UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 5(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
December 31, 2007
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 000-08187
CabelTel International Corporation
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(Exact name of registrant as specified in its charter)
Nevada 75-2399477
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(State or other jurisdiction of (IRS Employer
Incorporation or organization) Identification Number)
1755 Wittington Place, Suite 340
Dallas, Texas 75234
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(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, including area code (972) 407-8400
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Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of each exchange on which registered
Common Stock, $0.01 par value American Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act. Yes [ ] No [X]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer ____Accelerated filer ______Non-accelerated filer __X___
The aggregate market value of the shares of voting and non-voting common equity
held by non-affiliates of the Registrant, computed by reference to the closing
price at which the common equity was last sold which was the sales price of the
Common Stock on the American Stock Exchange as of June 30, 2007 (the last
business day of the Registrant's most recently completed second fiscal quarter)
was $2,182,933 based upon a total of 519,746 shares held as of December 31, 2007
by persons believed to be non-affiliates of the Registrant. The basis of the
calculation does not constitute a determination by the Registrant as defined in
Rule 405 of the Securities Act of 1933, as amended, such calculation, if made as
of a date within sixty days of this filing, would yield a different value.
As of March 20, 2008, there were 1,936,939 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
CABELTEL INTERNATIONAL CORPORATION
Index to Annual Report on Form 10-K
Fiscal year ended December 31, 2007
FORWARD-LOOKING STATEMENTS..............................................- 3 -
PART I.....................................................................- 3 -
ITEM 1. BUSINESS.......................................................- 3 -
ITEM 1A. RISK FACTORS...................................................- 6 -
ITEM 1B. UNRESOLVED STAFF COMMENTS......................................- 7 -
ITEM 2. PROPERTIES.....................................................- 7 -
ITEM 3. LEGAL PROCEEDINGS..............................................- 7 -
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............- 7 -
PART II....................................................................- 8 -
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES......................- 8 -
ITEM 6. SELECTED FINANCIAL DATA.......................................- 10 -
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATION..- 11 -
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...- 14 -
ITEM 8. FINANCIAL STATEMENTS..........................................- 14 -
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE......................................- 14 -
ITEM 9A. CONTROLS AND PROCEDURES......................................- 14 -
ITEM 9B. OTHER INFORMATION............................................- 15 -
PART III..................................................................- 16 -
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT...........- 16 -
ITEM 11. EXECUTIVE COMPENSATION.......................................- 20 -
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT...................................................- 21 -
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...............- 23 -
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.......................- 24 -
PART IV.......................................................................27
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.......................27
SIGNATURES....................................................................30
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM.......................31
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FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-K are forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of
the Securities Act of 1933, and Section 21E of the Securities Exchange Act of
1934. The words "estimate", "plan", "intend", "expect", "anticipate", "believe"
and similar expressions are intended to identify forward-looking statements.
These forward-looking statements are found at various places throughout this
Report and in the documents incorporated herein by reference. CabelTel
International Corporation disclaims any intention or obligation to update or
revise any forward-looking statements, whether as a result of new information,
future events or otherwise. Although we believe that our expectations are based
upon reasonable assumptions, we can give no assurance that our goals will be
achieved. Important factors that could cause our actual results to differ from
estimates or projections contained in any forward-looking statements are
described under ITEM 1A. RISK FACTORS beginning on page - 6 -.
PART I
ITEM 1. BUSINESS
CabelTel International Corporation ("CabelTel" or the "Company" or "we" or "us")
was incorporated in Nevada on May 31, 1991, originally under the name Medical
Resource Companies of America. The Company is the successor-by-merger to Wespac
Investors Trust, a California business trust that began operating in 1982. On
March 26, 1996, the name was changed to Greenbriar Corporation; on February 8,
2005, the name of the Company was changed to CabelTel International Corporation.
Business Operations
o During 2006, the Company disposed of subsidiaries engaged in the oil
and natural gas leasing and operating business. The Company has
decided to re-enter the oil and natural gas industry. In November 2007
the Company began its efforts by acquiring an interest in oil and
natural gas leases in Cleburne County, Arkansas covering approximately
1,712 net acres which we seek to develop using various financing
sources.
o We operate real estate through the leasing and operation of a
retirement community in King City, Oregon, with a capacity of 114
residents.
Real Estate Retirement Property
The Company leases and operates Pacific Pointe Retirement Inn ("Pacific Pointe")
in King City, Oregon. Pacific Pointe began operations in 1993, has a capacity of
114 residents and provides community living with basic services such as meals,
housekeeping, laundry, 24/7 staffing, transportation and social and recreational
activities. These residents do not yet need assistance or support with
activities of daily living but prefer the physical and psychological comfort of
a residential community of like-minded people and access to senior-oriented
services.
Pacific Pointe is not required to hold a license for its independent retirement
operation.
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At Pacific Pointe, the Company's marketing and sales efforts are undertaken at
the local level. These efforts are intended to create awareness of our 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.
Repair and Maintenance - The Company conducts routine repairs and maintenance,
as needed, on a regular basis. The Company has no other current plans for
significant expenditures relating to Pacific Pointe and considers it 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. An Executive Director receives training in all of these areas,
plus marketing, community relations and fiscal management. In addition to some
classroom training, the Company provides new employees with on- the-job
training, utilizing experienced staff as trainers and mentors.
Business Strategy
The Company is a Nevada corporation which has principally been a real estate
company, owning or leasing retirement specific real estate, an outlet shopping
mall and certain oil and natural gas leases through subsidiaries. During 2006,
the Company disposed of its subsidiaries engaged in the oil and natural gas
lease and operating business. During 2007 the Company transferred ownership of
its shopping mall to an independent third party.
The Company seeks to re-enter the oil and natural gas industry and in 2007,
acquired interests in a block of oil and natural gas leases in Cleburne County,
Arkansas covering approximately 1,712 net acres. We are seeking additional
acquisitions of leases and plan to develop the acquired acreage.
Insurance
The Company currently maintains property and liability insurance intended to
cover claims in its oil & gas operations, retirement community and corporate
operations. The provision of personal services entails an inherent risk of
liability compared to more institutional long-term care communities. Retirement
communities of the type operated by the Company offer residents a greater degree
of independence in their daily lives. This increased level of independence,
however, may subject the resident and the Company to certain risks that would be
reduced in a more institutionalized setting. The Company also carries property
insurance on each of its owned and leased properties, as appropriate.
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Employees
At December 31, 2007, the Company employed, in all segments, 51 people (17
full-time and 34 part-time). The Company believes it maintains good
relationships with its employees. None of the Company's employees are
represented by a collective bargaining group.
The Company's operations are subject to the Fair Labor Standards Act. Many of
the Company's employees are paid at rates related to the minimum wage and any
increase in the minimum wage will result in an increase in labor costs.
Management is not aware of any non-compliance by the Company as regards
applicable regulatory requirements that would have a material adverse effect on
the Company's financial condition or results of operations.
Quality Assurance
In operating a retirement community, our commitment to quality assurance is
designed to achieve a high degree of resident and family member satisfaction
with the care and services the Company provides. In addition to training and
performance reviews of all employees, the Company's quality control measures
include:
Philosophy of Management - The Company's philosophy of management is to
demonstrate by its actions and require from its employees high standards of
personal integrity, to develop a climate of openness and trust, to demonstrate
respect for human dignity in every circumstance, to be supportive in all
relationships, to promote teamwork by involving employees in the management of
their own work and to promote the free expression of ideas and opinions.
Regular Property Inspections - Property inspections are conducted by corporate
personnel. These inspections cover the appearance of the exterior and grounds,
the appearance and cleanliness of the interior, the professionalism and
friendliness of staff and notes on maintenance.
Marketing
In real estate, the Company's marketing and sales efforts are undertaken at the
local level. These are intended to create awareness of our 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.
Government Regulation
Pacific Pointe is not required to hold a state license for its independent
retirement operation.
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
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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).
Available Information
The Company maintains an internet website at http://www.cabeltel.us. The Company
has available through the website, free of charge, Annual Reports on Form 10-K,
Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, reports filed
pursuant to Section 16 of the Securities Exchange Act of 1934 (the "Exchange
Act") and amendments to those reports as soon as reasonably practicable after we
electronically file or furnish such materials to the Securities and Exchange
Commission. In addition, the Company has posted the charters for our Audit
Committee, Compensation Committee and Governance and Nominating Committee, as
well as our Code of Business Conduct and Ethics, Corporate Governance Guidelines
on Director Independence and other information on the website. These charters
and principles are not incorporated in this Report by reference. The Company
will also provide a copy of these documents free of charge to stockholders upon
request. The Company issues Annual Reports containing audited financial
statements to its common stockholders.
ITEM 1A. RISK FACTORS
Risks Related to the Company
The oil & gas industry is highly competitive. Competition for leasehold
interests, subcontractors and qualified employees are keen and we are competing
against companies that are larger, more experienced and better capitalized than
we are.
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:
* 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; and
* the so-called business combination "control act" requirements
involving the Company and a person that beneficially owns 10% or more
of the outstanding common stock except under certain circumstances;
and
* 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 28, 2008, a group of entities owned and controlled approximately 69%
of the Company's outstanding common stock. This group has the power to block any
attempted change in control - See Item 12 - Security Ownership of Certain
Beneficial Owners and Management - Change in Control.
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ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
The Company's principal offices are located at 1755 Wittington Place, Dallas,
Texas 75234 in approximately 5,000 square feet of leased space. The Company
believes its leased space is presently suitable, fully utilized and will be
adequate for the foreseeable future. The Company's retirement property is
described in detail beginning on page - 3 - under ITEM 1. BUSINESS and is
suitable and adequate for the purpose to which it is devoted.
ITEM 3. LEGAL PROCEEDINGS
Chesapeake Exploration Limited Partnership and Chesapeake Operating, Inc.
