incidental operations and (b) costs incurred to sell real estate projects does not apply to real estate time-sharing transactions. The accounting for those operations and costs is subject to the guidance in SOP 04-2. SFAS No. 152 is effective for financial statements for fiscal years beginning after June 15, 2005, and is to be reported as a cumulative effect of a change in accounting principle. The adoption of SFAS No. 152 is not expected to have a material impact on the consolidated financial position or results of operations of CIC. 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. F-13 NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued SFAS No. 153--In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 153, "Exchanges of Non-monetary Assets, an Amendment of APB Opinion No. 29" ("SFAS No. 153"). The guidance in APB Opinion No. 29, Accounting for Non-monetary Transactions, is based on the principle that exchanges of non-monetary assets should be measured based on the fair value of the assets exchanged. The guidance in APB Opinion No. 29, however, included certain exceptions to that principle. SFAS No. 153 amends APB Opinion No. 29 to eliminate the exception for non-monetary exchanges of similar productive assets and replaces it with a general exception for exchanges of non-monetary assets that do not have commercial substance. A non-monetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS No. 153 is effective for non-monetary asset exchanges in fiscal periods beginning after June 15, 2005. The adoption of SFAS No. 153 is not expected to have a material impact on the consolidated financial position or results of operations of CIC. 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. 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, 2004 and 2003: 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. F-14 NOTE E - NOTES PAYABLE LONG TERM DEBT Long-term debt is comprised of the following (in thousands): December 31, 2004 2003 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 and the assignment of rents 7,627 2,109 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 4,590 4,106 Notes payable to related parties bearing interest at rates ranging From 15% to 18% 901 528 13,118 6,743 --------------------- Less current maturities 4,780 4,690 ===================== 8,338 2,053 ===================== Aggregate annual principal maturities of long-term debt at December 31, 2004 are as follows (in thousands): 2005 4,780 2006 1,118 2007 250 2008 273 2009 6,085 Thereafter 612 ---------- $ 13,118 ========== F-15 NOTE F - OPERATING LEASES The Company leases an assisted living 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, 2004, are as follows (in thousands): 2005 $ 898 2006 898 2007 914 2008 853 2008 870 Thereafter 2,717 ---------- $ 7,150 ========== Lease expense in 2004, 2003 and 2002 was $917, $969, and $1,112, 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 bear 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. The Company accounted for its investment in CREI by the equity method. The Company recorded income of $131,733 in 2003 and a loss of $692,338 in 2002. These amounts are included in other income (expense), net in the accompanying financial statements. In January 2002 the Company became a 56% limited partner in a partnership, Muskogee Real Estate Investors (MREI), which acquired two assisted living communities in Muskogee, OK, including one community acquired from the Company. In September 2002 MREI leased the two communities to a third party for three years. The lessee has committed to purchase the two properties during the three-year period for $6,000,000. The current debt on the property is approximately $4,000,000. The Company had a note to Sylvia M. Gilley, wife of the former CEO of the Company, for $3,375,000. In November 2002, the Company transferred its 56% interest in MREI to Mrs. Gilley in exchange for a reduction of $1,120,000 on the debt and a one-year extension on the due date of the Company's note to Mrs. Gilley. The Company recognized a gain of $929,956 on the transaction. The Company accounted for its investment in MREI using the equity method. The Company recorded income of $80,215 during 2002. F-16
NOTE G - AFFILIATED PARTNERSHIP - Continued 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. 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. CREI has deferred a gain on sale in the amount $994,000 that will be recognized on the installment method. The Company also entered into an agreement in October 2002 wherein it would be allowed to participate in the acquisition of twelve communities and receive a 50% partnership interest. The Company agreed to pay $660,000, payable at $55,000 per month, from October 2002 through September 2003 to pay for due diligence required by these acquisitions. The Company's $660,000 obligation was accrued and charged to expense in 2002. 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, ------------------------------- 2004 2003 2002 -------- -------- -------- Numerator: Net income (loss) from continuing operations $ (632) $ 617 $ (3,473) Denominator: Shares used in basic earnings per share calculation 977 706 718 Effect of diluted securities: Employee stock options -- 80 -- Warrants -- -- -- Shares used in diluted earnings per share calculations 977 1,057 718 Pro forma basic earnings per share $ (0.65) $ 0.87 $ 4.84 Pro forma diluted earnings per share $ (0.65) $ 0.54 $ 4.84
F-17 NOTE I - INCOME TAXES At December 31, 2004, the Company had net operating loss carry forwards of approximately $23,000,000, which expire between 2004 and 2022. However, approximately $7,900,000 of these net operating loss carryforwards have limitations that restrict utilization to approximately $1,530,000 for any one year. The following is a summary of the components of income tax expense of continuing operations (in thousands): Year ended December 31, 2004 2003 2002 ------------------------------ Current - state $ -- $ -- $ -- Deferred - federal -- -- 749 ------------------------------ -- -- 749 ------------------------------ Deferred tax assets and liabilities were comprised of the following (in thousands): Year ended December 31, 2004 2003 ---------------------- Deferred tax assets: Net operating loss carryforwards $ 7,869 $ 7,163 Notes receivable -- 680 Alternative minimum tax carryforwards 324 235 Accounts receivable -- -- Accrued expenses -- 2,241 Financing obligations -- -- Other 386 583 Total deferred tax assets 8,579 10,902 Deferred tax liabilities - property and equipment -- (3,198) Valuation allowance (7,418) (6,543) 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, 2004 2003 2002 ----------------------------- Tax expense (benefit) at the statutory rate $ (216) $ 75 $(1,019) State taxes net of federal benefit -- -- -- Change in deferred tax asset valuation allowance, attributable to continuing operations 216 (75) 1,768 Other -- -- -- ----------------------------- Tax expense $ -- $ -- 749 ----------------------------- F-18 NOTE I - INCOME TAXES - Continued 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, 2004, 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, 2004 2003 --------------- 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 $ -- =============== 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. The Series J stock is non-convertible, however, the Company has agreed to hold a shareholder vote to allow the Series J shareholders to covert their 31,500 shares of preferred into 8,788,000 shares of the Company's common stock 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. F-19 NOTE J - STOCKHOLDERS' EQUITY - Continued Information with respect to stock option activity is as follows: Weighted Average exercise Shares price -------- -------- Outstanding at January 1, 2002 160,850 $ 81.28 Expired (5,050) 182.58 -------- -------- Outstanding at December 31, 2002 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 and 2004 142,000 $ 30.27 ======== ======== Options exercisable at December 31, 2002 155,800 $ 78.00 ======== ======== Options exercisable at December 31, 2003 and 2004 142,000 $ 30.27 ======== ======== Weighted average fair value per share of options granted during 2003 and 2001 was $0.71 and $7.60, respectively. Additional information about stock options outstanding at December 31, 2004, 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 F-20
NOTE K - OTHER INCOME (EXPENSE) Other income (expenses) consists of the following: (amounts in thousands) Year ended December 31, 2004 2003 2002 -------- -------- -------- Equity in earnings of CREI -- 131 (692) Property acquisition due diligence expense -- -- (660) Write off start up costs in projects not completed (167) -- -- Accrued tenant revenue -- 121 Other (236) 90 199 -------- -------- -------- $ (403) $ 342 $ (1,153) ======== ======== ========
