THE BEARD COMPANY
ENTERPRISE PLAZA, SUITE 320
5600 NORTH MAY AVENUE
OKLAHOMA CITY, OKLAHOMA 73112
FAX (405) 842-9901
(405) 842-2333
July 7, 2005
Mr. Bret Johnson VIA FACSIMILE: 202-772-9369
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 22, 2005 regarding
the Form 10-K of The Beard Company:
Exhibits
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We attach the following Exhibits for your information:
99.1 Certificate of Amendment Designating the Preferences, Limitations and
Relative Rights of Cibola Corporation Series A Preferred Stock
99.2 Certificate of Amendment Designating the Preferences, Limitations and
Relative Rights of Cibola Corporation Series B Preferred Stock
99.3 Certificate of Amendment Designating the Preferences, Limitations and
Relative Rights of Cibola Corporation Series C Preferred Stock
99.4 May 31, 2005 Balance Sheet (unaudited) of Cibola Corporation
SEC June 22, 2005 Comment No. 1
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You will note from Exhibits 99.1, 99.2 and 99.3 that the Series A, B and C
Preferred Stock each contain a preference designation which provides that
holders of such stock are not entitled to receive dividends, but are entitled in
the event of dissolution of the Corporation to a payment in the aggregate sum of
$50,000,000 before any payment is made to the holders of shares of common stock.
It is important to note that the holders of the three Series of Preferred Stock
collectively own 100% of the Preferred Stock and the 20% of the common stock not
owned by Beard. These same three parties are three of the five directors of
Cibola, with Bill Beard and myself being the other two directors. You will also
note in Exhibit 99.4 that the latest balance sheet of Cibola reflects a
shareholders' equity of $26,503,000.
Note 5 - Investments and Other Assets
Investment in Cibola Corporation
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Response to Item 1 of the June 22, 2005 SEC Comment Letter
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In your Comment No. 1 you refer to SFAS 94 and to the Call Option Agreement. You
then state that "In reviewing the referenced agreements, we did not note
contractual or legal rights which would preclude you from exercising control
over Cibola." You are, of course, correct in your conclusion. We could, at any
point in time, have elected to exercise control over Cibola. However, as a
practical matter and in view of the liquidation preference held by the holders
of the Preferred Stock, had we attempted to do so and make any decision or take
any action adverse to the desires of the preferred stockholders (controlling
directors) of Cibola such parties would have exercised their five day
termination right under the Call Option Agreement. Thus, any attempt by us to
exercise control over Cibola would have been of extremely short shrift, serving
no purpose and, in fact, being detrimental to Beard as set forth below.
We entered into the Cibola transaction in April of 1996 hoping that the value
(shareholders' equity) of Cibola would exceed $50,000,000 at the end of the day
(which was originally contemplated to be in 2007). However, due to poor market
results in 2000-2003, the hope of any upside potential has now vanished and the
common is currently $23,497,000 under water in terms of liquidation value. We
have continued to remain in the arrangement because we received cash
distributions ranging from $99,000 for 1996 (a short year) to $308,000 for 1999,
with $290,000 received for 2004. Now that Beard's financial results appear to be
turning the corner we decided early this year to terminate the arrangement at
year-end 2005. If, as discussed above, we had at any time attempted to take
control of Cibola, they would have exercised their Call Option and liquidated
the company. Our Cibola common would have been worthless, and our promissory
note to Cibola, secured by the common, would also have been worthless since it
is a non-recourse note. And, more importantly, we would have cut off a valuable
source of income to the Company.
You have asked us, after analyzing EITF 96-16, to address the contractual or
legal "minority rights" which overcome the general rule of consolidation for our
majority voting interest. We have analyzed the cited EITF, and particularly the
Factors to Consider set forth therein. It appears to us that Factors #2 and #6
have particular bearing given our fact situation. Upon considering the corporate
governance arrangements between the parties (Factor #2), we have always felt
that the actuality of the liquidation preference held by the preferred
stockholders has, as a practical matter, negated any rights Beard, as 80% owner
of the common stock, might have should it temporarily attempt to control Cibola
due to the facts recited above.