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("Chesapeake")
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In January 2006 the Company entered into a joint operating agreement evidencing
its acquisition of a 5% interest in two gas wells being drilled and ultimately
operated by Chesapeake. The Company relied on the cost projections provided by
Chesapeake to make its investment decision. Subsequent to its investment the
Company received an invoice from Chesapeake for $556,217 which, according to
Chesapeake, represents the Company's 5% share of additional costs incurred by
Chesapeake in drilling the wells. The Company believes that these additional
costs far exceed any reasonable expense that should have been incurred in
drilling the two wells and were incurred without notifying the Company of such
expenses. The Company has requested an accounting of the additional expenses and
a reconciliation of the final costs to the cost estimates previously presented.
In April 2007, Chesapeake filed a lawsuit against the Company and others in
State District Court in Tarrant County, Texas.
Management intends to vigorously defend this action. However, should the Company
not prevail, Source Rock of Arkansas, LLC, an entity affiliated with the
Company, has agreed to fully indemnify the Company for any losses it might incur
in this matter.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
An Annual Meeting of Stockholders was held on December 27, 2007, 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 AGAINST ABSTAINED
Roz Campisi Beadle 591,551 12 226
Gene S. Bertcher 591,551 12 226
James E. Huffstickler 591,551 12 226
Dan Locklear 591,551 12 226
Victor L. Lund 591,551 12 226
There were no broker non-votes in the election of directors at the annual
meeting.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
The common stock of the Company is listed and 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.)
2007 2006
High Low High Low
----------- ---------- ----------- ----------
First Quarter $5.98 $3.45 $6.10 $3.00
Second Quarter 5.87 3.30 2.15 1.90
Third Quarter 4.28 2.93 3.58 2.18
Fourth Quarter 3.49 1.26 3.72 2.65
On March 20, 2008, the closing price of the Company's common stock was $1.70 per
share. According to the Transfer Agent's records, at March 20, 2008 our common
stock was held by 439 holders of record.
Listing Compliance
By letter dated October 16, 2007, by facsimile transmission from the staff of
the AMEX, the Company received notice of intent of the AMEX to strike the Common
Stock of the Registrant from the AMEX for reasons stated in the letter. The
Company issued a press release dated October 22, 2007 and filed a Form 8-K
Current Report covering the matter. The Company's Information Statement on
Schedule 14C described the status of the Company's compliance with a Plan of
Compliance which had been previously accepted by the AMEX, that the Company had
appealed the decision and was to have an opportunity to present its position at
a hearing before a Listing Qualifications Panel in late November 2007 which
hearing was ultimately rescheduled to a later date. Following the approval of an
Additional Listing Application on March 12, 2008 covering the 950,000 shares of
Common Stock issued to URC Energy LLC, the Company, on March 19, 2008, received
a notice from the AMEX advising that the appeal hearing scheduled for March 18,
2008 had been cancelled based upon actions recently completed by the Company
allowing the Company to regain compliance with AMEX's continued listing
standards pursuant to Section 1003 of the AMEX Company Guide. Such letter
specified that the receipt of $2,850,000 in cash by the Company on March 6, 2008
cured the Company's financial impairment and provided the Company with
stockholders equity of $4.6 million on a pro forma basis at September 30, 2007.
The staff of the AMEX has advised the Company that the Company has regained
compliance with Sections 1003(a)(i), 1003(a)(ii) and 1003(a)(iv) of the AMEX
Company Guide.
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Performance Graph
The following graph compares the cumulative total return on a $100 investment in
the Company's common stock on December 31, 2003 through December 31, 2007, 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.
2003 2004 2005 2006 2007
---- ---- ---- ---- ----
CabelTel International
Corporation 100.00 130.64 88.38 96.67 46.40
Dow Jones US Market
Index 100.00 141.80 148.16 168.19 175.17
S&P 500 100.00 137.80 141.93 161.26 166.95
The Company paid no dividends on its common stock in 2007 or 2006. The Company
has not paid cash dividends on its common stock during at least the last ten
fiscal years and it has been the policy of the Board of Directors of the Company
to retain all earnings to pay down long-term debt and finance future expansion
and development of its businesses. The payment of dividends, if any, will be
determined by the Board of Directors in the future in light of conditions then
existing, including the Company's financial condition and requirements, future
prospects, restrictions in financing agreements, business conditions and other
factors deemed relevant by the Board of Directors.
Securities Authorized for Issuance under Equity Compensation Plans
We have two stock-based equity compensation plans that have been approved by our
stockholders. See NOTE J - STOCKHOLDERS EQUITY for a description of the plans,
the number of shares of common stock to be issued upon exercise of outstanding
stock options, the weighted average exercise price of outstanding stock options
and the number of shares of common stock remaining for future issuance under the
plans. We have no stock-based compensation plans which were adopted without the
approval of our stockholders.
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Purchases of Equity Securities
The Board of Directors has not authorized the repurchase of any shares of its
common stock under any share repurchase program, except when stockholders owning
less than one round lot (100 shares) so request, the Company will purchase
shares at market closing on the last trading day prior to receipt of the
certificate(s). The Company repurchased no shares during the three months ended
December 31, 2007.
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data presented below are derived from the
Company's audited financial statements.
December 31,
2007 2006 2005
---- ---- ----
Operating revenue $ 2,984 $ 3,033 $ 2,596
Operating expenses 2,956 3,330 3,289
Operating profit (loss) 28 (297) (693)
Earnings (loss) from continuing
operations before income
taxes 959 2,248 (558)
Income tax (income) expense (270) (437) --
Earnings (loss) from continuing
operations 689 1,811 (558)
Income (loss) from discontinued
operations (627) (510) (428)
NET EARNINGS (LOSS) $ 62 $ 1,301 $ (986)
Earnings (loss) per common
share - basic and diluted
Continuing operations $ 0.70 $ 1.83 $ (0.57)
Discontinued operations (0.64) (0.51) (0.44)
Net earnings (loss) per $ 0.06 $ 1.32 $ (1.01)
share
Basic weighted average
common shares 987 987 977
BALANCE SHEET DATA:
Total assets $ 9,786 $ 9,702 $ 20,080
Long-term debt 6,921 6,078 13,560
Total liabilities 7,645 7,623 19,328
Total stockholders equity $ 2,141 $ 2,079 $ 752
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATION
Overview
As of December 31, 2007, the Company leased one independent living community in
Oregon, with a capacity of 114 residents. The Company also leased mineral rights
to 1,712 acres in the Fayetteville Shale section of Arkansas.
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 acquisition
and disposition of its real estate assets has been an integral part of the
Company's business.
During 2004 and 2005, the Company anticipated acquiring a cable operator -
CableTEL AD. For the most part, all of its efforts were directed to that
acquisition. In June 2006, the acquisition of CableTEL AD was rescinded by the
parties and the Company received a break up fee of $1,500,000. After the
rescission of the CableTEL AD acquisition the Company began seeking new
acquisitions.
During 2006, the Company disposed of subsidiaries engaged in the oil and natural
gas leasing and operating business. The Company has re-entered the oil and
natural gas industry through an acquisition of interests in a significant block
of oil and natural gas leases in Cleburne County, Arkansas covering
approximately 1,712 net acres which the Company seeks to develop using various
financing sources.
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.
-11-
Deferred Tax Assets
Significant management judgment is required in determining the provision for
income taxes, deferred tax assets and liabilities and any valuation allowance
recorded against net deferred tax assets. The future recoverability of the
Company's net deferred tax assets is dependent upon the generation of future
taxable income prior to the expiration of the loss carry forwards. The company
believes that it will generate future taxable income to fully utilize the net
deferred tax assets.
Liquidity and Capital Resources
At December 31, 2007, the Company had current assets of $2.4 million and current
liabilities of $266,000.
On December 31, , cash and cash equivalents totaled $172,000 and $324,000 in
2007 and 2006, respectively. CabelTel's principal sources of cash have been
property operations and proceeds from property sales of assets. At December 31,
2007 the Company had $2.2 million invested in short term notes with interest
rates ranging form 8% to 8.5%.
In March 2008 we completed the sale of 950,000 shares of common stock and raised
$2,850,000 in cash. This cash was also invested in short term notes. The Company
intends to use the cash available from its short term investments to invest in
its future operations.
Net cash provided by (used in) continuing operating activities was $696,000 in
2007, ($908,000) in 2006 and $38,000 in 2005.
Net cash provided by (used in) investing activities was $(679,000) in 2007,
($1,219,000) in 2006 and $3,560,000 in 2005. In 2006, the net cash used was
principally a cash loan to Eurenergy Resources Corporation, a related party, for
$1,377,000. In addition, the Company purchased an interest in a gas well in
Fayetteville, Arkansas for $118,000. In 2005, the cash provided was principally
from the sale of two assisted living facilities.
Net cash provided by (used in) financing activities was $-0- in 2007, ($204,000)
in 2006 and ($3,969,000) in 2005. In 2006, the cash used was principally for the
payment of the mortgage for the Gainesville Outlet Mall. In 2005, the cash used
was principally for the repayment of the mortgage obligations on two assisted
living facilities that were sold as well as the Gainesville Outlet Mall.
Net cash provided (used in) by discontinued operations was ($169,000) in 2007,
$2,005,000 in 2006 and $259,000 in 2005. In 2006 the Company sold Gaywood Oil &
Gas and received cash proceeds of $1,737,000. Additionally, in 2006, Gaywood
provided cash from operations of $268,000.
-12-
Results of Operations
Fiscal 2007 as Compared to Fiscal 2006
Revenues and Operating Expenses from operations of a retirement facility:
Revenues were $3.0 million as compared to $3.0 million in 2006. Real estate
operating expenses, which consist of retirement operations expense, lease
expense and depreciation and amortization, were $2.2 million in both 2007 and
2006.
Corporate General and Administrative Expense: These expenses were $796,000 in
2007 and $1.1 million in 2006. 2007 includes $29,000 for prior year income
taxes. 2006 included approximately $80,000 in payroll and consulting fees that
were not incurred in 2007. In general there was an overall reduction in
administrative costs in the latter part of 2006 which has had the effect of
lowering administrative costs in 2007
Interest Income: Interest income was $112,000 in 2007 and $447,000 in 2006.