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 and entered into a contract to sell a second assisted living community, which has been reflected as an asset held for sale. Revenue for the two properties was $841,000, $1,986,000 and $1,122,000 in 2004, 2003 and 2002, respectively. The net loss for the two properties was $, $184,000, $395,000 and $272,000 in 2004, 2003 and 2002, respectively. During 2002, the Company disposed of six properties. The net loss from the operations of these properties was $627,000 and the loss incurred from the sale of these properties was $4,001,000 (including income tax of $440,000). 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. F-21
NOTE M - SEGMENT REPORTING - Continued Segment information and reconciliation to income (loss) from operations are as follows: Twelve months ended December 31, 2004 (amounts in thousands) Real Estate Oil & Gas Operations Operations Consolidated ---------------------------------------- Revenue $ 4,813 $ 1,410 $ 6,223 Depletion, depreciation and amortization 462 108 570 Net income (loss) (1,115) 299 (816) Total assets 15,150 1,616 16,766
NOTE N - CONTINGENCIES Cable Partners Bulgaria LLC vs. Greenbriar Corporation and Ronald C. Finley --------------------------------------------------------------------------- On January 24, 2005, a lawsuit was filed in the District Court of Dallas County, Texas by Cable Partners Bulgaria LLC ("CPB") a Colorado limited liability company, against the Company. The lawsuit states that on October 12, 2004, CPB entered into a letter agreement with the owners of Eurocom to acquire the assets of Eurocom, a cable operator in the city of Plovdiv, Bulgaria. The lawsuit further indicates that the October 12, 2004, letter outlines a time line for the completion of due diligence by CPB. The lawsuit states that in November 2004, a conversation occurred between a representative of CPB and Ronald Finley, CEO of both CIC and CableTEL, during which time such representative told Mr. Finley that CPB had an agreement to purchase Eurocom. The lawsuit alleges that CIC intentionally and improperly caused the sellers of Eurocom to enter into discussions with CableTEL which ultimately led to CableTEL entering into a separate and competing contract to purchase Eurocom. CPB alleges that the Company's interference was improper and that CPB has been damaged in the amount of at least $5,387,400. The lawsuit further alleges that CPB's letter agreement provided for a three-year management agreement with the sellers of Eurocom and that CPB was further damaged by the loss of the experience, expertise and contacts of the sellers of Eurocom in an amount to be determined at trial. CPE further seeks exemplary damages of an unspecified amount. The Company believes the lawsuit is totally without merit. CableTEL had been holding discussions, conducting due diligence and had agreements in place with the owners of Eurocom well before either the alleged November conversation or the October 12, 2004, letter. In addition, the Company believes the lawsuit misstates certain key facts, which could prove to be critical in CPB's ability to prevail in this matter. 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. F-22
NOTE O - QUARTERLY DATA (UNAUDITED) The table below reflects the Company's selected quarterly information for the years ended December 31, 2003 and 2002. Certain 2003 and 2002 amounts have been reclassified to conform to the current presentation of discontinued operations. All amounts shown are in thousands. Year ended December 31, 2004 First Second Third Fourth Quarter Quarter Quarter Quarter Revenue $ 1,806 $ 1,720 $ 1,947 $ 750 Operating expenses 1,709 1,799 1,677 1,945 Net income (loss) (175) (205) 623 (1,059) Income (loss) allocable to common shareholders (175) (205) 623 (1,059) Income (loss) per common share - basic and diluted (.18) (.21) .64 (1.09) Year ended December 31, 2003 First Second Third Fourth Quarter Quarter Quarter Quarter Revenue $ 1,070 $ 1,118 $ 1,342 $ 1,774 Operating expenses 1,266 1,235 1,491 1,819 Net income (loss) (262) (177) 855 (194) Income (loss) allocable to common shareholders (262) (177) 855 (194) Income (loss) per common share - basic and diluted (.38) (.26) 1.21 (.27)
NOTE P - SUPPLEMENTAL RESERVE INFORMATION (UNAUDITED) The Company's net proved oil and natural gas reserves as of December 31, 2004 and 2003 (when Gaywood was purchased), 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. F-23 NOTE P - SUPPLEMENTAL RESERVE INFORMATION (UNAUDITED) - Continued Changes in Estimated Quantities of Proved Oil and Gas Reserves (Unaudited): Crude Natural Oil Gas Quantities of Proved Reserves: Bbls Mcf ----------------------------- -------- -------- Balance August 2003 500,090 -- Sales of reserves in place -- Acquired properties -- Revisions of previous estimates 29,017 Production (18,217) -------- -------- Balance December 31, 2003 510,890 -- Sales of reserves in place -- Acquired properties -- Revisions of previous estimates (82,971) 38,870 Production (46,849) -------- -------- Balance December 31, 2004 381,070 38,870 ======== ======== Proved Developed Reserves: ------------------------- Balance December 31, 2003 510,890 -- Balance December 31, 2004 381,070 38,870 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 F-24 NOTE P - SUPPLEMENTAL RESERVE INFORMATION (UNAUDITED) - Continued 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 2004, the Company continued to operate the producing wells it acquired in 2003. The Company controls nearly 200 leases but only had 48 wells in production on December 31, 2004. 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. Standardized measure of discounted future net cash flows related to proved reserves: Year Ended December 31, 2004 2003 ----------- ----------- Future production revenue $19,371,000 $16,370,000 Future development costs 83,000 285,000 Future production costs 11,394,000 11,980,000 ----------- ----------- Future net cash flow before federal income tax 7,894,000 4,105,000 Federal income tax 2,684,000 1,396,000 ----------- ----------- Future net cash flows 5,210,000 2,709,000 Effect of 10% annual discounting 3,963,000 2,060,000 ----------- ----------- Standardized measure of Discounted net cash flows $ 1,247,000 $ 649,000 =========== =========== F-25 NOTE P - SUPPLEMENTAL RESERVE INFORMATION (UNAUDITED) - Continued Changes in the standardized measure of discounted future net cash flows: Year Ended December 31, 2004 2003 ----------- ----------- Beginning of the year $ 649,000 $ -- Oil and gas sales, net of production costs (407,000) (49,000) Purchases of reserves in place -- 655,000 Sales reserves in place -- -- Net change in prices, net of production costs 839,000 291,000 Changes in production rates, timing and other Revisions of quantity estimate 469,000 Effect of income tax (417,000) (337,000) Accretion of discount 114,000 89,000 ----------- ----------- Standardized measure of Discounted net cash flows $ 1,247,000 $ 649,000 =========== =========== F-26 EX-21.0 2 cabel10kaex21123104.txt SUBSIDIARIES OF THE REGISTRANT Exhibit 21.0
SUBSIDIARIES Entity Name State % Owned American Realty Management, Inc. Nevada 100% Big Bear Indian Art, LLC Texas 100% Crown Pointe, Inc. California 100% Finley Equities, Inc. Texas 100% Gainesville Outlet Mall, LLC Nevada 100% Gainesville Partners, LLC Nevada 100% Gainesville Property, LP Texas 100% Gaywood Oil & Gas, LLC Nevada 100% Gaywood Oil & Gas II, LLC Nevada 100% Graybrier, Inc. North Carolina 100% Greenbriar Financial Corporation Nevada 100% Kellway Corporation Texas 100% King City Retirement Corporation Oregon 100% Mesquite, LLC Nevada 60% Real Estate Investors, LLC Nevada 100% Retirement Real Estate, Inc. Nevada 100% Senior Living Management, Inc. Nevada 100% Senior Living Management Payroll Company Texas 100% Senior Property Management, Inc. Nevada 100% Senior Property Management- CP, LLC Nevada 100% Senior Property Management- OP, LLC Nevada 100% Senior Property Management- WT, LLC Nevada 100% SLM-Crown Pointe, Inc. Nevada 100% SLM-Oak Park, Inc. Nevada 100% SLM-Wedgwood Terrace, Inc. Nevada 100% Villa Residential Care Homes- Arlington I, L.P. Texas 49.005% Villa Residential Care Homes- Corpus Christi South, L.P. Texas 1% Villa Residential Care Homes- Ft. Worth East, L.P. Texas 1% Villa Residential Care Homes- Granbury, L.P. Texas 1% Villa Residential Care Homes- Oak Park, L.P. Texas 1% Wedgwood Retirement Inns, Inc. Washington 100% Wedgwood Terrace, Inc. Nevada 100% Windsor Group, LLC South Carolina 100% Windsor House Greenville, LLC South Carolina 100%