We have also considered Factor #6. Under the Call Option, if we exercise the
preferred stockholders would liquidate Cibola, we would own nothing and they
would own 100% as outlined above. Likewise, if they exercise they would
liquidate and the same thing would happen. It has always been the preferred
stockholders, who also happen to be the owners of the minority 20% common
position, that in reality control Cibola. Our situation is the reverse of the
situation outlined in Factor #6. Although we have the ability to take control of
Cibola, such action would be neither prudent nor feasible. Further, our ability
to take control is negated by the ability of the minority shareholders, through
their liquidation preference as preferred shareholders, to liquidate Cibola and
leave us with nothing. This clearly demonstrates that the participating rights
of the minority/preferred shareholders are a substantive right. Accordingly, in
our opinion, the "minority rights" of the minority/preferred shareholders
overcome the general rule of consolidation for our majority voting interest and
we should not consolidate Cibola.
Response to Item 2 of the June 22, 2005 SEC Comment Letter
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As you have noted in your Comment 2, the Call Option Agreement provides for
payment for the common shares upon exercise of the option at fair market value.
As cited above, it is the liquidation preference held by the preferred
stockholders that precludes our 80% ownership interest in the common equity from
having any value. As a practical matter the only value we presently have is the
right to receive a portion (less than 10%) of the pre-tax earnings of Cibola
each year so long as we continue to have our common ownership in the company.
General
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Hopefully with the additional facts now available to you, you will be able to
agree with us that to consolidate Cibola's financial results would be totally
misleading to our shareholders.
Thanks for your patience and consideration.
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
Exhibit 99.1
ARTICLES OF AMENDMENT DESIGNATING THE PREFERENCES
LIMITATIONS AND RELATIVE RIGHTS OF PREFERRED STOCK
OF
CIBOLA CORPORATION
Cibola Corporation, a Wyoming corporation (the "Corporation"), hereby
certifies that pursuant to the authority contained in Article Fifth of its
Articles of Incorporation, and in accordance with the provisions of Section
17-16-602 of the Wyoming Business Corporation Act, the Board of Directors of the
Corporation has adopted the following resolution creating a series of Preferred
Stock.
RESOLVED, that there be created a series of Preferred Stock to be
designated as Series A Preferred Stock, consisting of an aggregate of
9,979 shares of the 16,200 shares of Preferred Stock, par value
$1,000.00 per share, as authorized by the Corporation's Articles of
Incorporation, and that the preferences, limitations and relative
rights of the Series A Preferred Stock shall be as follows:
(a) DESIGNATION AND AMOUNT. The designation of the series of
Preferred Stock created by this Resolution shall be Series A
Preferred Stock, and the number of shares constituting such
series shall be 9,979 shares.
(b) DIVIDENDS. Holders of shares of Series A Preferred Stock shall
not be entitled to receive dividends.
(c) RIGHTS ON DISSOLUTION.
(i) Liquidation Payment. In the event of any voluntary or
involuntary dissolution of the Corporation, the holders of shares
of Preferred Stock then outstanding (including, without
limitation, shares of Series A Preferred Stock) shall be
subordinate to all claims of the Corporation's creditors, but
otherwise shall be entitled to be paid out of the assets of the
Corporation available for distribution to its shareholders,
before any payment is made to the holders of shares of common
stock, par value $0.01 of the Corporation (the "Common Stock"),
or of shares of any other class of stock of the Corporation, the
aggregate sum of $50,000,000. The amounts to be distributed to
holders of shares of each series of Preferred Stock then
outstanding shall be calculated in accordance with the terms of
those certain Sinking Fund Requirements (the "Requirements")
adopted by the Board of Directors of the Corporation on April
10th, 1996. After payment shall have been made to the holders of
Series A Preferred Stock of the full amount to which they shall
be entitled, as aforesaid, the holders of shares of Series A
Preferred Stock shall be entitled to no further distributions
thereon, and the holders of shares of Common Stock and of shares
of any other class of capital stock of the Corporation shall be
entitled to share, according to their respective rights and
preferences, in all remaining assets of the Corporation available
for distribution to its shareholders.
