THE BEARD COMPANY
ENTERPRISE PLAZA, SUITE 320
5600 NORTH MAY AVENUE
OKLAHOMA CITY, OKLAHOMA 73112
FAX (405) 842-9901
(405) 842-2333
June 7, 2005
Mr. Bret Johnson
Staff Accountant
Division of Corporation Finance
Securities and Exchange Commission
Washington, D.C. 20549-0510
Re: Form 10-K for the fiscal year
ended December 31, 2004
File No. 1-12396
Dear Mr. Johnson:
The following is offered in response to your letter of June 1, 2005 regarding
the Form 10-K of The Beard Company:
SEC June 1, 2005 Comment No. 1
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Note 5 - Investments and Other Assets
Investment in Cibola Corporation
The information contained in the Company's letter dated May 5, 2005, in response
to Comment 5 in the SEC Comment Letter of April 28, 2005, is filed as a
correspondence file as follows:
Response to Item 5 of the April 28, 2005 SEC Comment Letter
As set forth in Note 5 to the Company's financial statements, "The Company owns
80% of the outstanding common stock of Cibola Corporation ("Cibola"),...but does
not consolidate the assets, liabilities, revenues or expenses of Cibola because
Cibola's assets are controlled by its minority common stockholders and preferred
stockholders."
In arriving at our conclusion not to consolidate our 80% ownership interest in
Cibola, we considered the accounting literature cited below and the following
facts:
o In October 1987, Paragraph 13 of Statement of Financial Accounting
Standards No. 94 amended Paragraphs 2 and 3 of ARB No. 51 to read as
follows:
"2. The usual condition for a controlling financial interest is
ownership of a majority voting interest, and, therefore, as a
general rule ownership by one company, directly or indirectly, of
over fifty percent of the outstanding voting shares of another
company is a condition pointing toward consolidation. However,
there are exceptions to this general rule. A majority-owned
subsidiary shall not be consolidated if control is likely to be
temporary or if it does not rest with the majority owner....."
"3. All majority-owned subsidiaries---all companies in which a
parent has a controlling financial interest through direct or
indirect ownership of a majority interest---shall be consolidated
except those described in the last sentence of paragraph 2."
o The minority common stockholders and preferred stockholders have, at all
times since the Company acquired its common stock, been represented by
three members on Cibola's five member Board of Directors.
o Two of Cibola's preferred stockholders, who own a total of 79.2% of its
preferred stock and 15.84% of its common stock, are the "Executive
Officers" of Cibola and have, at all times since the Company acquired its
80% ownership, been authorized to manage and have managed all of Cibola's
affairs, negotiated its contracts and financing arrangements, etc. Due to
the Company's minority representation on Cibola's Board of Directors, it
has always been in a minority position when voting upon all matters that
have come before the Board. As a result, and after giving consideration to
the Call Option described below, the Company has never been in a position
to exercise either financial or managerial control of Cibola, and
accordingly Cibola should not be consolidated pursuant to paragraph 3
above.
o Although Cibola is an affiliate of the Company for Federal consolidated
income tax return purposes, and despite owning 80% of Cibola's common
stock, the Company is entitled, under an agreed allocation formula, to
receive as its share of Cibola's financial income, a cash distribution
which amounts to less than 10% of the separate return Federal taxable
income of Cibola during each year or portion thereof in which Cibola is a
member of the consolidated Federal income tax group of which the Company is
the parent. The preferred stockholders have elected to leave the remaining
net income in Cibola each year to enhance the rate of return and the
ultimate rate of return to Cibola shareholders. In FY2004, Cibola reported
financial net income of approximately $4,221,000; however, the Company's
cash distribution under the agreed allocation formula was only
approximately $290,000. To treat Cibola as an 80%-owned subsidiary under
these conditions would have been both highly misleading and confusing to
our shareholders.
o Both the Company (upon six months' written notice) and the preferred
stockholders (five days' written notice) have since inception had the right
to terminate the governing agreements under a Call Option agreement, and as
a matter of fact agreed earlier this year to terminate the agreement on
December 31, 2005. Since the Call Option could have been exercised at
virtually any time, with Cibola ceasing to be a subsidiary (majority-owned
or otherwise), any control we might be deemed to have or to have had is or
was temporary and, as a result, Cibola would have qualified for an
exception to consolidation as noted in Paragraph 2 of ARB 51.
SEC June 1, 2005 Comment No. 2
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Note 5 - Investments and Other Assets
Investment in Cibola Corporation
As noted in Footnote 1 to the Company's Form 10-K for the year ended December
31, 2004, under the heading Principles of Consolidation and Basis of
Presentation:
"The accompanying financial statements include the accounts of the Company
and its wholly and majority owned subsidiaries in which the Company has a
controlling financial interest. SUBSIDIARIES AND INVESTEES IN WHICH THE COMPANY
DOES NOT EXERCISE CONTROL ARE ACCOUNTED FOR USING THE EQUITY METHOD. All
significant intercompany transactions have been eliminated in the accompanying
financial statements."
In addition, in future filings, the Company will add the following highlighted
comment to its Footnote 5, INVESTMENTS AND OTHER ASSETS:
"The Company owns 80% of the outstanding common stock of Cibola Corporation
("Cibola"), a natural gas marketing company, but does not consolidate the
assets, liabilities, revenues or expenses of Cibola because Cibola's assets are
controlled by its minority common stockholders and preferred stockholders. THE
COMPANY'S INVESTMENT IN CIBOLA IS ACCOUNTED FOR USING THE EQUITY METHOD. The
Company's equity in the earnings of Cibola was $290,000, $238,000, and $123,000,
in 2004, 2003 and 2002, respectively."
The June 1, 2005 SEC Comment letter asked that the Company reference the
accounting literature which supports the Company's accounting treatment for its
investment in Cibola. The information provided by the Company in its May 5, 2005
response to the April 28, 2005 SEC Comment letter (and repeated above) indicates
why Cibola Corporation is not consolidated in the financial statements of the
Company. The Company follows APB18, The Equity Method of Accounting for
Investments in Common Stock, as amended by FASB 94, Consolidation of All
Majority-Owned Subsidiaries to account for its investment in Cibola.
SEC June 1, 2005 Comment No. 3
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Item 9A - Controls and Procedures
The Company will amend its controls and procedures disclosure in future filings
to read that its officers and directors concluded that the Company's controls
and procedures are effective as of the reporting date rather than a date within
90 days of the date of filing.
Please acknowledge receipt hereof by returning one copy of this letter with your
filing stamp endorsed thereon. A stamped, self-addressed envelope is enclosed
for your convenience.
Sincerely,
THE BEARD COMPANY
HERB MEE, JR.
Herb Mee, Jr. President and
Chief Financial Officer
HMJr/do
cc: Mr. Jerry A. Warren, Esq.
c/o McAfee & Taft
Tenth Floor
Two Leadership Square
Oklahoma City, OK 73102
Mr. Michael Gibson
c/o Cole & Reed, P.C.
531 Couch Drive, Suite 200
Oklahoma City, OK 73102-2251
Mr. W. M. Beard
Chairman of the Board
c/o The Beard Company
Mr. Jack A. Martine
Chief Accounting Officer
c/o The Beard Company