EX-23.0 3 cabel10kaex230123104.txt CONSENT OF FARMER, FUQUA & HUNT, P.C. EXHIBIT 23.0 We have issued our opinion dated April 15, 2005, accompanying the consolidated financial statements included in the Annual Report of Cabeltel International Corporation, formerly Greenbriar Corporation on Form 10-K for the year ended December 31, 2004. We hereby consent to the incorporation by reference of said report in the Registration Statements of Cabeltel International Corporation, formerly Greenbriar Corporation on Form S-8 (File No. 33-50868 and 33-33985). /s/ FARMER, FUQUA & HUFF, P.C. Plano, Texas April 15, 2005 EX-23.2 4 cabel10kaex232123104.txt CONSENT OF GRANT THORNTON LLP Exhibit 23.2 Consent of Independent Registered Public Accounting Firm We have issued our report dated March 28, 2003 accompanying the consolidated financial statements of Cabeltel International Corporation (formerly Greenbriar Corporation) and subsidiaries for the year ended December 31, 2002 included in the Annual Report of Cabeltel International Corporation on Form 10-K for the year ended December 31, 2004. We hereby consent to the incorporation by reference of said report in the Registration Statements of Greenbriar Corporation on Form S-8 (File No. 33-50868 and 33-33985). GRANT THORNTON LLP Dallas, Texas November 21, 2005 EX-31.1 5 cabel10kaex2311123104.txt CERTIFICATION BY CHIEF EXECUTIVE OFFICER EXHIBIT 31.1 CHIEF EXECUTIVE OFFICER'S RULE 13a-14(a)/15d-14(a) CERTIFICATION I, Ronald C. Finley, certify that: 1) I have reviewed this annual report on Form 10-K of CabelTel International Corporation; 2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4) The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13-15(e) and 15d-15e) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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 principals; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the controls and procedures as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. 5) The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls. Dated: November 18, 2005. /s/ Ronald C. Finley ----------------------------------------- Ronald C. Finley, Chief Executive Officer EX-31.2 6 cabel10kaex312123104.txt CERTIFICATION BY CHIEF FINANCIAL OFFICER EXHIBIT 31.2 CHIEF FINANCIAL OFFICER'S RULE 13a-14(a)/15d-14(a) CERTIFICATION I, Gene S. Bertcher, certify that: 1. I have reviewed this annual report on Form 10-K of CabelTel International Corporation; 2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4) The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13-15(e) and 15d-15e) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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 principals; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the controls and procedures as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. 5) The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls. Dated: November 18, 2005. /s/ Gene S. Bertcher ------------------------------- Gene S. Bertcher, President and Chief Financial Officer EX-32.1 7 cabel10kaex321123104.txt CERTIFICATION BY CEO & CFO Exhibit 32.1 OFFICERS' SECTION 1350 CERTIFICATIONS The undersigned officers of CabelTel International Corporation, a Nevada corporation (the "Company"), hereby certifies that (i) the Company's Annual Report on Form 10-K for the year ended December 31, 2004 fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934, and (ii) the information contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2004 fairly presents, in all material respects, the financial condition and results of operations of the Company, at and for the periods indicated. Dated: November 18, 2005. /s/ Ronald C. Finley ----------------------------------------- Ronald C. Finley, Chief Executive Officer /s/ Gene S. Bertcher ----------------------------------------- Gene S. Bertcher, President and Chief Financial Officer EX-99.1 8 cabel10kaex991123104.txt AUDITED FINANCIAL STATEMENTS OF CABLETEL AD Exhibit 99.1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders Cabeltel AD We have audited the accompanying consolidated balance sheets of Cabeltel AD and subsidiaries as of December 31, 2004, 2003 and 2002, and the related consolidated statements of income, shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 2004. 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 U.S. generally accepted auditing standards. 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. 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 AD and subsidiaries as of December 31, 2004, 2003 and 2002, and the consolidated results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2004 in conformity with accounting principles generally accepted in the United States of America. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company incurred a net loss of approximately $1,900,000 for the year ended December 31, 2004 and, as of that date, current liabilities exceeded current liabilities by approximately $14,500,000. These conditions, along with other factors discussed in Note C to the consolidated financial statements, are enough to raise substantial doubt about the Company's ability to continue as a going concern. These consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ FARMER FUQUA & HUFF, P.C.Plano, TexasApril 15, 2005, except for Note C which is dated November 18, 2005
CABLETEL AD and Subsidiaries CONSOLIDATED BALANCE SHEETS (Amounts in thousands) December 31, ASSETS 2004 2003 2002 -------- -------- -------- CURRENT ASSETS Cash and cash equivalents $ 590 $ 1,420 $ 423 Accounts receivable - trade 1,391 1,942 382 Inventory 3,408 235 181 Other current assets, net 74 44 65 -------- -------- -------- Total Current Assets 5,463 3,641 1,051 PROPERTY AND EQUIPMENT, AT COST Buildings and improvements 581 544 400 Equipment and furnishings 11,946 7,378 6,163 Assets under construction 11,508 3,833 1,363 -------- -------- -------- 24,035 11,755 7,926 Less accumulated depreciation and amortization (5,036) 3,454 1,943 -------- -------- -------- 18,999 8,301 5,983 GOODWILL 3,248 2,956 2,692 OTHER ASSETS 7 29 7 -------- -------- -------- Total Assets $ 27,717 $ 14,927 $ 9,733 ======== ======== ========
The accompanying notes are an integral part of this statement.
CABLETEL AD and Subsidiaries CONSOLIDATED BALANCE SHEETS - CONTINUED (Amounts in thousands) December 31, LIABILITIES AND STOCKHOLDERS' EQUITY 2004 2003 2002 -------- -------- -------- CURRENT LIABILITIES Accounts payable - trade $ 12,324 $ 3,177 $ 2,039 Accrued expenses 264 122 146 Current notes payable - related party 3,657 2,248 2,032 Current maturities of long-term debt 3,797 297 22 -------- -------- -------- Total Current Liabilities 20,042 5,844 4,239 LONG-TERM LIABILITIES Long-term debt 3,364 2,438 48 Net deferred tax liability 12 68 188 -------- -------- -------- Total Liabilities 23,418 8,350 4,475 MINORITY INTEREST 177 656 580 STOCKHOLDERS' EQUITY Common stock, $69.70 par value; 122,542 shares; issued and outstanding, 8,541 8,541 8,541 Accumulated other comprehensive income (loss) (281) (356) (955) Accumulated deficit (4,138) (2,264) (2,908) -------- -------- -------- 4,122 5,921 4,678 -------- -------- -------- Total liabilities & equity $ 27,717 $ 14,927 $ 9,733 ======== ======== ========
The accompanying notes are an integral part of this statement.
CABLETEL AD and Subsidiaries CONSOLIDATED STATEMENTS OF OPERATIONS (Amounts in thousands) Year ended -------------------------------- December 31, -------------------------------- 2004 2003 2002 -------- -------- -------- Revenue $ 9,463 $ 8,338 $ 6,262 -------- -------- -------- 9,463 8,338 6,262 -------- -------- -------- Operating expenses Cable operations 5,760 5,627 3,858 Lease expense 948 560 565 Depreciation and amortization 1,476 1,439 790 Corporate general and administrative 3,648 1,002 511 -------- -------- -------- 11,832 8,628 5,724 -------- -------- -------- Operating earnings (loss) (2,369) (290) 538 Other income (expense) Interest income 10 6 -- Interest expense (268) (202) (45) Gain on foreign transactions, net 239 413 338 Gain on sale of assets, net 278 229 -- Other income (expense), net 309 389 1 -------- -------- -------- 568 835 294 -------- -------- -------- Earnings (loss) before income taxes and minority interest (1,801) 545 832 Income tax (benefit) expense 30 (66) 121 Minority interest 43 (33) 78 -------- -------- -------- Net earnings (loss) from continuing operations (1,874) 644 633 -------- -------- -------- Discontinued operations -- -- (508) -------- -------- -------- Net income (loss) $ (1,874) $ 644 $ 125 ======== ======== ========
The accompanying notes are an integral part of this statement.