During 2006, the Company recorded interest income of $307,000 from funds it had
advanced to CableTEL AD for operations and acquisitions in Bulgaria. (See
interest expense below).
Interest Expense: Interest expense was $73,000 in 2007 and $486,000 in 2006.
During the first quarter of 2006, the Company recorded interest expense of
$307,000 on loans it made to acquire funds which were provided to CableTEL AD
for operating expenses. The interest expense equaled the interest income.
Gain on sale of assets: In November 2007, the Company sold a participation in
the future cash flow of its retirement community in King City, Oregon and
recorded a gain of $750,000.
Other Income (Expense): Other income was $142,000 in 2007 and $2.6 million in
2006. In June 2006, the Company rescinded its acquisition of CableTEL AD and
received a break up fee of $1,500,000 which resulted in net income, after
deducting expenses of $1,467,000. In addition, in November 2006, the Company
settled another obligation and recorded a gain on such settlement of $1,021,000.
Additionally, the Company collected certain payments on certain receivables that
were previously written off.
Discontinued Operations: During 2007, the Company transferred ownership of the
Gainesville Outlet Mall to an unrelated third party.
Fiscal 2006 as Compared to Fiscal 2005
Revenues and Operating Expenses from operations of a retirement facility:
Revenues were $3.0 million in 2006 as compared to $2.6 million in 2005.
Retirement operating expenses, which consist of retirement operations expense,
lease expense and depreciation and amortization, were $2.2 million in 2006 as
compared to $2.1 million in 2005.
Corporate General and Administrative Expense: These expenses were $1.1 million
in 2006 and $1.2 million in 2005. During 2006, the Company reduced certain
salary and personnel expenses that existed in 2005.
Interest Income: Interest income was $447,000 in 2006 and $700,000 in 2005.
During 2006, the Company recorded interest income of $314,000 from funds it had
advanced to CableTEL AD for operations and acquisitions in Bulgaria as compared
to 515,000 in 2005. (See interest expense below).
Interest Expense: Interest expense was $486,000 in 2006 and $819,000 in 2005.
During the fourth quarter of 2004 and continuing through 2005, the Company
borrowed a total of $7,200,000 which it advanced to CableTEL AD for operations
and acquisitions in Bulgaria. The interest expense on this debt was $314,000 on
2006 as compared to $515,000 in 2005.
-13-
Other Income (Expense): Other income was $2.6 million in 2006 as compared to
$135,000 in 2005. In June 2006, the Company rescinded its acquisition of
CableTEL AD and received a break up fee of $1,500,000 which resulted in net
income, after deducting expenses of $1,467,000. In addition, in November 2006,
the Company settled its obligation to Sylvia Gilley and recorded a gain on the
settlement of $1,021,000. Additionally, the Company collected certain payments
on certain receivables that were previously written off.
Discontinued Operations: During 2006, the Company sold Gaywood Oil and Gas.
During 2005, the Company disposed of two assisted living communities in North
and South Carolina.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 31 of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
A review and evaluation was performed by management under the supervision and
with the participation of the Principal Executive Officer and Chief Financial
Officer of the effectiveness of the Company's disclosure controls and
procedures, as required by Rule 13a-15(b) of the Securities Exchange Act of 1934
as of December 31, 2007. Based upon that most recent evaluation, which was
completed as of the end of the period covered by this Form 10-K, the Principal
Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures were effective at December 31, 2007 to ensure
that information required to be disclosed in reports that the Company files
submits under the Securities Exchange Act of 1934 is recorded, processed,
summarized and timely reported as provided in the Securities and Exchange
Commission ("SEC") rules and forms. As a result of this evaluation, there were
no significant changes in the Company's internal control over financial
reporting during the three months ended December 31, 2007 that have materially
affected or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
Management Report on Internal Control Over Financial Reporting
Management of the Company is responsible for establishing and maintaining
adequate internal control over financial reporting as defined in Rules 13a-15(f)
and 15d-15(f) under the Securities Exchange Act of 1934, as amended, as a
process designed by, or under the supervision of, the Company's principal
executive and principal financial officers and effected by the Company's board,
management and other personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with accounting principles generally
accepted in the United States ("GAAP, US") and includes those policies and
procedures that:
-14-
* pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions of the
assets of a company; and
* provide reasonable assurance that the transactions are recorded as
necessary to permit preparation of financial statements in accordance
with GAAP, US and that receipts and expenditures of a company are
being made only in accordance with authorizations of management and
directors of a company; and
* provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use or disposition of a company's assets
that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial
reporting, including the possibility of human error and the circumvention or
overriding of controls, material misstatements may not be prevented or detected
on a timely basis. Projections of any evaluation of effectiveness to future
periods are subject to the risks that controls may become inadequate because of
changes and conditions or that the degree of compliance with policies or
procedures may deteriorate. Accordingly, even internal controls determine to be
effective can provide only reasonable assurance that information required to be
disclosed in and reports filed under the Securities Exchange Act of 1934 is
recorded, processed, summarized and represented within the time periods
required.
Management of the Company has assessed the effectiveness of its internal control
over financial reporting at December 31, 2007. To make this assessment, the
Company used the criteria for effective internal control over financial
reporting described in Internal Control - Integrated Framework, issued by the
Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). Based
on this assessment, management of the Company believes that as of December 31,
2007, the internal control system over financial reporting met those criteria.
This Annual Report does not include an attestation report of the Company's
registered public accounting firm regarding internal control over financial
reporting. Management's report was not subject to attestation by the Company's
registered public accounting firm pursuant to temporary rules of the SEC that
permit the Company to provide only management's report in this annual report.
Changes in Internal Control Over Financial Reporting
There has been no change in the Registrant's internal control over financial
reporting during the quarter ended December 31, 2007 that has materially
affected, or is reasonably likely to materially affect, the Registrant's
internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
Not applicable.
-15-
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors
The affairs of the Company are managed by the Board of Directors. The directors
are elected at the Annual Meeting of Stockholders or appointed by the incumbent
Board and serve until the next Annual Meeting of Stockholders, until a successor
has been elected or approved, or until earlier resignation, removal or death.
It is the Board's objective that a majority of the Board consists of independent
directors. For a director to be considered "independent", the Board must
determine that the director does not have any direct or indirect material
relationship with the Company. The Board has established guidelines to assist it
in determining director independence, which conform to, or are more exacting
than, the independence requirements in the American Stock Exchange listing
rules. The independence guidelines are set forth in the Company's "Corporate
Governance Guidelines". The text of this document has been posted on the
Company's internet website at http://www.cabeltel.us, and is available in print
to any stockholder who requests it. In addition to applying these guidelines,
the Board will consider all relevant facts and circumstances in making an
independent determination.
The Company has adopted a code of conduct that applies to all directors,
officers and employees, including our principal executive officer, principal
financial officer and principal accounting officer. Stockholders may find our
Code of Conduct on our internet website address at http://www.cabeltel.us. We
will post any amendments to the Code of Conduct as well as any waivers that are
required to be disclosed by the rules of the SEC or the AMEX on our website.
Our Board of Directors has adopted charters for our Audit, Compensation and
Governance and Nominating Committees of the Board of Directors. Stockholders may
find these documents on our website by going to the website address
http://www.cabeltel.us. Stockholders may also obtain a printed copy of the
materials referred to by contacting us at the following address:
CabelTel International Corporation
Attn: Investor Relations
1755 Wittington Place, Suite 340
Dallas, Texas 75234
972-407-8400 (Telephone)
The Audit Committee of the Board of Directors is an "audit committee" for the
purposes of Section 3(a) (58) of the Exchange Act. The members of that Committee
are Dan Locklear (Chairman), James Huffstickler and Victor Lund. Mr. Locklear is
qualified as an "audit committee financial expert" within the meaning of SEC
regulations and the Board has determined that he has the accounting and related
financial management expertise within the meaning of the listing standards of
the AMEX. All of the members of the Audit Committee meet the independence and
experience requirements of the listing standards of the AMEX.
-16-
All members of the Audit Committee, Compensation Committee and the Governance
and Nominating Committee must be independent directors. Members of the Audit
Committee must also satisfy additional independence requirements which provide
(i) that they may not accept, directly or indirectly, any consulting, advisory
or compensatory fee from the Company or any of its subsidiaries other than their
director's compensation (other than in their capacity as a member of the Audit
Committee, the Board of Directors or any other Committee of the Board), and (ii)
no member of the Audit Committee may be an "affiliated person" of the Company or
any of its subsidiaries, as defined by the Securities and Exchange Commission.
The current directors of the Company are listed below, together with their ages,
terms of service, all positions and offices with the Company, their principal
occupations, business experience and directorships with other companies during
the last five years or more. The designation "affiliated", when used below with
respect to a director, means that the director is an officer or employee of the
Company or one of its subsidiaries. The designation "independent", when used
below with respect to a director, means that the director is neither an officer
of the Company nor a director, officer or employee of a subsidiary of the
Company, although the Company may have certain business or professional
relationships with the director as discussed in ITEM 13. CERTAIN RELATIONSHIPS
AND RELATED TRANSACTIONS.
Roz Campisi Beadle, age 52, (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 59, (Affiliated) Director November 1989 to September 1996
and since June 1999
Mr. Bertcher was elected President and Chief Financial Officer effective
November 1, 2004. He was elected Chairman and Chief Executive Officer in
December 2006. Mr. Bertcher has been Chief Financial Officer and Treasurer of
the Company since November 1989 and Executive Vice President from November 1989
until he was elected President in 2003. He has been a certified public
accountant since 1973.
James E. Huffstickler, age 65, (Independent) Director since December 2003
Mr. Huffstickler has been Chief Financial Officer of Sunchase America, Ltd., a
multi-state property management company, for more than five years. He is a
graduate of the University of South Carolina and was formerly employed by
Southmark Management, Inc., a nationwide real estate management company. Mr.