(ii) If, upon any such voluntary or involuntary dissolution
of the Corporation, the assets of the Corporation available for
distribution to its shareholders shall be insufficient to pay the
holders of shares of Preferred Stock the full amounts to which
they shall respectively be entitled, the holders of shares of
Preferred Stock (including, without limitation, shares of Series
A Preferred Stock) shall receive all of the assets of the
Corporation available for distribution and each such holder of
shares of Preferred Stock shall share in such distribution in
accordance with the terms of the Requirements.
(d) VOTING. Except as otherwise provided in the Act, the holders of
shares of Series A Preferred Stock shall not be entitled to vote
on any matter that properly comes before a meeting of the
shareholders of the Corporation. Notwithstanding anything to the
contrary herein or in the Act, the holders of shares of Series A
Preferred Stock shall be entitled to receive notification of any
meeting of shareholders of the Corporation, which notice shall be
given at the same time and in the same manner as is given to
holders of shares of Common Stock.
(e) CONVERSION. Shares of Series A Preferred Stock shall not be
convertible into shares of Common Stock or any other class of
capital stock of the Corporation.
Such resolution was duly adopted by the Board of Directors of the
Corporation on the 10th day of April, 1996.
Cibola Corporation has caused these Articles of Amendment to be signed and
acknowledged by its duly authorized officers on the 10th day of April, 1996, in
Cheyenne, Wyoming.
CIBOLA CORPORATION
By: MICHAEL C. BLACK
Michael C. Black, President
ATTEST:
RICHARD R. DUNNING
Richard R. Dunning, Assistant Secretary
Exhibit 99.2
ARTICLES OF AMENDMENT DESIGNATING THE PREFERENCES
LIMITATIONS AND RELATIVE RIGHTS OF PREFERRED STOCK
OF
CIBOLA CORPORATION
Cibola Corporation, a Wyoming corporation (the "Corporation"), hereby
certifies that pursuant to the authority contained in Article Fifth of its
Articles of Incorporation, and in accordance with the provisions of Section
17-16-602 of the Wyoming Business Corporation Act, the Board of Directors of the
Corporation has adopted the following resolution creating a series of Preferred
Stock.
RESOLVED, that there be created a series of Preferred Stock to be
designated as Series B Preferred Stock, consisting of an aggregate of
3,370 shares of the 16,200 shares of Preferred Stock, par value
$1,000.00 per share, as authorized by the Corporation's Articles of
Incorporation, and that the preferences, limitations and relative
rights of the Series B Preferred Stock shall be as follows:
(a) DESIGNATION AND AMOUNT. The designation of the series of
Preferred Stock created by this Resolution shall be Series B
Preferred Stock, and the number of shares constituting such
series shall be 3,370 shares.
(b) DIVIDENDS. Holders of shares of Series B Preferred Stock shall
not be entitled to receive dividends.
(c) RIGHTS ON DISSOLUTION.
(i) Liquidation Payment. In the event of any voluntary or
involuntary dissolution of the Corporation, the holders of shares
of Preferred Stock then outstanding (including, without
limitation, shares of Series A Preferred Stock) shall be
subordinate to all claims of the Corporation's creditors, but
otherwise shall be entitled to be paid out of the assets of the
Corporation available for distribution to its shareholders,
before any payment is made to the holders of shares of common
stock, par value $0.01 of the Corporation (the "Common Stock"),
or of shares of any other class of stock of the Corporation, the
aggregate sum of $50,000,000. The amounts to be distributed to
holders of shares of each series of Preferred Stock then
outstanding shall be calculated in accordance with the terms of
those certain Sinking Fund Requirements (the "Requirements")
adopted by the Board of Directors of the Corporation on April
10th, 1996. After payment shall have been made to the holders of
Series A Preferred Stock of the full amount to which they shall
be entitled, as aforesaid, the holders of shares of Series A
Preferred Stock shall be entitled to no further distributions
thereon, and the holders of shares of Common Stock and of shares
of any other class of capital stock of the Corporation shall be
entitled to share, according to their respective rights and
preferences, in all remaining assets of the Corporation available
for distribution to its shareholders.