CABLETEL AD and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands) Year ended December 31, 2004 2003 2002 ------- ------- ------- Cash flows from operating activities Net earnings (loss) $(1,874) $ 644 $ 125 Adjustments to reconcile net earnings (loss) to net Cash provided by (used in) operating activities Depreciation and amortization 1,476 1,439 790 Gain on foreign currency transactions (239) (413) (338) Gain on sale of assets (278) (229) -- Increase in minority interest 43 216 78 Changes in operating assets and liabilities Accounts receivable - trade 717 (1,377) (32) Property held for sale (3,153) -- -- Other current and non-current assets (1) 33 53 Accounts payable and other liabilities 741 741 635 ------- ------- ------- Net cash provided by (used in) operating activities (2,568) 1,054 1,311 Cash flows from investing activities Purchase of property and equipment (4,567) (3,013) (1,512) Proceeds from disposal of property and equipment 1,783 -- -- Purchase of intangible assets (63) -- -- Purchase of minority interests in subsidiaries (492) -- -- ------- ------- ------- Net cash provided by (used in) investing activities (3,339) (3,013) (1,512) Cash flows from financing activities Proceeds from borrowings 5,727 4,658 457 Payments on debt (650) (1,702) (218) ------- ------- ------- Net cash provided by (used in) financing activities 5,077 2,956 239 ------- ------- ------- Net increase (decrease) in cash and cash equivalents (830) 977 38 Cash and cash equivalents at beginning of year 1,420 423 385 ------- ------- ------- Cash and cash equivalents at end of year $ 590 $ 1,420 $ 423 ======= ======= =======
The accompanying notes are an integral part of this statement.
CABLETEL AD and Subsidiaries CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (Amounts in thousands, except share amounts) Accumulated Common stock Other ---------------------- Accumulated Comprehensive Shares Amount deficit Income (Loss) Total ---------- ---------- ----------- ------------ ---------- Balance at January 1, 2002 123 8,541 (3,033) (1,521) 3,987 Comprehensive income: -- -- -- -- -- Unrealized gain on foreign currency translation -- -- -- 566 566 Net earnings -- -- 125 -- 125 ---------- ---------- ----------- ------------ ---------- Balance at December 31, 2002 123 8,541 (2,908) (955) 4,678 Comprehensive income: -- -- -- -- -- Unrealized gain on foreign currency translation -- -- -- 599 599 Net earnings -- -- 644 -- 644 ---------- ---------- ----------- ------------ ---------- Balance at December 31, 2003 123 8,541 (2,264) (356) 5,921 Comprehensive income: -- -- -- -- -- Unrealized gain on foreign currency translation -- -- -- 75 75 Net loss -- -- (1,874) -- (1,874) ------ ------ ------ ------ Balance at December 31, 2004 123 8,541 (4,138) (281) 4,122 ========== ========== =========== ============ ==========
The accompanying notes are an integral part of this statement. CABLETEL AD and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2004 NOTE A - BUSINESS DESCRIPTION AND PRESENTATION Nature of Operations CABLETEL AD ("the Company") was incorporated in the Republic of Bulgaria and its principal activities include operating a cable TV (CATV) distribution network, rendering of telecommunication, internet access and fiber optic line capacity services in the country of Bulgaria. The parent entity of CABLETEL AD is Narisma Holdings Limited and the ultimate parent entity is Cabeltel International Corporation As of December 31, 2004 the Company had nearly 130,000 cable TV subscribers and access to another 400,000 households in Bulgaria. It had also completed the first alternative fiber optical backbone in Bulgaria with connectivity to Turkey, Greece, Romania and Macedonia. 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: Basis of Preparation - -------------------- The consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries 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. The functional currency of the Company is Bulgarian Leva (BGN). The accompanying balance sheets have been translated at year-end exchange rates from Bulgarian Leva (BGN) to U.S. Dollars ($). The statements of operations were translated using a annual average exchange rate from Bulgarian Leva (BGN) to U.S. Dollars ($). The effects of translation are recorded in the cumulative translation component of shareholder's equity. Basis of Consolidation ---------------------- The consolidated financial statements comprise the financial statements of the Company and its subsidiaries as of December 31st of each year. Adjustments are made to bring into line any dissimilar accounting policies that may exist. All intercompany balances and transactions, including unrealized profits arising from intra-group transactions, have been eliminated in full. Subsidiaries are consolidated from the date on which control is transferred to the Company and cease to be consolidated from the date on which control is transferred out of the Company. Where there is a loss of control of a subsidiary, the consolidated financial statements include the results for the part of the reporting year during which the Company has control. Where the effect is immaterial subsidiaries are not included in the consolidation even if not disposed of at the beginning of the year. Where the effect is immaterial subsidiaries are consolidated from the beginning of the year even if acquired during the year. F-27 NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued 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. 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. Property, plant and equipment - ----------------------------- Property, plant and equipment is carried at cost. Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"), requires that a property be considered impaired if the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the property. If impairment exists, an impairment loss is recognized, by a charge against earnings, equal to the amount by which the carrying amount of the property exceeds the fair value less cost to sell the property. If impairment of a property is recognized, the carrying amount of the property is reduced by the amount of the impairment, and a new cost for the property is established. Such new cost is depreciated over the property's remaining useful life. Depreciation is provided by the straight-line method over estimated useful lives, which range from 3 to 30 years. Inventories - ----------- Inventories are stated at the lower of cost or net realizable value. Cost is determined weighted average method. Net realizable value is the estimate of the selling price in the ordinary course of business, less the cost of completion and selling expenses. Goodwill - -------- Goodwill represents the excess of the cost of an acquisition over the fair value of the Company's share of the net assets of the acquired subsidiary or associated undertaking at the date of acquisition. Until January 1, 2002 goodwill was amortized using the straight-line method over its estimated useful life. The Company has adopted FASB 142 Business Combinations from the date it was issued and after initial recognition goodwill is measured at cost less any accumulated impairment losses. The value of goodwill is reviewed annually and written down for permanent impairment where it is considered necessary. 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. F-28 NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued Impairment of Long-Lived Assets - ------------------------------- The Company reviews its long-lived assets and certain identifiable intangibles for impairment when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. In reviewing recoverability, the Company estimates the future cash flows expected to result from 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. Interest-bearing loans and borrowings - ------------------------------------- All loans and borrowings are initially recognized at cost, being the fair value of the consideration received net of issue costs associated with the borrowing. After initial recognition, interest-bearing loans and borrowings are subsequently measured at amortized cost using the effective interest method. Amortized cost is calculated by taking into account any issue costs, and any discount or premium on settlement. Gains and losses are recognized in net profit or loss when the liabilities are derecognized or impaired, as well as through the amortization process. Revenue - ------- Revenue is recognized to the extent that it is probable that the economic benefits will flow to the Company and the revenue can be reliably measured. The following specific recognition criteria must also be met before revenue is recognized: Rendering of services Revenue from cable TV is recognized based on the subscriptions received for services performed. When the subscriptions relate to subsequent periods, they are deferred and recognized as revenue over the period during which the service is performed. Revenue from rented lines is recognized on a straight-line basis over the period of the rent. Revenue from data transfer and other services is recognized over the period during which the service is performed. F-29 NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued Revenue - continued - ------------------- Sale of duct Revenue is recognized when the significant risks and rewards of ownership of the duct have passed to the buyer and the amount of revenue can be measured reliably. Interest - -------- Revenue is recognized as the interest accrues (using the effective interest method that is the rate that exactly discounts estimated future cash receipts through the expected life of the financial instrument) to the net carrying amount of the financial asset. 