Huffstickler has been a certified public accountant since 1976.
Dan Locklear, age 55, (Independent) Director since December 2003
Mr. Locklear has been Chief Financial Officer of Sunridge Management Group, a
real estate management company, for more than five years. Mr. Locklear was
formerly employed by Johnstown Management Company, Inc. and Trammel Crow
Company. Mr. Locklear has been a certified public accountant since 1981 and a
-17-
licensed real estate broker in the State of Texas since 1978.
Victor L. Lund, age 79, (Independent) Director since March 1996
Mr. Lund founded Wedgwood Retirement Inns, Inc. ("Wedgwood") in 1977, which
became a wholly owned subsidiary of the Company in 1996. For most of Wedgwood's
existence, Mr. Lund was Chairman of the Board, President and Chief Executive
Officer, positions he held until Wedgwood was acquired by the Company. Mr. Lund
is President and Chief Executive Officer of Wedgwood Services, Inc., a
construction services company not affiliated with the Company.
Board Committees
The Board of Directors held six meetings during 2007. 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 Audit Committee met once in 2007.
The Governance and Nominating Committee is responsible for developing and
implementing policies and practices relating to the corporate governance,
including reviewing and monitoring implementation of the Company's Corporate
Governance Guidelines. In addition, the Committee develops and reviews
background information on candidates for the Board and makes recommendations to
the Board regarding such candidates. The Committee also prepares and supervises
the Board's annual review of director independence and the Board's performance
and self-evaluation. The Charter of the Governance and Nominating Committee was
adopted on October 20, 2004. The members of the Committee are Messrs.
Huffstickler (Chairman), Lund and Ms. Beadle. The Governance and Nominating
Committee met once in 2007.
The Board has also formed a Compensation Committee of the Board of Directors,
adopted a Charter for the Compensation Committee on October 20, 2004, and
selected Ms. Beadle (Chairman) and Messrs. Huffstickler and Locklear as members
of that Committee. The Compensation Committee met once in 2007.
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:
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---------------------------------------------------------------------------
Governance and
Audit Nominating Compensation
Director Committee Committee Committee
Roz Campisi Beadle |X| Chairman
Gene S. Bertcher
James E. Huffstickler |X| Chairman |X|
Dan Locklear Chairman |X|
Victor L. Lund |X| |X|
---------------------------------------------------------------------------
Executive Officers
The following persons currently serve as executive officers of the Company: Gene
S. Bertcher, Chairman of the Board, President, Chief Executive Officer 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 Mr. Bertcher, see the description under the caption "Directors"
above.
Oscar Smith, age 65, 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.
In addition to the foregoing officers, the Company has other officers not listed
herein who are not considered executive officers.
Code of Ethics
The Board of Directors has adopted a code of ethics entitled "Code of Business
Conduct and Ethics" that applies to all directors, officers and employees of the
Company and its subsidiaries. In addition, the Company has adopted a code of
ethics entitled "Code of Ethics for Senior Financial Officers" that applies to
the principal executive officer, president, principal financial officer, chief
financial officer, principal accounting officer and controller. The text of
these documents is posted on the Company's internet website address at
http://www.cabeltel.us and is available in print to any stockholder who requests
them.
Section 16(a) Beneficial Ownership Reporting Compliance
Based solely upon a review of Forms 3, 4 and 5 furnished to the Company pursuant
to Rule 16a-3(e) promulgated under the Securities Exchange Act of 1934 (the
"Exchange Act"), or upon written representations received by the Company, the
Company is not aware of any failure by any director, officer or beneficial owner
of more than 10% of the Company's common stock to file with the Securities and
Exchange Commission on a timely basis.
-19-
ITEM 11. EXECUTIVE COMPENSATION
The following tables set forth the compensation in all categories paid by the
Company for services rendered during the fiscal years ended December 31, 2007,
2006 and 2005 by the Chief Executive Officer of the Company and to the other
executive officers and Directors of the Company whose total annual salary in
2007 exceeded $100,000, the number of options granted to any of such persons
during 2007 and the value of the unexercised options held by any of such persons
on December 31, 2007.
SUMMARY COMPENSATION TABLE
Change in
Non- Pension
Equity Value and
Name Incentive Nonqualified All
and Plan Deferred Other
Principal Stock Option Comp- Compensation Comp-
Position Year Salary Bonus Awards Awards ensation Earnings ensation Total
Gene S. Bertcher 2007 $ 186,000 $ 186,000
Chairman, President 2006 186,000 186,000
Chief Executive 2005 186,000 186,000
Officer
& Chief Financial
Officer
GRANTS OF PLAN-BASED AWARDS
None
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
None
OPTION EXERCISES AND STOCK VESTED
None
PENSION BENEFITS
None
NONQUALIFIED DEFERRED COMPENSATION
None
DIRECTOR COMPENSATION
Change in
Pension
Value and
Non-Equity Nonqualified
Fees Earned Incentive Deferred
Or Paid in Stock Option Plan Compensation All Other
Name Cash Awards Awards Compensation Earnings Compensation Total
Roz Campisi Beadle $ 8,500 $ 8,500
Gene S. Bertcher -- --
James E. 8,500 8,500
Huffstickler
Dan Locklear 8,500 8,500
Victor L. Lund 8,500 8,500
-20-
MANAGEMENT AND CERTAIN SECURITY HOLDERS
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
provide for grants of incentive and non-qualified stock options to the Company's
executive officers, as well as its directors and other key employees and
consultants. Under the two Plans, options are granted to provide incentives to
participants to promote long-term performance of the Company and specifically,
to retain and motivate senior management in achieving a sustained increase in
stockholder value. Currently, none of the Plans has a pre-set formula or
criteria for determining the number of options that may be granted. The exercise
price for an option granted is determined by the Compensation Committee, in an
amount not less than 100% of the fair market value of the Company's common stock
on the date of grant. The Compensation Committee reviews and evaluates the
overall compensation package of the executive officers and determines the awards
based on the overall performance of the Company and the individual performance
of the executive officers. The Company's stock plans total 50,000 shares of
common stock under the 1997 Plan and 50,000 shares of common stock under the
2000 Plan. Options have been granted for all shares reserved under the 1997 Plan
and 10,000 shares for the 2000 Plan.
Compensation of Directors
The Company pays each non-employee director a fee of $2,500 per year, plus a
meeting fee of $2,000 for each board meeting attended. Employee directors serve
without compensation.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 28, 2008, 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 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 and current executive officers,
whose compensation from the company in 2007 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.
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Common Stock
-----------------------------------
Name of Beneficial Owner No. of Shares Percent of Class*
--------------------------------------------------------------------------------
HKS Investment Corp. (1) 108,994 5.63%
Gene S. Bertcher(2) 71,811 3.71%
Roz Campisi Beadle 100 **
James E. Huffstickler - -
Dan Locklear - -
JRG Investment Company, Inc.(3)(5) 156,886 8.11%
TacCo Financial, Inc.(3)(4)(6) 228,726 11.81%
URC Energy, LLC(3)((8)) 950,000 49.05%
Syntek West, Inc. (3)((8)) 950,000 49.05%
Gene E. Phillips(3)((8)) 950,000 49.05%
International Health Products, Inc.(3)(7) 9,770 **
All executive officers and directors
as a group (six persons) 180,905 9.33%
-----------------------
* Based on 1,936,969 shares of common stock outstanding at January 29, 2008. **
Less than 1%.
(1) Consists of 108,994 shares of common stock owned by HKS Investment
Corporation ("HKS"). According to an original statement on Schedule
13D dated January 9, 2006, the group consists of HKS Investment
Corporation, David Hensel, John Kellar and Marshall Stagg, each of
whom are deemed to be the beneficial owner of all 108,994 shares.
Hensel is stated to be a shareholder, director and President of HKS;
Kellar is a shareholder, director, Vice President and Treasurer of
HKS; and Stagg is a shareholder, director and Secretary of HKS.
(2) Consists of 71,811 shares of common stock owned by Mr. Bertcher.
(3) Based on a Schedule 13D, amended March 18, 2008, 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 sole member of URC Energy, LLC is Syntek West, Inc.
("SWI") which is owned by Gene E. Phillips. The amended Schedule 13D
indicates that these entities, Mr. Phillips, SWI and Basic Capital
Management, Inc., collectively, may be deemed a "Person" within the
meaning of Section 13D of the Securities Exchange Act of 1934.
(4) Consists of 228,726 shares of common stock (which does not include
156,884 shares held by JRG Investment Company, Inc. or an option to
40,000 shares of common stock at an exercise price of $2.60 per
share).
(5) Officers and Directors of JRG Investment Co., Inc. ("JRG") are J. T.
Tackett, Director, President and Treasurer and E. Wayne Starr,
Director, Chairman and Chief Executive Officer. JRG is a wholly owned
subsidiary of TacCo Financial, Inc.
(6) Officers and Directors of TacCo Financial, Inc. ("TFI") are J.T.
Tackett, Director, Chairman and CEO; Wayne Starr, Director, President
and Treasurer and R. Neil Crouch II, 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 R. Neil Crouch II, Director, President and Treasurer and Cecelia
Maynard, Secretary. IHPI is wholly owned by a trust for the benefit of
the wife and children of Gene E. Phillips.
(8) The direct owner of the 950,000 shares of common stock is URC Energy,
LLC. Under Rule 13d-3 of the Exchange Act, SWI as the sole member of
URC Energy, LLC is deemed to be the beneficial owner of such shares
and Gene E. Phillips as an officer, director and sole owner of SWI is
also deemed to be the beneficial owner of such shares.
