CIBOLA CORPORATION
Financial Statements
December 31, 2004, 2003 and 2002
(Information with respect to 2003 and 2002 is unaudited)
CIBOLA CORPORATION
TABLE OF CONTENTS
INDEPENDENT AUDITORS' REPORT..................................................1
FINANCIAL STATEMENTS - Information with respect to 2003 and 2002 is unaudited
Balance Sheets
December 31, 2004 and 2003............................................2
Statements of Earnings
Years Ended December 31, 2004, 2003 and 2002..........................3
Statements of Stockholders' Equity
Years Ended December 31, 2004, 2003 and 2002..........................4
Statements of Cash Flows
Years Ended December 31, 2004, 2003 and 2002..........................5
Notes to the Financial Statements........................................6
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Cibola Corporation:
We have audited the accompanying balance sheet of Cibola Corporation as of
December 31, 2004, and the related statements of earnings, stockholders' equity
and cash flows for the year then ended. These financial statements are the
responsibility of Cibola's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with the auditing 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
financial statements are free of material misstatement. An audit includes
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company's
internal control over financial reporting. Accordingly, we express no such
opinion. An audit also includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Cibola Corporation as of
December 31, 2004, and the results of its operations and its cash flows for the
year then ended in conformity with accounting principles generally accepted in
the United States of America.
The accompanying balance sheet of Cibola Corporation as of December 31, 2003 and
the related statements of earnings, stockholders' equity and cash flows for the
years ended December 31, 2003 and 2002 were not audited by us and, accordingly,
we do not express an opinion on them.
COLE & REED P.C.
Oklahoma City, Oklahoma
April 11, 2006
Cibola Corporation
Balance Sheets
December 31, 2004 and 2003
(unaudited)
2004 2003
---- ----
Assets
Current assets:
Cash and cash equivalents $ 5,470 $ 18,948
Accounts receivable 635,178 667,185
Accrued interest 27,585 25,037
Notes receivable 91,544 103,464
Deposits -- 729,600
Other 16,374 41,095
-------------- --------------
Total current assets 776,151 1,585,329
-------------- --------------
Restricted assets:
Cash and cash equlvalents 3,742,603 2,726,356
Investment securities 11,912,417 11,656,973
Certificates of deposit -- 122,000
Accrued Interest 478,052 134,762
Notes receivable 7,184,203 3,758,202
-------------- --------------
Total restricted assets 23,317,275 18,398,293
-------------- --------------
Total assets $ 24,093,426 19,983,622
============== ==============
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 371,494 371,494
Deferred Income taxes 109,000 83,000
-------------- --------------
Total current liabilities 480,494 454,494
-------------- --------------
Stockholders' equity:
Preferred stock, $1,000 par, 16,200 shares authorized, issued and 2,127,929 2,127,929
outstanding
Common stock, $0.01 par, 180,000 shares authorized, issued and 1,800 1,800
outstanding
Contributed capital 1,474,200 1,474,200
Retained enarnings 20,408,712 16,596,141
Accumulated other comprehansive income 1,038,851 767,618
Note receivable - common stock (1,438,560) (1,438,560)
-------------- --------------
Total stockholders' equity 23,612,932 19,529,128
-------------- --------------
Total liabilities and stockholders' equity $ 24,093,426 19,983,622
============== ==============
See accompanying notes to the financial statements
Cibola Corporation
Statement of Earnings
Years Ended December 31, 2004, 2003 and 2002
(unaudited) (unaudited)
2004 2003 2002
--------------------------------------------
Natural gas marketing sales $ 7,261,830 6,887,241 6,561,718
Cost of natural gas sold 4,410,748 4,398,696 4,405,485
------------- ------------- -------------
Gross margin 2,851,082 2,488,545 2,156,233
Operating expenses