(ii) If, upon any such voluntary or involuntary dissolution
of the Corporation, the assets of the Corporation available for
distribution to its shareholders shall be insufficient to pay the
holders of shares of Preferred Stock the full amounts to which
they shall respectively be entitled, the holders of shares of
Preferred Stock (including, without limitation, shares of Series
B Preferred Stock) shall receive all of the assets of the
Corporation available for distribution and each such holder of
shares of Preferred Stock shall share in such distribution in
accordance with the terms of the Requirements.
(d) VOTING. Except as otherwise provided in the Act, the holders of
shares of Series B Preferred Stock shall not be entitled to vote
on any matter that properly comes before a meeting of the
shareholders of the Corporation. Notwithstanding anything to the
contrary herein or in the Act, the holders of shares of Series B
Preferred Stock shall be entitled to receive notification of any
meeting of shareholders of the Corporation, which notice shall be
given at the same time and in the same manner as is given to
holders of shares of Common Stock.
(e) CONVERSION. Shares of Series B Preferred Stock shall not be
convertible into shares of Common Stock or any other class of
capital stock of the Corporation.
Such resolution was duly adopted by the Board of Directors of the
Corporation on the 10th day of April, 1996.
Cibola Corporation has caused these Articles of Amendment to be signed and
acknowledged by its duly authorized officers on the 10th day of April, 1996, in
Cheyenne, Wyoming.
CIBOLA CORPORATION
By: MICHAEL C. BLACK
Michael C. Black, President
ATTEST:
RICHARD R. DUNNING
Richard R. Dunning, Assistant Secretary
Exhibit 99.3
ARTICLES OF AMENDMENT DESIGNATING THE PREFERENCES
LIMITATIONS AND RELATIVE RIGHTS OF PREFERRED STOCK
OF
CIBOLA CORPORATION
Cibola Corporation, a Wyoming corporation (the "Corporation"), hereby
certifies that pursuant to the authority contained in Article Fifth of its
Articles of Incorporation, and in accordance with the provisions of Section
17-16-602 of the Wyoming Business Corporation Act, the Board of Directors of the
Corporation has adopted the following resolution creating a series of Preferred
Stock.
RESOLVED, that there be created a series of Preferred Stock to be
designated as Series C Preferred Stock, consisting of an aggregate of
2,851 shares of the 16,200 shares of Preferred Stock, par value
$1,000.00 per share, as authorized by the Corporation's Articles of
Incorporation, and that the preferences, limitations and relative
rights of the Series C Preferred Stock shall be as follows:
(a) DESIGNATION AND AMOUNT. The designation of the series of
Preferred Stock created by this Resolution shall be Series C
Preferred Stock, and the number of shares constituting such
series shall be 2,851 shares.
(b) DIVIDENDS. Holders of shares of Series C Preferred Stock shall
not be entitled to receive dividends.
(c) RIGHTS ON DISSOLUTION.
(i) Liquidation Payment. In the event of any voluntary or
involuntary dissolution of the Corporation, the holders of shares
of Preferred Stock then outstanding (including, without
limitation, shares of Series A Preferred Stock) shall be
subordinate to all claims of the Corporation's creditors, but
otherwise shall be entitled to be paid out of the assets of the
Corporation available for distribution to its shareholders,
before any payment is made to the holders of shares of common
stock, par value $0.01 of the Corporation (the "Common Stock"),
or of shares of any other class of stock of the Corporation, the
aggregate sum of $50,000,000. The amounts to be distributed to
holders of shares of each series of Preferred Stock then
outstanding shall be calculated in accordance with the terms of
those certain Sinking Fund Requirements (the "Requirements")
adopted by the Board of Directors of the Corporation on April
10th, 1996. After payment shall have been made to the holders of
Series A Preferred Stock of the full amount to which they shall
be entitled, as aforesaid, the holders of shares of Series A
Preferred Stock shall be entitled to no further distributions
thereon, and the holders of shares of Common Stock and of shares
of any other class of capital stock of the Corporation shall be
entitled to share, according to their respective rights and
preferences, in all remaining assets of the Corporation available
for distribution to its shareholders.