Change in Control
As of March 18, 2008, with the delivery of a certificate representing
950,000 shares of new Common Stock of the Company to URC Energy LLC, a "deemed"
-22-
change of control occurred. Such 950,000 shares of Common Stock constitutes
approximately 49.05% of the 1,969,939 shares of Common Stock of the Company
issued and outstanding. URC Energy LLC is a Nevada limited liability company
organized by Articles of Organization filed with the Secretary of State of
Nevada on October 26, 2006; its sole member is Syntek West, Inc., a Nevada
corporation, one hundred percent (100%) of the issued and outstanding stock of
Syntek West, Inc. is owned by Gene E. Phillips. Such 950,000 shares of Common
Stock were issued pursuant to the final consummation of a Purchase Agreement
described in Item 13. Certain Relationships and Related Transactions below. The
basis of control is the aggregate percentage of voting securities of the Company
which is now owned by the "Reporting Persons" (approximately 69%) which include
URC Energy LLC at 49.05% with 950,000 shares of Common Stock, IHPI with 9,970
shares of Common Stock (approximately 0.51%), TFI holding 228,726 shares of
Common Stock of the Company (approximately 11.81%) and JRGIC, a wholly owned
subsidiary of TFI holding 156,886 shares of Common Stock of the Company
(approximately 8.11% of the outstanding).
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On March 6, 2008, URC Energy LLC paid to the Company the sum of $2,850,000 in
cash pursuant to the consummation of the transaction covered by that certain
Securities Purchase Agreement effective October 19, 2007 (executed November 16,
2007) between the Company and URC Energy LLC (the "Purchase Agreement").
Pursuant to the Purchase Agreement, URC Energy LLC purchased 950,000 new shares
of Common Stock of the Company following the approval by consent of the holders
of 58% of the Common Stock and following the issuance to all stockholders of the
Company of a Schedule 14C Information Statement mailed on February 8, 2008 to
stockholders of record as of the close of business of November 5, 2007. Under
requirements of the Exchange Act such 950,000 shares could not be issued to URC
Energy LLC until twenty-one (21) calendar days after the date of distribution of
the definitive copies of such Information Statement to the stockholders of the
Company and URC Energy LLC was not obligated to pay the purchase price of
$2,850,000 until such time as certificates representing such 950,000 shares were
available for delivery. Such payment on March 6, 2008 was necessary as the
950,000 shares of Common Stock could not be issued until approval was given by
the American Stock Exchange of an Additional Listing Application submitted March
3, 2008 by the Company covering such 950,000 shares, which approval was issued
on March 12, 2008. A certificate representing 950,000 shares of Common Stock was
issued to URC Energy LLC and delivered on March 18, 2008.
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. In June 2006, the transaction was
rescinded.
The Company, SWI, Gene E. Phillips and others are parties to a Rescission
Agreement dated June 1, 2006 which covered rescission of a October 2004
transaction and other matters. Pursuant to such Rescission Agreement, among
other items, the Issuer covenanted that subject to its compliance with all
applicable American Stock Exchange rules and federal securities laws, it would
in the future change its name to a name that does not include the word "Cable"
or "Cabel." As of March 18, 2008, the covenant has not yet been fulfilled. The
-23-
Issuer in the future should seek to change its name to satisfy such covenant
and, although no express commitment exists with respect thereto, it is likely
that SWI and Gene E. Phillips will support a change of the name of the Company.
Except as set forth above, the Reporting Persons do not have any contracts,
arrangements, understandings or relationships, legal or otherwise, with any
person with respect to any securities of the Issuer, including but not limited
to, transfer or voting of any of the securities, finders' fees, joint ventures,
loan or option arrangements, puts or calls, guarantees of profits, divisions of
profits or losses, or the giving or withholding of proxies.
In July 2006, the Company loaned Source Rock of Arkansas, LLC $1,377,000. The
Company received a demand note with interest of 8% per annum.
In November 2007, the Company loaned Prime Income Asset Management, Inc.
$630,000. The Company received a demand note with interest of 8 1/2 % per annum
In November 2007, the Company acquired 1,712 acres of mineral rights in the
Fayetteville Shale area of Arkansas from Source Rock of Arkansas, LLC for
$6,848,000. The purchase price was paid by issuing a note bearing interest at 9
1/2 %, and maturing on December 31, 2010.
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 2007 and 2006 by the Company's principal
accounting firm Farmer, Fuqua & Huff, PC:
Type of Fees 2007 2006
Audit Fees $27,500 $106,046
Audit Related Fees
Tax Fees 7,250 9,625
All Other Fees
Total Fees $34,450 $115,671
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.
-24-
Audit-Related Fees: These are fees for assurance and related services
performed by the principal auditor that are reasonably related to the
performance of the audit or review of the Company's financial
statements. These services include attestation by the principal auditor
that is not required by statute or regulation and consulting on
financial accounting/reporting standards.
Tax Fees: These are fees for professional services performed by the
principal auditor with respect to tax compliance, tax planning, tax
consultation, returns preparation and reviews of returns. The review of
tax returns includes the Company and its consolidated subsidiaries.
All Other Fees: These are fees for other permissible work performed by
the principal auditor that does not meet the above category
descriptions.
These services are actively monitored (as to both spending level and work
content) by the Audit Committee to maintain the appropriate objectivity and
independence in the principal auditor's core work, which is the audit of the
Company's consolidated financial statements.
Financial Information Systems Design and Implementation Fees
Farmer, Fuqua & Huff, P.C. did not render any professional services to the
Company in 2007 with respect to financial information systems design and
implementation.
Under the Sarbanes-Oxley Act of 2002 (the "SO Act"), and the rules of the
Securities and Exchange Commission (the "SEC"), the Audit Committee of the Board
of Directors is responsible for the appointment, compensation and oversight of
the work of the independent auditor. The purpose of the provisions of the SO Act
and the SEC rules for the Audit Committee's role in retaining the independent
auditor is two-fold. First, the authority and responsibility for the
appointment, compensation and oversight of the auditors should be with directors
who are independent of management. Second, any non-audit work performed by the
auditors should be reviewed and approved by these same independent directors to
ensure that any non-audit services performed by the auditor do not impair the
independence of the independent auditor. To implement the provisions of the SO
Act, the SEC issued rules specifying the types of services that an independent
auditor 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
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
-25-
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.
-26-
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as a part of this report:
(1) FINANCIAL STATEMENTS: The following financial statements of the
Registrant and the Report of Independent Public Accountants
therein are filed as part of this Report on Form 10-K:
Report of Farmer, Fuqua & Huff, P.C.........................31
Consolidated Balance Sheets.................................32
Consolidated Statement of Operations........................34
Consolidated Statements of Cash Flows.......................35
Consolidated Statement of Changes in Stockholders' Equity...37
Notes to Consolidated Financial Statements..............- 38 -
(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)
27
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)
3.13 Certificate of Amendment to Articles of Incorporation effective
March 21, 2007 (incorporated by reference to Exhibit 3.13 of
Registrant's Current Report on Form 8-K for event occurring March
21, 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)
28
10.3 Form of Umbrella Agreement between Greenbriar Corporation, James
R. Gilley and Jon Harder, Sunwest Management, Inc. et al
14.0 Code of Ethics for Senior Financial Officers (incorporated by
reference to Exhibit 14.0 to Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 2003)
21.1* Subsidiaries of the Registrant
23.1* Consent of Farmer, Fuqua & Hunt, P.C.
31.1* Rule 13a-14(a) Certification by Principal Executive Officer and
Chief Financial Officer
32.1* Certification of Principal Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. ss.1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
*Filed herewith.
29
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
March 31, 2008 by: /s/ Gene S. Bertcher
--------------------------------------
Gene S. Bertcher
President and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons in the capacities and
on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Gene S. Bertcher President, Chairman, Principal March 31, 2008
-------------------- Executive Officer, Chief Financial
Gene S. Bertcher Officer and Director
Director
/s/ Roz Campisi Beadle March 31, 2008
-------------------------
Roz Campisi Beadle
/s/ James Huffstickler Director March 31, 2008
----------------------
James Huffstickler
/s/ Dan Locklear Director March 31, 2008
----------------
Dan Locklear
/s/ Victor Lund March 31, 2008
------------------
Director
Victor Lund
30
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, 2007, and 2006, and the related consolidated statements of
income, shareholders' equity and cash flows for each of the three years in the
period ended December 31, 2007. 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, 2007, and 2006, and the consolidated results of their operations
and their cash flows for each of the three years in the period ended December
31, 2007 in conformity with accounting principles generally accepted in the
United States of America.
/s/ FARMER FUQUA & HUFF, P.C.
Plano, Texas
March 31, 2008
31
CabelTel International Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
December 31,
2007 2006
------ ------
Assets
Current assets
Cash and cash equivalents $ 172 $ 324
Note and interest receivable - related party 2,200 1,428
Other current assets 8 36
Assets held for sale -- 7,047
Total current assets 2,380 8,835
Investment in Mineral Rights 6,848 --
Property and equipment, at cost
Land and improvements 20 20
Buildings and improvements 172 169
Equipment and furnishings 336 290
------ ------
528 479
Less accumulated depreciation 397 364
------ ------
131 115
Deferred tax asset 250 491
Other assets 177 261
Total Assets $9,786 $9,702
------ ------
The accompanying notes are an integral part of these statements.
32
CabelTel International Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS - CONTINUED
(Amounts in thousands, except share amounts)
December 31,
--------------------
Liabilities And Stockholders' Equity 2007 2006
Current liabilities -------- --------
Accounts payable - trade $ 90 $ 439
Accrued expenses 175 124
Liabilities held for sale -- 6,642
-------- --------
Total Current Liabilities 265 7,205
Long-term debt - related party 6,921 --
Other long-term liabilities 459 418
-------- --------
Total liabilities 7,645 7,623
Stockholders' equity
Preferred stock, Series B 1 1
Common stock, $.01 par value; authorized, 100,000,000
shares; issued and outstanding, 986,939 shares at
December 31, 2007 and 986,953 shares at
December 31, 2006 10 10
Additional paid-in capital 55,992 55,992
Accumulated deficit (53,862) (53,924)
-------- --------
2,141 2,079
-------- --------
Total Liabilities & Equity $ 9,786 $ 9,702
======== ========
The accompanying notes are an integral part of these statements.