General and administrative expenses 30,275 58,191 29,344
------------- ------------- -------------
Operating Income 2,820,807 2,430,354 2,126,889
Investment Income (loss), net 1,462,659 564,894 (1,140,047)
Other expense (62,164) -- --
------------- ------------- -------------
Earnings before income tax 4,221,302 2,995,248 986,842
Income tax expense 408,731 356,188 241,432
------------- ------------- -------------
Net earnings $ 3,812,571 2,639,060 745,410
============= ============= =============
See accompanying notes to the financial statements
Cibola Corporation
Statements of Stockholders' Equity
Years Ended December 31, 2004, 2003 and 2002
Number of Shares
Outstanding Accumulated Note
----------------- Other Receivable Total
Preferred Common Preferred Common Contributed Retained Comprehensive Common Stockholders'
Stock Stock Stock Stock Earnings Earnings Income (Loss) Stock Equity
------ ------- ---------- ----- --------- ---------- ----------- ---------- ---------
Balance as of December 31, 2001 |
(unaudited) 16,200 180,000| $2,127,929 1,800 1,474,200 13,211,671 (1,611,226) (1,438,560) 13,765,814
|
Comprehensive income (unaudited): |
Net earnings -- --| -- -- -- 745,410 -- -- 745,410
Other comprehensive income, net of tax: |
Net unrealized gains on investment -- --| -- -- -- -- 377,776 -- 377,776
securitiesarising during the year |
net of reclassification adjustment |
for gains the year not of |
reclassification adjustment for |
gains included in net earnings |
| ----------
Total comprehensive income | 1,123,186
| ----------
------ -------| ---------- ----- --------- ---------- ---------- ---------- ----------
Balance as of December 31, 2002 |
(unaudited) 16,200 180,000| $2,127,929 1,800 1,474,200 13,957,081 (1,233,450) (1,438,560) 14,889,000
|
Comprehensive income (unaudited) |
Net Earnings -- --| -- -- -- 2,639,060 -- -- 2,639,060
Other comprehensive income, net of tax: |
Net unrealized gains on investment -- --| -- -- -- -- 2,001,068 -- 2,001,068
securities arising during the year |
net of reclassification adjustment |
for gains the year not of |
reclassification adjustment for |
gains included in net earnings |
| ----------
Total comprehensive income | 4,640,128
| ----------
------ -------| ---------- ----- --------- ---------- ---------- ---------- ----------
Balance as of December 31, 2003 |
(unaudited) 16,200 180,000| $2,127,929 1,800 1,474,200 16,596,141 767,618 (1,438,560) 19,529,128
|
Comprehensive income |
Net Earnings -- --| -- -- -- 3,812,571 -- -- 3,812,571
Other comprehensive income, net of tax: |
Net unrealized gains on investment -- --| -- -- -- -- 271,233 -- 271,233
securities arising during the year |
net of reclassification adjustment |
for gains the year not of |
reclassification adjustment for |
gains included in net earnings |
| ----------
Total comprehensive income | 4,083,804
| ----------
------ -------| ---------- ----- --------- ---------- ---------- ---------- ----------
Balance as of December 31, 2004 16,200 180,000| $2,127,929 1,800 1,474,200 20,408,712 1,038,851 (1,438,560) 23,612,932
====== =======| ========== ===== ========= ========== ========= ========== ==========
See accompanying notes to the financial statements
Cibola Corporation
Statements of Cash Flows
Years Ended December 31, 2004, 2003 and 2002
(unaudited) (unaudited)
2004 2003 2002
----------- ----------- -----------
Cash flows from operating activities
Net earnings $ 3,812,571 $ 2,639,060 $ 745,410
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Realized (gain) loss on sale of investment securities (606,942) 58,456 1,612,197
Amortization of bond premiums and discounts, net (57,766) (56,977) (35,851)
Changes in operating assets and liabilities:
Accounts receivable 32,007 526,163 (582,708)
Accrued interest (345,838) (69,928) (29,628)
Deposits 729,600 -- (729,600)
Other assets 24,721 24,653 24,653
Accounts payable -- (359,510) 359,574
Income taxes payable -- (27,443) (37,218)
----------- ----------- -----------
Net cash provided by operating activities 3,588,353 2,734,474 1,326,829
----------- ----------- -----------
Cash flows from investing activities