(ii) If, upon any such voluntary or involuntary dissolution
of the Corporation, the assets of the Corporation available for
distribution to its shareholders shall be insufficient to pay the
holders of shares of Preferred Stock the full amounts to which
they shall respectively be entitled, the holders of shares of
Preferred Stock (including, without limitation, shares of Series
C Preferred Stock) shall receive all of the assets of the
Corporation available for distribution and each such holder of
shares of Preferred Stock shall share in such distribution in
accordance with the terms of the Requirements.
(d) VOTING. Except as otherwise provided in the Act, the holders of
shares of Series C Preferred Stock shall not be entitled to vote
on any matter that properly comes before a meeting of the
shareholders of the Corporation. Notwithstanding anything to the
contrary herein or in the Act, the holders of shares of Series C
Preferred Stock shall be entitled to receive notification of any
meeting of shareholders of the Corporation, which notice shall be
given at the same time and in the same manner as is given to
holders of shares of Common Stock.
(e) CONVERSION. Shares of Series C Preferred Stock shall not be
convertible into shares of Common Stock or any other class of
capital stock of the Corporation.
Such resolution was duly adopted by the Board of Directors of the
Corporation on the 10th day of April, 1996.
Cibola Corporation has caused these Articles of Amendment to be signed and
acknowledged by its duly authorized officers on the 10th day of April, 1996, in
Cheyenne, Wyoming.
CIBOLA CORPORATION
By: MICHAEL C. BLACK
Michael C. Black, President
ATTEST:
RICHARD R. DUNNING
Richard R. Dunning, Assistant Secretary
Exhibit 99.4
Lisle Compton [Logo]
Certified Public Accountants and Business Advisors
ACCOUNTANTS' COMPILATION REPORT
Cibola Corporation
Cody, Wyoming
We have compiled the accompanying balance sheet of Cibola Corporation as of May
31, 2005, and the related statement of earnings and comprehensive income for the
five months then ended, and the accompanying supplementary information contained
in Schedule I, II, and III, which are presented only for supplementary analysis
purposs, in accordance with the Statements on Standards for Accounting and
Review Services issued by the American Institute of Certified Public
Accountants.
A compilation is limited to presenting in the form of financial statements and
supplementary schedules information that is the representation of the
management. We have not audited or reviewed the accompanying financial
statements and accordingly, do not express an opinion or any form of assurance
on them.
Management has elected to omit substantially all of the disclosures and the
statement of cash flows required by accounting principles generally accepted in
the United States of America. If the omitted disclosures and statements of cash
flows were included in the financial statements, they might influence the user's
conclusion about the company's financial position, results of operations, and
cash flows. Accordingly, these financial statements are not designed for those
who are not informed about such matters.
We are not independent with respect to Cibola Corporation.
LISLE COMPTON COLE & ALMEN LLP
June 16, 2005
Lisle Compton Cole & Almen LLP
2601 N.W. Expressway, Suite 200W, Oklahoma City OK 73112
Tel 405.842.7977 Fax 405.842.7984 www.okccpa.com
Cibola Corporation
Balance Sheet
May 31, 2005
(unaudited)
Assets
Current assets:
Cash and cash equivalents $ 3,007,578
Accounts receivable 635,178
Investment securities 12,223,845
Other current assets 730,426
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Total current assets 16,597,027
Notes receivable 10,415,238
Other assets 6,175
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Total assets $ 27,018,440
=================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable 371,493
Income tax payable 75,766
Deferred income taxes 68,000
-----------------
Total current liabilities 515,259
-----------------
Stockholders' equity:
Preferred stock 2,127,929
Common stock 1,800
Contributed capital 1,474,200
Retained earnings 22,155,320
Accumulated other comprehensive income 743,932
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Total stockholders' equity 26,503,181
-----------------
Total liabilities and stockholders' equity $ 27,018,440
=================
See accompanying accountants' compilation report.