33
CabelTel International Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share amounts)
Year Ended
December 31,
-----------------------------
2007 2006 2005
------- ------- -------
Revenue
Real estate operations $ 2,984 $ 3,033 $ 2,596
------- ------- -------
Operating expenses
Real estate operations 1,315 1,300 1,167
Lease expense 845 939 931
Corporate general and administrative 796 1,091 1,191
------- ------- -------
2,956 3,330 3,289
------- ------- -------
Operating earnings (loss) 28 (297) (693)
Other income (expense)
Interest income 112 447 700
Interest expense (73) (486) (819)
Gain (loss) on sale of assets, net 750 -- (42)
Other income (expense), net 142 2,584 296
------- ------- -------
931 2,545 135
------- ------- -------
Earnings (loss) from continuing operations 959 2,248 (558)
Provision for income taxes (270) (437) --
------- ------- -------
Net income (loss) from continuing operations 689 1,811 (558)
Discontinued operations
Loss from operations (101) (786) (346)
Gain (loss) from sale of assets (526) 276 (82)
------- ------- -------
Net loss from discontinued operations (627) (510) (428)
------- ------- -------
Net income (loss) applicable to common shares 62 1,301 (986)
======= ======= =======
Earnings (loss) per common share - basic and diluted
Continuing operations $ 0.70 $ 1.83 $ (0.57)
Discontinued operations (0.64) (0.51) (0.44)
------- ------- -------
Net earnings (loss) per share $ 0.06 $ 1.32 $ (1.01)
======= ======= =======
Weighted average common and equivalent shares
outstanding - basic and diluted 987 987 977
The accompanying notes are an integral part of these statements.
34
CabelTel International Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
Year ended December 31,
2007 2006 2005
------- ------- -------
Cash flows from operating activities
Net earnings (loss) from continuing operations $ 689 $ 1,811 $ (558)
Adjustments to reconcile net earnings (loss) to net
cash provided by (used in) operating activities
Depreciation and amortization 47 31 41
(Gain) loss from affiliates (1,500) --
(Gain) from settlement with Sylvia Gilley (1,303) --
(Gain) loss on sale of assets -- -- 39
Change in deferred tax asset 241 670 --
Changes in operating assets and liabilities
Other current and non-current assets (44) (339) 272
Accounts payable and other liabilities (184) 473 612
------- ------- -------
Net cash provided by (used) in operating activities 749 (157) 406
Cash flows from investing activities
Funding of a note receivable (630) (1,377) --
Investment mineral rights (118) --
Purchase of property and equipment, net (49) (30) (107)
Net repayment of notes receivable 306 550
Proceeds from sale of other real estate -- -- 1,147
Proceeds from sale of properties -- -- 1,910
------- ------- -------
Net cash provided by (used in) investing activities (679) (1,219) 3,500
Cash flows from financing activities
Proceeds from common stock issuance -- 26 --
Funding of a note receivable
Payments on debt -- -- (3,711)
------- ------- -------
Net cash provided by (used in)
financing activities -- 26 (3,711)
Cash flows from discontinued operations
Cash provided by operating activities (222) (713) (307)
Cash provided by investing activities -
proceeds from sale -- 1,737 --
------- ------- -------
Net cash provided by (used in) discontinued
operations (222) 1,024 (307)
Net decrease in cash
and cash equivalents (152) (326) (112)
Cash and cash equivalents at beginning of year 324 650 762
------- ------- -------
Cash and cash equivalents at end of year $ 172 $ 324 $ 650
The accompanying notes are an integral part of this statement.
35
December 31,
2007 2006 2005
------- ------- -------
Supplemental information on cash flows is as follows:
Interest paid -- 380 370
Non-cash investing and financing activities:
Notes payable dissolved under rescission -- (7,245) --
Interest payable dissolved under rescission -- (991) --
Funds due from affiliate dissolved under rescission -- 8,236 --
Notes receivable funded under rescission -- 1,500 --
Notes payable cancelled under Gilley settlement -- (2,255) --
Interest payable cancelled under Gilley settlement -- (857) --
Notes receivable transferred to Gilleys -- 1,809 --
Acquisition of leases for mineral rights (6,848) -- --
Notes payable for acquisition of mineral rights 6,848 -- --
The accompanying notes are an integral part of this statement.
36
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 December 31, 2004 1 1 32 3,150 (32) (3,150) 977 10
Net loss
------- ------- ------- ------- ------- ------- ------- -------
Balance at December 31, 2005
1 1 32 3,150 (32) (3,150) 977 10
Rescission of Series J
Preferred Stock (32) (3,150) 32 3,150
Exercised stock option 10 --
Net income
------- ------- ------- ------- ------- ------- ------- -------
Balance at December 31, 2006 1 1 -- -- -- -- 987 10
Net Income
------- ------- ------- ------- ------- ------- ------- -------
Balance at December 31, 2007 1 1 -- -- -- -- 987 10
The accompanying notes are an integral part of this statement.
37
CabelTel International Corporation and Subsidiaries
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Amounts in thousands)
Additional Accum-
paid in ulated
capital deficit Total
------- ------- -------
Balance at December 31, 2004 55,966 (54,239) 1,738
Net loss (986) (986)
------- ------- -------
Balance at December 31, 2005
55,966 (55,225) 752
Rescission of Series J
Preferred Stock
Exercised stock option 26 26
Net income 1,301 1,301
------- ------- -------
Balance at December 31, 2006 55,992 (53,924) 2,079
Net Income 62 62
------- ------- -------
Balance at December 31, 2007 55,992 (53,862) 2,141
The accompanying notes are an integral part of this statement.
38
CabelTel International Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007
The accompanying Consolidated Financial Statements of CabelTel
International Corporation and consolidated entities were prepared in
conformity with accounting principles generally accepted in the United
States of America, the most significant of which are described in NOTE B.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. The Notes to Consolidated
Financial Statements are an integral part of these Consolidated Financial
Statements. The data presented in the Notes to Consolidated Financial
Statements are as of December 31, of each year and for the year then ended,
unless otherwise indicated. Dollar amounts in tables are in thousands,
except per share amounts.
Certain balances for 2005 and 2006 have been reclassified to conform to the
2007 presentation.
NOTE A - BUSINESS DESCRIPTION AND PRESENTATION
Name Change
-----------
On February 10, 2005, Greenbriar Corporation changed its name to CabelTel
International Corporation (which is referred throughout this report as "the
Company" or "CIC")
Acquisition of Leases for Mineral Interests
-------------------------------------------
On November 21, 2007, a wholly owned subsidiary of CabelTel International
Corporation entered into an agreement with Source Rock of Arkansas, LLC, a
Nevada limited liability company ("SRA"), a related party to acquire 1,712
net acres of mineral leasehold interests in four separate sections of land
in the Fayetteville Shale area of Arkansas in exchange for the issuance of
a promissory note. Through such arrangement, the subsidiary also acquired
two separate options to acquire additional leasehold acreage through August
15, 2008. The Company and its subsidiary intend to, subject to the
availability of funds, develop such acreage through drilling of one or more
exploratory wells on the property acquired. The acquisition price was
$4,000 per net acre payable on December 31, 2010 with interest at 9.5% per
annum. The two separate options to acquire additional acreage cover
leasehold interests on 1,815 net acres and 583 net acres in the same county
in Arkansas at the same price of $4,000 per net acre.
Acquisition and Disposition of CableTEL AD
------------------------------------------
On October 12, 2004, the Company acquired, for 31,500 shares of
newly-designated Series J 2% Preferred Stock, 74.8% of CableTEL AD
("CableTEL"), a Bulgarian telecommunications company. The terms of the
Acquisition Agreement required the Company to present a proposal to its
stockholders to approve the mandatory exchange of all shares of Series J 2%
Preferred Stock into 8,788,500 shares of common stock which, if approved by
stockholders, would have represented 90% of the resulting total issued and
outstanding shares of common stock in the Company.
-39-
The Acquisition Agreement, as amended, provided that the stockholders of
the Company had until June 30, 2006 to approve the exchange of Series J 2%
Preferred Stock into the Company common stock. If the exchange was not
approved by June 30, 2006, the holders of the Series J 2% Preferred Stock
had the option to rescind the entire transaction.
Until the acquisition was completed, the financial statements of CableTEL
AD were not included in the Company's consolidated financial statements.
The financial statements of the Company at December 31, 2005 did reflect
the Series J 2% Preferred Stock as well as a contra equity account
reflecting that the transaction had not yet occurred.
Effective June 1, 2006, the Company and the owners of CableTEL AD entered
into a Rescission Agreement whereby the original Acquisition Agreement
dated October 12, 2004, plus all amendments, was rescinded in its entirety.
The Company, as a "break up fee", received a $1,500,000 participation in a
9 1/2% tax free bond. The bond has a total face value of $2,406,850. In
June 2006, the Company recorded $1,467,000 as other income, representing
the $1,500,000, net of expenses.
Disposition of Gaywood Oil & Gas
--------------------------------
Effective June 30, 2006, the Company sold all of its membership interests
in the two limited liability companies Gaywood Oil & Gas, LLC and Gaywood
Oil & Gas II, LLC which own oil and gas leases in Gregg and Rusk Counties,
Texas and on which approximately 50 oil-producing wells are operating.
These wells averaged two to three barrels of oil per day. The sale price of
$1,737,000 was received in cash on July 5, 2006. The Company recorded a
gain on the sale of $418,000.
Disposition of Gainesville Outlet Mall
--------------------------------------
Effective December 31, 2007, the Company transferred all its ownership in
the Gainesville Outlet Mall and approximately 40 acres of undeveloped land.
The mall, which the Company acquired in 2003, has incurred both cash and
accounting losses for the past several years. The Company recorded an
impairment loss of $314,000 in the quarter ended March 31, 2007. Subsequent
to March 31, 2007 the Company did not fund any cash shortfalls incurred by
the mall.
Nature of Operations
--------------------
As of December 31, 2007, the Company leases and operates a retirement
community in King City Oregon, with a capacity of 114 residents.