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. Capital 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 recognised as an expense in the period in which termination takes place. Employee benefits - ----------------- Short-term employee benefits include salaries, social security contributions and short-term compensated absences for current employees. They are recognized as an expense or included in the cost of an asset when service is rendered to the Company. Long-term employee benefits include benefits that the Company has legal obligation to pay to their employees upon retirement depending on the length of their service with the employer. According to Bulgarian Labor Code an employee is entitled to retirement benefit of six gross monthly salaries if the length of service with the current employer is not less than ten years, otherwise two gross salaries. The Company has estimated the retirement benefit provision at the balance sheet date. The directors believe that the retirement benefit provision has an immaterial effect on the consolidated financial statements and therefore decided not to recognize it. F-30 NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued Foreign Currency Transactions Foreign currency transactions by the Company are accounted for at the exchange rates prevailing at the date of the transactions; gains and losses resulting from the settlement of such transactions and from the translation of monetary assets and liabilities denominated in foreign currencies are recognized in the income statement. Income Tax - ---------- Deferred income tax is provided, using the liability method, on all temporary differences at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred income tax liabilities are recognized for all taxable temporary differences: o except where the deferred income tax liability arises from goodwill amortization or the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and o in respect of taxable temporary differences associated with investments in subsidiaries, except where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future. Deferred income tax assets are recognized for all deductible temporary differences, carry-forward of unused tax assets and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry-forward of unused tax assets and unused tax losses can be utilized: o except where the deferred income tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and o in respect of deductible temporary differences associated with investments in subsidiaries, deferred tax assets are only recognized to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilized. The carrying amount of deferred income tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be utilized. Income Tax - continued - ---------------------- Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the balance sheet date. F-31 NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued Income tax relating to items, recognized directly in equity, is recognized in equity and not in the income statement. Financial Risk Management - ------------------------- The Company's activities expose it to a variety of financial risks, including the effects of foreign currency exchange rates and interest rates. Management monitors the overall risk and seeks to minimize potential adverse effects on the financial performance of the Company. Foreign exchange risk - --------------------- The Company operates in Bulgaria and is currently exposed to foreign exchange risk arising from purchase of program rights and of equipment from foreign suppliers and from borrowing from the shareholders, both denominated in USD, different from the reporting currency. The exposures involved are closely monitored to ensure effective risk management. Interest rate risk - ------------------ The Company's interest bearing liabilities are with fixed and floating interest rates. The Company usually borrows at fixed and floating rates and the exposures involved are monitored regularly. Credit risk - ----------- The Company has no significant concentrations of credit risk. The Company operates in the CATV business where normally the subscribers pay regularly in their majority. Liquidity risk - -------------- The Company is operating in the cash generating CATV, telephony and internet business and is additionally financed by its shareholders and banks for its investment activity in cable network and acquisition of CATV operators. The liquidity is addressed by continuing support of the parent company and the ultimate parent company, and negotiating new loans with banks as well as restructuring the existing ones. New Accounting Pronouncements - ----------------------------- SFAS No. 151--In November 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 151, "Inventory Costs, an Amendment of ARB No. 43, Chapter 4" ("SFAS No.151"). SFAS No. 151 amends ARB 43, Chapter 4, to clarify that abnormal amounts of idle facility expense, freight, handling costs and wasted materials (spoilage) be recognized as current period charges. It also requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS No. 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The adoption of SFAS No. 151 is not expected to have a material impact on the consolidated financial position or results of operations of the Company. F-32 NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued New Accounting Pronouncements - continued - ----------------------------------------- SFAS No. 152--In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 152, "Accounting for Real Estate Time-Sharing Transactions" ("SFAS No. 152"). SFAS No. 152 amends FASB Statement No. 66, Accounting for Sales of Real Estate, to reference the financial accounting and reporting guidance for real estate time-sharing transactions that is provided in AICPA Statement of Position 04-2, Accounting for Real Estate Time-SharingTransactions ("SOP 04-2"). This Statement also amends FASB Statement No. 67, Accounting for Costs and Initial Rental Operations of Real Estate Projects, to state that the guidance for (a) incidental operations and (b) costs incurred to sell real estate projects does not apply to real estate time-sharing transactions. The accounting for those operations and costs is subject to the guidance in SOP 04-2. SFAS No. 152 is effective for financial statements for fiscal years beginning after June 15, 2005, and is to be reported as a cumulative effect of a change in accounting principle. The adoption of SFAS No. 152 is not expected to have a material impact on the consolidated financial position or results of operations of the Company. 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. SFAS No. 153--In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 153, Exchanges of Non-monetary Assets, an Amendment of APB Opinion No. 29 ("SFAS No. 153"). The guidance in APB Opinion No. 29, Accounting for Non-monetary Transactions, is based on the principle that exchanges of non-monetary assets should be measured based on the fair value of the assets exchanged. The guidance in APB Opinion No. 29, however, included certain exceptions to that principle. SFAS No. 153 amends APB Opinion No. 29 to eliminate the exception for non-monetary exchanges of similar productive assets and replaces it with a general exception for exchanges of non-monetary assets that do not have commercial substance. A non-monetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS No. 153 is effective for non-monetary asset exchanges in fiscal periods beginning after June 15, 2005. The adoption of SFAS No. 153 is not expected to have a material impact on the consolidated financial position or results of operations of the Company. F-33 NOTE C - GOING CONCERN The consolidated financial statements have been prepared on a going concern basis. As a result of the operations of the Company in current and prior reporting periods, significant losses have been accumulated and current liabilities have exceeded current assets, which may cast doubts as regards to its ability to continue its activities as a going concern. The future viability of the Company depends upon the business environment as well as upon the continuing support of the existing and potential shareholders and providers of finance. The directors have analyzed the ability of the Company and its subsidiaries to continue operations in the future and have taken measures to strengthen its position by continuing financial support of the parent company and the ultimate parent company, seeking agreements to sell capacity to international telecom operators and to sell underground optical fiber network segments, launching new services such as telephony, increasing CABLETEL trademark recognition and thus increasing the number of subscribers. The directors seek external growth through acquisitions of other cable operators in Bulgaria. As part of these