Purchase of investment securities (4,437,108) (3,404,384) (8,339,825)
Proceeds from the sale or maturity of investment securities 5,143,605 2,548,443 6,040,081
Receipts on notes receivable 211,920 275,000 20,000
Funding of notes receivable (3,626,001) (2,769,282) (700,000)
Purchase of certificates of deposit -- (97,000) (672,000)
Proceeds from the maturity of certificates of deposit 122,000 552,000 515,000
----------- ----------- -----------
Net cash used for investing activities (2,585,584) (2,895,223) (3,136,744)
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 1,002,769 (160,749) (1,809,915)
Cash and cash equivalents as of beginning of year 2,745,304 2,906,053 4,715,968
----------- ----------- -----------
Cash and cash equivalents as of end of year $ 3,748,073 $ 2,745,304 $ 2,906,053
=========== =========== ===========
Supplemental disclosure of cash flow information -
Cash paid during the year for income taxes $ 408,731 $ 383,631 $ 278,650
=========== =========== ===========
See accompanying notes to the financial statements
Cibola Corporation
Notes to the Financial Statements
December 31, 2004, 2003 and 2002
(Information with respect to 2003 and 2002 is unaudited)
1 NATURE OF OPERATIONS
Cibola Corporation (Cibola), a Wyoming corporation formed in 1996, is a
natural gas marketing company located in Cody, Wyoming.
NATURAL GAS MARKETING OPERATIONS
Cibola's natural gas marketing operations are limited to one long-term
sales contract and at least two long term purchase contracts. Cibola
sells natural gas to a third party under a long-term sales agreement that
expires August 31, 2005. Under the terms of the agreement, Cibola
delivers a specified quantity of gas daily to the third party at a
mandated deliver point at a fixed price that increases 5% annually. To
provide the supply of natural gas to fulfill the sales agreement, Cibola
has entered into purchase contracts with another third party to receive
the same quantity of gas daily at the deliver point mandated by the sales
agreement.
With the excess cash flow generated from its gas marketing operations
since 1996, Cibola has invested in a portfolio of investment securities
and notes receivable.
2 SIGNIFICANT ACCOUNTING POLICIES
BASIS OF ACCOUNTING
Cibola's accounting policies reflect industry practices and conform to
accounting principles generally accepted in the United States of America.
The more significant of such policies are briefly described below.
CASH AND CASH EQUIVALENTS
Cash equivalents are highly liquid investments with an original maturity
of three months or less at the date of purchase. This includes money
market accounts held at brokerage firms.
ACCOUNTS RECEIVABLE
Accounts receivable are recorded at their invoiced amount and are not
interest bearing. Uncollectible accounts have been historically
infrequent and insignificant. In addition, management believes the risk
of loss associated with uncollectible accounts is minimal. Accordingly,
no allowance for uncollectible accounts has been recorded.
RESTRICTED ASSETS
As discussed in note 6, the preferred stock provides for individual
sinking funds for Series A, Series B and Series C. The sinking fund
provides for a periodic irrevocable pro rata transfer of excess cash
flows to each sinking fund. Such assets are classified as restricted
assets on the balance sheets.
INVESTMENT SECURITIES
Publicly-traded equity securities and debt securities are classified as
available for sale and are recorded at market using the specific
identification method. The fair value of investments available for sale
is based on quoted market prices. Unrealized gains and losses (excluding
other-than-temporary impairments) are reflected as accumulated other
comprehensive income in equity. Equity investments in privately-held
companies are recorded at cost.
Premiums and discounts on investments are deferred and amortized/accreted
to income over the term of the investment using a method that
approximates the interest method. Gains and losses on sales are included
in the statement of earnings and are computed on the basis of specific
identification of the cost of each security.