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
-40-
generally accepted in the United States of America. All significant intercompany
transactions and accounts have been eliminated.
Depreciation
------------
Depreciation is provided for in amounts sufficient to relate the cost of
property and equipment to operations over their estimated service lives, ranging
from 3 to 40 years. Depreciation is computed by the straight-line method.
Depreciation expense, included in operations expenses, was $396,000, $369,000
and $389,000 for 2007, 2006 and 2005, respectively.
Accounting for Leases
---------------------
Leases of property, plant and equipment where the Company assumes substantially
all the benefits and risks of ownership are classified as finance leases.
Finance leases are capitalized at the estimated present value of the underlying
lease payments. Each lease payment is allocated between the liability and
finance charges so as to achieve a constant rate on the finance balance
outstanding. The corresponding rental obligations, net of finance charges, are
included in other long-term payables. The interest element of the finance charge
is charged to the income statement over the lease period. Property, plant and
equipment acquired under finance leasing contracts are 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
-------------------
Rental income for commercial property leases is recognized on a straight-line
basis over the respective lease terms. Rental income for residential property
leases is recorded when due from residents and is recognized monthly as it is
earned, which is not materially different than on a straight-line basis as lease
terms are generally for periods of one year or less.
Use of Estimates
----------------
In preparing financial statements in conformity with accounting principles
generally accepted in the United States of America, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and revenues and expenses during the reporting
period. Actual results could differ from those estimates.
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.
-41-
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.
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 follows Statement of Financial Accounting Standards No. 123(R),
"Share-Based Payment" ("SFAS 123R") for its stock options. The effect of SFAS
123R is immaterial to the Company's financial statements.
Sales of Real Estate
--------------------
Gains on sales of real estate are recognized to the extent permitted by
Statement of Financial Accounting Standards No. 66, "Accounting for Sales of
Real Estate" ("SFAS No. 66"). 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.
-42-
Real Estate Held for Sale
-------------------------
Statement of Financial Accounting Standards No. 144, ("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.
Recent Accounting Pronouncements
In February 2006, the FASB issued Statement of Financial Accounting Standards
No. 155, "Accounting for Certain Hybrid Financial Instruments--an Amendment of
FASB Statements No. 133 and 140" ("SFAS No. 155"). The purpose of SFAS No. 155
is to simplify the accounting for certain hybrid financial instruments by
permitting fair value re-measurement for any hybrid financial instrument that
contains an embedded derivative that otherwise would require bifurcation. SFAS
No. 155 is effective for all financial instruments acquired or issued after the
beginning of an entity's first fiscal year that begins after September 15, 2006.
We do not expect the adoption of SFAS No. 155 to have a material impact on our
cash flows, results of operations, financial position or liquidity.
In March 2006, the FASB issued Statement of Financial Accounting Standards No.
156, "Accounting for Servicing of Financial Assets--an Amendment of FASB
Statement No. 140" ("SFAS No. 156"). SFAS No. 156 requires recognition of a
servicing asset or a servicing liability each time an entity undertakes an
obligation to service a financial asset by entering into a servicing contract.
SFAS No. 156 also requires that all separately recognized servicing assets and
servicing liabilities be initially measured at fair value and subsequently
measured at fair value at each reporting date. SFAS No. 156 is effective as of
the beginning of an entity's first fiscal year that begins after September 15,
2006. We do not expect the adoption of SFAS No. 156 to have a material impact on
our cash flows, results of operations, financial position or liquidity.
In June 2006, the FASB issued Interpretation No. 48, "Accounting for Uncertainty
in Income Taxes, an Interpretation of FASB Statement No. 109" ("FIN No. 48").
FIN No. 48 clarifies the accounting for uncertainty in income taxes recognized
in a company's financial statements and prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. FIN No. 48 also
provides guidance on description, classification, interest and penalties,
accounting in interim periods, disclosure and transition. FIN No. 48 is
effective for fiscal years beginning after December 15, 2006. We do not expect
the adoption of FIN No. 48 to have a material impact on our cash flows, results
of operations, financial position or liquidity.
-43-
In September 2006, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 108, "Considering the Effects of Prior Year
Misstatements When Quantifying Misstatements in Current Year Financial
Statements" ("SAB No. 108"). SAB 108 provides guidance on the consideration of
the effects of prior period misstatements in quantifying current year
misstatements for the purpose of a materiality assessment. SAB 108 requires the
quantification of financial statement misstatements based on the effects of the
misstatements on each of the company's financial statements and the related
financial statement disclosures. This model is commonly referred to as the "dual
approach" because it requires quantification of errors under both the iron
curtain and the roll-over methods. The roll-over method focuses primarily on the
impact of a misstatement on the income statement--including the reversing effect
of prior year misstatements--but its use can lead to the accumulation of
misstatements in the balance sheet. The iron-curtain method focuses primarily on
the effect of correcting the period-end balance sheet with less emphasis on the
reversing effects of prior year errors on the income statement. SAB 108 was
effective for financial statements for fiscal years ending after November 15,
2006. The adoption of SAB 108 did not have a material impact on our cash flows,
results of operations, financial position or liquidity.
In September 2006, the FASB issued Statement of Financial Accounting Standards
No. 157, "Fair Value Measurements" ("SFAS No. 157"). The new FASB rule defines
fair value, establishes a framework for measuring fair value in generally
accepted accounting principles, or GAAP, and expands disclosures about fair
value measurements. The statement is effective for financial statements issued
for fiscal years beginning after November 15, 2007, and interim periods within
those fiscal years. We are currently evaluating the impact, if any, to our
financial condition or results of operations from the adoption of SFAS No. 157.
NOTE C - SHORT TERM NOTE RECEIVABLE - RELATED PARTY
In July 2006, the Company made an unsecured $1,377,000 loan to Source Rock of
Arkansas, LLC (a company that is 20% owned by an entity deemed to be related to
CabelTel). The loan has an annual interest rate of 8% with principal and
interest payable within 30 days after demand, and if not sooner demanded, on
July 17, 2007. Effective July 17, 2007 the existing accrued interest was added
to the principal balance, which increased the principal balance to $1,487,160,
and the maturity date was extended to July, 17, 2009. All other terms of the
note remain the same.
On November 20, 2007 the company made a $630,000 loan to Prime Income Asset
Management, Inc. The loan has an annual interest rate of 8 1/2 % with principal
and interest payable within 30 days after demand.
NOTE D - LONG TERM NOTES RECEIVABLE
As a result of the sale of a property in 2001, the Company holds a tax-exempt
note in the amount of $830,000, bearing interest at 9.5%. The note matures on
August 1, 2031. The repayment of the note and interest thereon is limited to the
cash flow of the property either from operations, refinancing or sale. The
Company has deferred gains in the amount of $521,000 as well as unpaid interest
due. The Company has been recognizing income when cash is received.
As a result of the CableTEL AD rescission, the Company holds a $1,500,000
participation in a tax-exempt note with a face amount of $2,406,000, bearing
interest at 9.5%. The note matures on August 20, 2037. The repayment of the note
and interest thereon has been limited to the cash flow of the property either
from operations, refinancing or sale.
In November 2006 the Company settled an obligation to Sylvia Gilley, wife of a
former CEO of the Company, and, as part of that settlement, the $830,000 note
and the $1,500,000 participation discussed above were assigned to Mrs. Gilley -
see Note F - Notes Payable.
-44-
As a result of the CableTEL AD rescission, the Company holds a $1,500,000
participation in a tax-exempt note with a face amount of $2,406,000, bearing
interest at 9.5%. The note matures on August 20, 2037. The repayment of the
notes and interest thereon is limited to the cash flow of the property either
from operations, refinancing or sale.
NOTE E - 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, 2007 and 2006:
Cash and cash equivalents - The carrying amount approximates fair value because
of the short maturity of these instruments.
Long-term debt - The fair value of the Company's long-term debt is estimated
based on market rates for the same or similar issues. The carrying value of
long-term debt approximates its fair value.
Notes receivable - The fair value of the note receivable from an affiliate
partnership is estimated to approximate fair value based on its short maturity.
It is not practical to estimate the fair value of notes receivable from sale of
properties because no quoted market exists and there are no comparable debt
instruments to provide a basis for valuation.
NOTE F - NOTES PAYABLE
LONG TERM DEBT
Long-term debt is comprised of the following (in thousands):
2007 2006
------------ -------------
Note payable to Source Rock of $ 6,921 $ --
Arkansas, LLC, a related party,
and accrued interest at 9.5% per
annum
Less current maturities -- --
============ =============
$ 6,921 $ --
============ =============
Aggregate annual principal maturities of long-term debt at December 31, 2007
are as follows (in thousands):
2008 --
2009 --
2010 6,921
2011 --
2012 --
Thereafter --
---------------
$ 6,921
===============
-45-
In November 2002, the Company converted an existing obligation to Sylvia Gilley,
the wife of the former CEO, into a note for $2,255,000 with interest accruing at
10% per year. At November 30, 2006, the total obligation to Sylvia Gilley was
$3,112,148. The Company and Mrs. Gilley have negotiated a settlement whereby
Mrs. Gilley will agree to cancel the obligation owed to her in exchange for:
o The transfer of two notes receivable from third parties currently held
by the Company. At November 30, 2006 these notes had a book value of
$1,809,000 (see NOTE D - Long Term Notes Receivable)
o 10% of the cash flow from Pacific Pointe, a retirement facility leased
by the Company, for as long as the Company holds the lease; and
o Interest received from the notes since June 2006.
The transaction resulted in the Company being relieved of a $3,112,148
obligation and, based upon the value of the assets provided to Mrs. Gilley,
recording a gain of $1,034,000, which has been reflected as other income in
2006.
NOTE G - OPERATING LEASES
The Company leases a retirement community under an operating lease in which the
basic term expires December 31, 2011, and has operating leases for equipment and
office space. The leases generally provide that the Company pay property taxes,
insurance and maintenance.