considerations, Cabeltel International Corporation, the ultimate parent company, has sought various sources of financing for the future growth and current operations cost of CABLETEL AD. As mentioned in Note S, CABELTEL International lnc. has discussed a number of possible arrangements with several new investors. The directors, in light of their assessment of expected future cash flows and continued financial support from the parent entity believe that the Company will continue its operations and settle its obligations in the ordinary course of business, without externally forced revisions of its operations or similar actions. NOTE D - FAIR VALUE OF FINANCIAL INSTRUMENTS Fair value is the amount at which a financial instrument may be exchanged or settled in an arm's length transaction as best proof of its market value in an active market. The estimated fair value of the financial instruments is determined by the Company on the basis of available market information, if any, or proper valuation models. When the management uses available market information to determine the financial instruments' fair value, the market information might not completely reflect the value at which these instruments may be actually realized. The management of the Company believes that the fair value of financial instruments comprising cash items, trade and other receivables, interest-bearing loans and borrowings, trade and other payables does not differ significantly from their current carrying amounts, especially when they are short-term in nature or their interest rates are changing in line with the change in the current market conditions. 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, 2004, 2003 and 2002: 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. F-34
NOTE D - FAIR VALUE OF FINANCIAL INSTRUMENTS -Continued 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 - PROPERTY PLANT AND EQUIPMENT (amounts in thousands) Assets under construction include the optical backbone that was 90% completed as of December 31, 2004. The Company expects to complete it by the second quarter of 2005. The carrying value of vehicles and equipment held under finance leases as of December 31, 2004 and 2003 is $239 and $183, respectively. Land and buildings with a carrying amount of $334, equipment of $696 thousand and assets under construction $1,013 are subject to a first charge to secure the Company's loans. The management of the Company has performed an impairment review of property, plant and equipment as of December 31, 2004. No indications of impairment have been established and therefore no impairment loss has been recognized in the consolidated financial statements. NOTE F - INTANGIBLE ASSETS (amounts in thousands) Other intangible Goodwill Assets Total --------- --------- --------- Balance at January 1, 2002, net of accumulated 2,287 102 2,389 amortization Additions (25) 7 (18) Amortization of other intangibles, only -- (33) (33) Translation gain (loss) 338 16 354 --------- --------- --------- Balance at December 31, 2002 2,600 92 2,692 ========= ========= ========= Additions -- 17 17 Disposals at net book value -- (31) (31) Amortization of other intangibles, only -- (40) (40) Translation gain (loss) 305 13 318 --------- --------- --------- Balance at December 31, 2003 2,905 51 2,956 ========= ========= ========= Additions 349 61 410 Disposals at net book value (117) (23) (140) Amortization of other intangibles, only -- (27) (27) Translation gain (loss) 47 2 49 --------- --------- --------- Balance at December 31, 2004 3,184 64 3,248 ========= ========= =========
F-35 NOTE G - INVENTORIES (amounts in thousands) Work in progress comprises segments of the national fiber backbone which are under construction and subject to sale in accordance with the concluded agreements. 2004 2003 2002 -------- -------- -------- Work in progress 2,242 -- -- Materials 1,166 235 181 -------- -------- -------- 3,408 235 181 ======== ======== ======== During 2004, the Company sold an inventory segment with a cost of $946, for cash to an unrelated third-party, resulting in a gain of approximately $802. NOTE H - TRADE AND OTHER RECEIVABLES (amounts in thousands) 2004 2003 2002 ------- ------- ------- Trade receivables and accrued CATV subscriptions 819 444 252 Taxes refundable 447 61 45 Advances paid 35 1,368 36 Other receivables 90 69 49 ------- ------- ------- 1,391 1,942 382 ======= ======= ======= Taxes refundable are comprised mainly of value addes taxes (VAT) refundable of $390, $4 and $3 as of December 31, 2004, 2003 and 2002, respectively. As of December 31, 2003 advances paid related mainly to delivery of materials for telephone services. As of December 3l, 2004, 2003 and 2002 the Company has not identified any doubtful receivables and therefore no doubtful debt allowance has been recognized in the consolidated financial statements. NOTE I - LONG TERM DEBT (amounts in thousands) Long-term debt is comprised of the following: 2004 2003 2002 ------- ------- ------- Note payable to financial institution maturing December 2006; fixed interest rate of 11% ; collateralized by equipment, specific land and buildings, and future trade receivables 856 538 -- Note payable to financial institution maturing May 2006; fixed interest rate of 11%; collateralized by a pledge over the Company's commercial enterprise 4,896 2,048 -- Notes payable to various third-parties maturing May 2006; effective interest rates of 9%; collateralized by underground duct construction 1,231 -- -- Obligations due under capital leases for equipment and machinery due through 2006; effective interest rates from 7% - 12% 178 149 70 ------- ------- ------- Less current maturities 3,797 297 22 ======= ======= ======= 3,364 2,438 48 ======= ======= ======= Aggregate annual principal maturities of long-term debt at December 31, 2004 are as follows: 2005 3,797 2006 3,364 --------- $ 7,161 ========= F-36 NOTE J - ACCOUNTS PAYABLE - TRADE (amounts in thousands) Accounts payable - trade is comprised of the following: 2004 2003 2002 -------- -------- -------- Vendor financing for backbone construction 6,654 -- -- Trade accounts payable 3,161 949 754 Accrual for program, broadcast and construction rights payable 1,296 1,504 398 Taxes payable 628 -- -- Payables to employees 433 198 289 Payroll taxes payable 112 235 348 Other payables and accruals 40 291 250 -------- -------- -------- 12,324 3,177 2,039 ======== ======== ======== NOTE K - INCOME TAXES (amounts in thousands) The Company pays income tax in Bulgaria based on their earnings. All amounts presented below have been translated to U.S. Dollars ($) for presentation purposes. Major components of income tax (expense)/benefit for the years ended 3l December 2004, 2003 and 2002 are: 2004 2003 2002 ------- ------- ------- Current income tax (expense)/benefit $ (80) $ (75) $ 73 Deferred income tax 50 141 48 ------- ------- ------- Income tax (expense)/benefit reported in consolidated statement of income (30) 66 121 ======= ======= ======= In 2004, 2003 and 2002, the nominal statutory effective tax rate is 19.5%, 23.5%, and 23.5% respectively. Effective January 1, 2005 the nominal corporate income tax rate is reduced to15%.
NOTE K - INCOME TAXES (amounts in thousands) - Continued A reconciliation of income tax (expense) / benefit applicable to loss before tax and minority interest at the statutory income tax rate to income tax (expense) / benefit at the Group's effective income tax rate for the years ended December 31, 2004, 2003 and 2002 is as follows: 2004 2003 2002 ------ ------ ------ Loss before tax and minority interest (1,801) 545 324 U.S. GAAP adjustment for Goodwill amortization and capitalized interest expense for backbone (1,161) (798) (673) ------ ------ ------ (2,962) (253) (349) ====== ====== ====== Income tax benefit at statutory rate of 19.5% for 2004 / 23.5% for 2003 and 2002 578 (60) (82) Unused tax loss for 2004 at statutory tax rate of 19.5% (197) -- -- Effect of permanent differences (414) (6) 203 Effect of change in tax rate 3 -- -- ------ ------ ------ Income tax (expense)/benefit (30) 66 121 ====== ====== ====== As of December 31, 2004, 2003 and 2002 the composition of the deferred tax (liability) / asset and related statement of income and statement of equity effects are as follows: Deferred tax (liability)/asset Deferred tax (expense)/benefit ------------------------------ ------------------------------ 2004 2003 2002 2004 2003 2002 ------ ------ ------ ------ ------ ------ Intangible assets recognized as expense 8 11 119 (3) (108) (3) Unused leave allowance 15 17 19 -- (2) (2) Capitalized network extension expenditure (43) (96) (347) 53 251 53 ------ ------ ------ ------ ------ ------ Net deferred tax (liability)/benefit charged (20) (68) (209) 50 141 48 to statement of income ------ ------ ------ ------ ------ ------ Foreign currency translation difference -- -- 21 (2) -- -- Deferred tax on revaluation reserve / Net deferred tax charged to equity 8 -- -- 8 -- -- ------ ------ ------ ------ ------ ------ Net deferred tax (liability)/total change in benefit (12) (68) (188) 56 141 48 ====== ====== ====== ====== ====== ======
F-37