Future minimum payments following December 31, 2007 are as follows (in
thousands):
2008 931
2009 948
2010 965
2011 983
-----------
$ 3,827
Lease expense in 2007, 2006 and 2005 was $923,000, $939,000 and $932,000,
respectively.
-46-
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,
2007 2006 2005
--------- --------- ---------
Numerator:
Net income (loss) from continuing operations $ 689 $ 1,811 $ (558)
Net income (loss) from discontinued operations (627) (510) (428)
Denominator:
Shares used in basic earnings per share
calculation 987 987 977
Effect of diluted securities:
Employee stock options -- -- --
Pro forma basic earnings per share from
continuing operations $ 0.70 $ 1.83 $ (0.57)
Pro forma basic earnings per share from
discontinued operations (0.64) (0.51) (0.44)
Pro forma diluted earnings per share $ 0.06 $ 1.32 $ (1.01)
Shares used in diluted earnings per share
calculations 987 987 977
-47-
NOTE I - INCOME TAXES
At December 31, 2007, the Company had net operating loss carry forwards of
approximately $19,800,000, which expire between 2012 and 2024.
Deferred tax assets and liabilities were comprised of the following (in thousands):
Year ended
December 31,
2007 2006
------------- -------------
Deferred tax assets:
Net operating loss carry forwards $ 7,343 $ 7,363
Alternative minimum tax carry forwards 324 324
Other 496 496
------------- -------------
Total deferred tax assets 8,163 8,183
Valuation allowance (7913) (7,692)
-------------- --------------
Net deferred tax asset $ 250 $ 491
============= =============
Tax computed at the federal statutory rate of 34% (in thousands):
Year ended
December 31,
2007 2006 2005
--------------- --------------- ---------------
Federal income tax expense (benefit) at the statutory rate $ 270 $ 670 $ (331)
Change in deferred tax asset valuation allowance,
attributable to continuing operations (270) (670) (331)
--------------- --------------- ---------------
Federal income tax expense $ -- $ -- $ --
=============== =============== ===============
Changes in the deferred tax valuation allowance result from assessments
made by the Company each year of its expected future taxable income
available to absorb its carry forwards. The Company believes that it is
more likely than not that the net deferred tax asset at December 31, 2007,
of $250,000 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,
2007 2006
----------- -----------
1 1
Series B convertible preferred stock, $10 par value, liquidation value of ----------- -----------
$100, authorized 100 shares, issued and outstanding one share
-48-
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.
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.
Information with respect to stock option activity is as follows:
Weighted
average
exercise
Shares price
------------ --------------
Outstanding December 31, 2005 60,000 $ 2.60
Exercised (10,000) 2.60
Cancelled --
Outstanding December 31, 2006 50,000 $ 2.60
Outstanding December 31, 2007 50,000 $ 2.60
Additional information about stock options outstanding at December 31, 2007 is
summarized as follows:
Options outstanding and exercisable
Weighted Average
Number Remaining Weighted average
Range of exercise price Outstanding contractual life exercise price
------------ ---------------- --------------
$ 2.60 50,000 1.0 $2.60
-49-
NOTE K - GAIN (LOSS) ON SALE OF ASSETS
The Company leases and operates the Pacific Pointe Retirement Inn in King City,
Oregon. On November 16, 2007 the Company sold, to an unrelated third party, a
portion of its future cash flow from its Retirement Center in Oregon for a cash
payment of $750,000. More specifically the Company sold 25% of the cash flow for
the 60 month period ending November 2012. For the period December 2012 through
December 2022 the buyer will receive 10% of the cash flow from the retirement
center.
NOTE L - OTHER INCOME (EXPENSE)
Other income (expense) consists of the following: (amounts in thousands)
Year ended December 31,
2007 2006 2005
------ ------ ------
Breakup fee upon the rescission of the Cabeltel
AD acquisition $ -- $1,467 $ --
------ ------ ------
Gain from the settlement with Sylvia Gilley -- 1,034 --
------ ------ ------
Collection of previously deferred receivables -- 61 145
------ ------ ------
Other 142 22 151
------ ------ ------
$ 142 $2,584 $ 296
====== ====== ======
NOTE M - DISCONTINUED OPERATIONS AND SALES OF REAL ESTATE
In October 2001, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"). SFAS No. 144
supersedes FASB Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of" ("SFAS No. 121") and the accounting and reporting provisions for disposals
of a segment of a business as addressed in Accounting Principles Board 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" ("APB Opinion No. 30"). SFAS No. 144 establishes a
single accounting model for long-lived assets to be disposed of by sale and
addresses various implementation issues of SFAS No. 121. In addition, SFAS No.
144 extends the reporting requirements of discontinued operations to include
components of an entity that has either been disposed of or is classified as
held for sale. The Company adopted SFAS No. 144 as of January 1, 2002.
During 2004, the Company disposed of an assisted living community in North
Carolina and entered into a contract to sell an assisted living community in
South Carolina. The operations of these two facilities have been reflected as an
assets held for sale. Revenue for the two properties was $841,000, in 2004. The
net loss for the two properties was $184,000 in 2004.
-50-
The South Carolina facility was sold in May 2005. Revenue and net loss for 2005
were $40,610 and $11,640, respectively.
Effective June 30, 2006, the Company sold all of its membership interests in two
limited liability companies, Gaywood Oil & Gas, LLC and Gaywood Oil & Gas II,
LLC ("Gaywood"), which own oil and gas leases in Gregg and Rusk Counties, Texas
and on which approximately 50 oil-producing wells are operating. These are wells
averaging two to three barrels of oil per day. The sale price of $1,737,000 was
received in cash on July 5, 2006. The Company recorded a pre-tax gain on the
sale of $418,000. The operation of Gaywood and the gain on the sale have been
reflected as a discontinued operation in 2006 and prior years.
During 2007, the Company transferred ownership of the Gainesville Outlet Mall to
an unrelated third party.
The following table shows discontinued operations detail for 2007, 2006 and
2005, respectively (amounts in thousands).
December 31,
2007 2006 2005
------- ------- -------
Revenue
Oil & gas operations -- $ 995 $ 1,723
Outlet mall -- 1,235 1,501
Other -- -- 41
------- ------- -------
2,230 3,265
Operating expenses
Oil and gas operating expenses -- 674 1,245
Outlet mall (101) 1,760 1,486
Depreciation and amortization -- 53 473
Corporate general and administrative -- -- --
------- ------- -------
(101) 2,487 3,204
Operating income (101) (257) 64
Other income (expense)
Interest expense -- -- (398)
Gain (Loss) on sale of assets (526) -- (82)
Other -- -- (9)
------- ------- -------
(526) -- (489)
Earnings before income tax (627) (257) (428)
Income tax -- (253) --
Net earnings $ (627) $ (510) $ (428)
======= ======= =======
-51-
NOTE N - CONTINGENCIES
Chesapeake Exploration Limited Partnership and Chesapeake Operating, Inc.
--------------------------------------------------------------------------------
("Chesapeake")
--------------
In January 2006, the Company entered into a joint operating agreement evidencing
its acquisition of a 5% interest in two gas wells being drilled and ultimately
operated by Chesapeake. The Company relied on the cost projections provided by
Chesapeake to make its investment decision. Subsequent to its investment the
Company received an invoice from Chesapeake for $556,217 which, according to
Chesapeake, represents the Company's 5% share of additional costs incurred by
Chesapeake in drilling the wells. The Company believes that these additional
costs far exceed any reasonable expense that should have been incurred in
drilling the two wells and were incurred without notifying the Company of such
expenses. The Company has requested an accounting of the additional expenses and
a reconciliation of the final costs to the cost estimates previously presented.
In April 2007, Chesapeake filed a lawsuit against the Company and others in
State District Court in Tarrant County, Texas.
Management intends to vigorously defend this action. However, should the Company
not prevail, Source Rock of Arkansas, LLC, an entity affiliated with the
Company, has agreed to fully indemnify the Company for any losses it might incur
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.
NOTE O - QUARTERLY DATA (UNAUDITED)
The table below reflects the Company's selected quarterly information for the
years ended December 31, 2007 and 2006. Certain 2006 amounts have been
reclassified to conform to the current presentation of discontinued operations.
All amounts shown are in thousands.
First Second Third Fourth
Year ended December 31, 2007 Quarter Quarter Quarter Quarter
------- ------- ------- -------
Revenue $ 721 $ 761 $ 751 $ 751
Operating (expense) (560) (543) (526) (531)
Corporate general and administrative expense (209) (251) (225) (111)
Other income (expense) net 94 27 105 705
Provision for income taxes -- -- -- (270)
Net income (loss) from continuing operations 46 (6) 105 544
Gain (loss) from discontinued operations (627) -- -- --
Income (loss) allocable to common shareholders (581) (6) 105 544
Income (loss) per common share -
basic and diluted (0.59) (0.01) 0.11 0.55
-52-
Year ended December 31, 2006 First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Revenue $ 777 $ 682 $ 708 $ 866
Operating (expense) (607) (546) (546) (540)
Corporate general and administrative expense (348) (249) (202) (292)
Other income (expense) net (37) 1,995 302 285
Net income (loss) from continuing operations (215) 1,882 262 319
Provision for income taxes -- (233) -- (204)
Gain (loss) from discontinued operations (83) 383 (390) (420)
Income (loss) allocable to common shareholders (298) 2,032 (128) (305)
Income (loss) per common share -
basic and diluted $ (0.31) $ 2.08 $ (0.14) $ (0.31)
NOTE P - SUBSEQUENT EVENT
Sale of Common Stock
On March 18, 2008, the Company completed the sale of 950,000 newly registered
shares of its common stock to URC Energy, LLC. ("URC") for $3.00 per share or
$2,850,000. This brought total shares of common stock outstanding to 1,969,939
shares and gave URC 49.05% of the outstanding shares of the Company's common
stock. URC is a related party. As a group related parties control approximately
69% of the Company's issued and outstanding common stock.
-53-