NOTE K - INCOME TAXES (amounts in thousands) - Continued The entities of the Group have incurred tax losses as follows: Tax period Period of availability for tax relief 2004 2003 2002 -------- -------- ------- 2004 2005 through 2009 1,103 -- -- 2003 2004 through 2008 1,192 1,192 -- 2001 2002 through 2006 316 316 316 2000 2001 through 2005 314 314 14 1999 2000 through 2004 -- 27 27 1998 1999 through 2003 -- -- 10 -------- -------- ------- Total tax loss carried forward 2,925 1,849 667 Effective income tax rate 15% 19.5% 23.5% -------- -------- ------- Deferred income tax asset not recognized 439 361 157 ======== ======== =======
These losses can be carried forward as relief against future taxable profits. However, since the amounts and timing of future taxable income cannot be estimated reliably due to the uncertainties of the economic environment of the Group, no deferred tax asset has been recognized for the tax losses carried forward as of December 31, 2004. Tax periods of CABLETEL AD until 2003, inclusive have been subject to tax audits covering corporate income tax, municipal tax and personal income tax. The tax authorities reimbursed to the Company corporate income tax of BGN 40 (approximately $28). NOTE L - GAIN ON SALES (amounts in thousands) 2004 2003 2002 -------- -------- -------- Gain on sale of duct $ 802 $ -- $ -- Gain (loss) on disposal of investment (162) 368 -- Gain (loss) on disposal of fixed asset (362) (139) -- -------- -------- -------- Total gain on sale of assets 278 229 -- ======== ======== ======== NOTE M - OTHER INCOME (EXPENSE) (amounts in thousands) Other income (expenses) consists of the following: Year ended December 31, 2004 2003 2002 ------- ------- ------- Program rights fee income $ 338 $ -- $ -- Tax Penalties (159) -- -- Rental Income 44 -- -- Advertising income 14 62 -- Other 72 327 1 ------- ------- ------- $ 309 $ 389 $ 1 ======= ======= ======= F-38
NOTE N - CASH FLOW INFORMATION (amounts in thousands) Supplemental information on cash flows is as follows: Year ended December 31, 2004 2003 2002 ------- ------- ------- Interest paid $ 407 $ -- $ 17 Income taxes paid 83 43 69 Non-cash investing and financing activities: Unrealized foreign currency translation gain 67 597 565 Purchase of property and equipment vendor financed 8,200 -- -- NOTE O - DISCONTINUED OPERATIONS (amounts in thousands) Discontinued Operations was a loss of $508 in 2002. During 2000 and 2001 CableTEL's growth occurred by acquiring other existing cable operators. During that period in time cable operators in Bulgaria were required to actually own and operate TV studios. In early 2003 The Company sold its studio operations. Any gain or loss in 2003 was immaterial and the loss from operations in 2002 was $508. NOTE P - ACQUISITIONS AND DISPOSALS (amounts in thousands) Purchase of minority interests in existing subsidiaries: During 2004 the Company purchased additional interests in existing subsidiaries with the effective date of transactions for accounting purposes being January 1, 2004. The additional interests acquired are: Subdiary Additional interest purchased - ------------------------------------------------------------------------ ------------------------------------ KIS AD, Russe 26.91% Union Television Velingrad OOD 30.00% Union Kabel OOD 52.50% Dovacom EOOD 52.50% Details of net assets acquired, goodwill arising on the transaction and consideration, in aggregate, are as follows (in thousands): Carrying value Additional interest of net assets purchased $393 Goodwill arising on transaction 353 ----------------- $746 ================= Consideration: Cash paid $539 Interest of net assets of Pleven Sprint OOD disposed 207 ----------------- $746 =================
F-39 NOTE P - ACQUISITIONS AND DISPOSALS (amounts in thousands) - Continued The Company's interest of 51% of Pleven Sprint was swapped for the additional 52.50% of Dovacom (refer to "Disposals, Pleven Sprint OOD" caption below). Acquisition of subsidiary: Bulmet OOD - ---------- On March 4, 2004 the Group acquired a 100% interest in Bulmet OOD, a cable operator in the town of Svishtov. The effective date of the combination for accounting purposes is March 31, 2004. The management of the Company believes that the change in the net assets for the period from March 5, 2004 to March 31, 2004 would not have a material effect on the presentation of the consolidated financial statements. Management believes that the carrying value of net assets of Bulmet OOD approximates the fair value of the aggregated individual assets and liabilities. The Company acquired Bulmet's net assets of $8 for $4 in cash, resulting in negative goodwill of approximately $4. Disposals: During 2004 the Company disposed in full the following interests of subsidiaries, Subsidiary Disposed interest TV Mix AD 100.00% Pleven Sprint OOD 51.00% TV Mix AD - --------- In March 2004 the management of the Company decided to dispose of a wholly owned subsidiary, TV Mix AD, operator of the Mix TV channel, which was not a part of the core business (CATV) of the Company. The effective date of the disposal for accounting purposes is January 1, 2004. The management of the Company believes that the results for the period from January 1, 2004 to March 31,2004 would not have material effect on the presentation of the consolidated financial statements. Pleven Sprint OOD - ----------------- On March 4, 2004 the management of the Company decided to dispose of Pleven Sprint OOD, a 51% subsidiary. The disposal was completed as an exchange for an additional 52.50o/o interest in Dovacom EOOD. The share exchange transaction resulted in no loss of subscribers, with the subscribers added from the acquisition of Dovacom EOOD, being of a similar number to those lost from the disposal of Pleven Sprint OOD. Given the neutral impact on subscriber numbers from the share exchange transaction, management of the Group consider that that any difference between the results of Pleven Sprint OOD and Dovacom EOOD for the period from January 1, 2004 to March 3, 2004 would not have material effect on the presentation of the consolidated financial statements, and therefore it has been decided to consolidate Dovacom EOOD from January 1, 2004 as a wholly owned subsidiary and to discontinue the inclusion of Pleven Sprint OOD with effect from January 1, 2004. The management of the Group considers that the carrying values of the additional interest of net assets in Dovacom EOOD purchased and interest of the net assets in Pleven Sprint OOD disposed of approximate their fair values. F-40
NOTE Q - RELATED PARTIES (amounts in thousands) On October 1, 2003 The Company entered into a consulting agreement with a shareholder whereby the related party is to receive $21 per month for consulting services. These services include technical and financial advice to the Company. The initial agreement was amended on March 26, 2004 to extend the agreement to March 26, 2009. This agreement may be terminated upon mutual consent of the parties or by any of the parties with a three month written notification. Global Communication Technologies, Inc. ("Globaltec") is a manufacturer of telecommunications switching equipment. Globaltec is owned by related shareholders. In 2004 CableTEL AD paid $1,993 to Globaltec for the purchase of hardware, software and licensing. In addition, CableTEL AD paid Globaltec's Bulgarian subsidiary $164 in consulting fees to implement the switching equipment installation and management. Related party balances are comprised of the following: Related party Nature of outstanding balance 2004 2003 2002 - ------------------------------ ----------------------------- -------- -------- -------- Narisma Holdings Limited $2,384 loan $2,282 $2,248 $2,032 Narisma Holdings Limited trade payable 418 -- -- -------- -------- -------- 2,700 2,248 2,032 Cabeltel International Corp $300 loan 306 -- -- Cabeltel International Corp $660 loan 651 -- -- -------- -------- -------- 957 -- -- -------- -------- -------- $3,657 $2,248 $2,032 ======== ======== ========
$2,384 loan from Narisma Holdings Limited - ----------------------------------------- The loan is unsecured and was repayable in full on December 31, 2004. The effective annual interest rate is 4.23%. The loan has not been repaid and/or rescheduled till the date when the consolidated financial statements were authorized for issue. The management intends to settle it when they secure the necessary financial resources. $300 Loan from Cabeltel International Corporation. - -------------------------------------------------- The loan is unsecured and is repayable in full on November 18, 2005. The effective annual interest rate is the Wall Street Journal prime rate. $660 Loan from Cabeltel International Corporation - ------------------------------------------------- The loan is unsecured and is repayable in full on July 11, 2005. The effective annual interest rate is 12%. The loan has not been repaid and/or rescheduled till the date when the consolidated financial statements were authorized for issue. The management intends to settle it when they secure the necessary financial resources. F-41
NOTE Q - RELATED PARTIES (amounts in thousands) - Continued Related party transactions include the following: Related party Nature of transactions 2004 2003 2002 - ---------------------------- ----------------------------------- ---------- --------- -------- Narisma Holdings Limited Technical services received $ 1,120 $ 57 $ - Narisma Holdings Limited Interest accrued 89 84 - Cabeltel International Corp Loan received and interest accrued 874 - -
All applicable related party transactions have been carried out at market prices and resulted in approximate net foreign exchange gains of $239, $413, and $338 for 2004, 2003 and 2002, respectively. NOTE R - COMMITMENTS AND CONTINGENCIES (amounts in thousands) Cable Partners Bulgaria LLC vs. Greenbriar Corporation (the Company's ultimate parent) and shareholder On January 24, 2005 a lawsuit was filed in the District Court of Dallas County, Texas by Cable Partners Bulgaria LLC, ("CPB") a Colorado limited liability company against the Company's ultimate parent. The lawsuit states that on October 12, 2004 CPB entered into a letter agreement with the owners of Eurocom to acquire the assets of Eurocom, a cable operator in the city of Plovdiv Bulgaria. The lawsuit further indicates that the October 12, 2004 letter outlines a time line for the completion of due diligence by CPB. The lawsuit states that in November 2004 a conversation occurred between a representative of CPB and the CEO of the Company during which time such representative told the CEO that CPB had an agreement to purchase Eurocom. The lawsuit alleges that the Company's ultimate parent intentionally and improperly caused the sellers of Eurocom to enter into discussions with CableTEL which ultimately led to CableTEL entering into a separate and competing contract to purchase Eurocom. CPB alleges that the Company's ultimate parent's interference was improper and that CPB has been damaged in the amount of at least $6,400. The lawsuit further alleges that CPB's letter agreement provided for a three year management agreement with the sellers of Eurocom and that CPB was would be further damaged by the loss of the experience, expertise and contacts of the sellers of Eurocom in an amount to be determined at trial. CPE further seeks exemplary damages of an unspecified amount. The Company's ultimate parent believes the lawsuit is totally without merit. CableTEL had been holding discussions, conducting due diligence and had agreements in place with the owners of Eurocom well before either the alleged November conversation or the October 12, 2004 letter. In addition the Company's ultimate parent believes the lawsuit misstates certain key facts which could prove to be critical in CPB's ability to prevail in this matter. 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. F-42 NOTE R - COMMITMENTS AND CONTINGENCIES (amounts in thousands) - Continued Contract with an international carrier - -------------------------------------- On December 23, 2004 the Company entered into a long-term contract to provide capacity to an international carrier. The Company has not executed the contract yet as it is considering other solutions to optimize the costs of providing capacity. As of the date of the approval of the consolidated financial statements, based on the existing agreement with the international carrier and subcontractors, the management has estimated that the outcome of the contract would be a loss of approximately $1,400. The management has not provided for that loss in the consolidated financial statements for the year ended December 31, 2004 as it is considered, based on legal advice, that the Company will be able to terminate the contract with the international carrier without any penalties being payable. American Realty Investors' debt subordination - --------------------------------------------- On November 30, 2004 the management of the Company decided to join as a joint debtor together with American Realty Investors, a related party, under a Bulgarian bank loan agreement from 2003. As a result, on January 10, 2005, the Company paid $657 to repay the debt of American Realty Investors to the bank. The Company will be reimbursed subsequently through a negotiated settlement with Narisma Holdings Limited, the parent company. Legal claim initiated by Union Television AD - -------------------------------------------- Union Television AD, a former wholly-owned subsidiary of the Company, disposed of in 2003, has initiated litigation against the Company claiming invalidity of Sofia City Court's decision on the legal reorganization of Union Television AD. In accordance with a General Meeting of Shareholders' decision, a new legal entity, Cable Bulgaria West, was established. In accordance with a protocol approved by the General Meeting of Shareholders, Cable Bulgaria West acquired the assets and liabilities of Union Television AD related to its cable TV operations, including the cable networks. The claimants argued that the protocol performed was without legal grounds, as the decision was not voted at the General Meeting of Shareholders. Cable Bulgaria West was merged into CABLETEL AD in 2002 and all its assets and liabilities were transferred to CABLETEL AD. Based on legal advice, the management of the Company considers that the claim of Union Television AD is groundless and that the probability of an unfavorable court decision for the Company is remote. Broadcasting rights - ------------------- The Company has contracts with program providers for broadcasting rights. The contract fee payable to most of the foreign providers for broadcasting rights is based on the number of subscribers a cable operator has. The subscriber base reported to providers is in most cases a constant number (based on contract commitment date information) and does not reflect the actual subscriber base, which the terms of the contract provide for. The industry practice in Bulgaria to date has been to report the number of subscribers negotiated on contract commencement. Under most of the re-broadcasting contracts, the suppliers retain the right to audit the reported subscriber base. The possibility exists that the program providers can exercise their contractual rights to perform an audit at any time to confirm the calculation of the liabilities due to them and this may identify the number of subscribers reported is not representative of the actual viewing subscriber base. F-43 NOTE R - COMMITMENTS AND CONTINGENCIES (amounts in thousands) - Continued Broadcasting rights - continued - ------------------------------- Given past experience of the approach of program providers the Company's management considers it is unlikely that the contractual rights to perform an audit will be exercised. In addition, as the Company's management has been aware of the potential issues related to reported numbers of subscribers which are not in direct compliance with the terms and conditions of the signed contracts, they have undertaken the following steps to eliminate the potential exposure: o adopted a more transparent approach in the reporting of subscriber numbers. This is reflecting increased maturity in the market as it moves from a development stage, where broadcasting rights providers have accepted fee payment based on contract date subscriber numbers with no claims for retrospective adjustments; o negotiated new contracts with the broadcasting rights providers where either a flat fee is agreed or a reported subscriber base is accepted by both parties and not subject to audits retrospectively; o continuous discussions with all the program providers to ensure that all parties are aware of the current status of activity levels on a regular basis and how they relate to existing and potential newly negotiated contract terms. Based on the above the Company's management believes that they have ensured a fair assessment of the number of subscribers declared to the broadcasting rights providers and therefore, a material misstatement of the broadcasting rights liabilities is unlikely. NOTE S - SUBSEQUENT EVENTS (amounts in thousands) $2,729 investment bank loan - --------------------------- On January 18, 2005 the Company concluded a loan agreement for a total amount of $2,729 to finance underground duct construction. The maturity of the investment loan is December 31, 2005 and it is repayable in 6 equal monthly installments of $455 for the period from July 1 to December 31, 2005. The effective annual interest rate is 3 month Euribor plus 7.75%. The loan is secured by specifically identified underground duct segments. Frame agreement with the Council of Ministers of Bulgaria - --------------------------------------------------------- On June 14, 2005 the Company has signed a frame agreement with the Council of Ministers to sell specific segments of its underground optical fiber network. Cabeltel International Corporation has discussed a number of possible arrangements with several entities in relation to the ownership of the Company. As a result of the discussions, on June 16, 2005 Cabeltel International Corporation gave Cable Partners Europe LLC (CPE) an exclusivity period of 45 days to review the operations of the Company and to negotiate an arrangement with either Cabeltel International Corporation or the Company for the acquisition by CPE of part of the operations of the Company, with such acquisition being subject to regulatory approvals. As of the date of the approval of the consolidated financial statements, no definitive agreement has been negotiated, written or executed that would be considered to be binding upon Cabeltel International Corporation or CPE. -----END PRIVACY-ENHANCED MESSAGE-----