Investments are considered to be impaired when a decline in fair value is
judged to be other-than-temporary. If the cost of an investment exceeds
its fair value, we evaluate, among other factors, general market
conditions, the duration and extent to which the fair value is less than
cost, and our intent and ability to hold the investment. We also consider
specific adverse conditions related to the financial health of and
business outlook for the investee, including operational and financing
cash flow factors. Once a decline in fair value is determined to be
other-than-temporary, an impairment charge is recorded and a new cost
basis in the investment is established.
MAJORITY STOCKHOLDER
Since formation of Cibola, The Beard Company (Beard) owns 144,000 of
Cibola's 180,000 shares of common stock.
REVENUE RECOGNITION
Natural gas marketing sales are recognized when delivery has occurred and
title has transferred.
INCOME TAXES
The results of Cibola's operations are included in the consolidated
federal tax return of Beard. Under the tax allocation policy, Cibola
calculates and remits its federal tax liability quarterly to Beard.
Cibola, with its Wyoming operation, is not subject to state income tax.
Cibola accounts for income taxes using the asset and liability method,
whereby deferred tax assets and liabilities are recognized for the future
tax consequences attributable to difference between the financial
statement carrying amounts of assets and liabilities and their respective
tax bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences and carryforwards are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the
enactment date. The principal items, which give rise to these
differences, are the change in unrealized gains (losses) on investment
securities.
USE OF ESTIMATES
Management has made a number of estimates and assumptions relating to the
reporting of assets and liabilities and the disclosure of contingent
assets and liabilities to prepare the financial statements in conformity
with accounting principles generally accepted in the United States of
America. Actual results could differ from these estimates.
3 CASH AND CASH EQUIVALENTS
Cibola maintains cash balances at a banking institution, which at times,
exceed federally insured limits. Cibola has not experienced any losses in
such accounts and believes there is no exposure to any significant credit
risk on cash and cash equivalents.
4 INVESTMENT SECURITIES
A summary of investment securities at December 31, 2004 and 2003 is as
follows:
(unaudited)
2004 2003
------------------ -------------------
Investments available for sale, at fair value $ 9,294,417 10,046,973
Equity investments, at the lower of cost or impaired value 2,618,000 1,610,000
------------------ -------------------
$ 11,912,417 11,656,973
================== ===================
Investments available for sale at December 31, 2004 and 2003 consist of the
following:
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
--------------- ---------------- ---------------- ----------------
December 31, 2004
Publicly-traded equity stocks $ 4,717,162 1,221,835 (64,437) 5,874,560
Mutual funds 1,867,004 185,629 (68,488) 1,984,145
Corporate bonds 1,098,618 32,732 (1,933) 1,129,417
Government bonds 297,132 9,354 (191) 306,295
--------------- ---------------- ---------------- ----------------
$ 7,979,916 1,444,550 (135,049) 9,294,417
=============== ================ ================ ================
December 31, 2003 (unaudited)
Publicly-traded equity stocks $ 5,075,009 954,449 (84,740) 5,944,718
Mutual funds 1,904,484 74,421 (125,010) 1,853,895
Corporate bonds 1,371,791 165,709 -- 1,537,500
Government bonds 678,421 34,947 (2,508) 710,860
--------------- ---------------- ---------------- ----------------
$ 9,029,705 1,229,526 (212,258) 10,046,973
=============== ================ ================ ================
A summary of proceeds from the sale of investment securities available
for sale, as well as gross realized gains and losses for the years ended
December 31, 2004 and 2003, is as follows:
(unaudited) (unaudited)
2004 2003 2002
------------------ ------------------ -------------------
Proceeds $ 5,143,605 2,548,443 6,040,081
------------------ ------------------ -------------------
Gross realized gains 664,993 129,432 433,328
------------------ ------------------ -------------------
Gross realized losses (58,051) (187,888) (2,045,525)
================== ================== ====================
The contractual maturities of investments available for sale at December
31, 2004 are shown below. Expected maturities may differ from contractual
maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties:
Due in less than one year $ 302,920
Due in one to five years 1,132,792
-------------------
1,435,712
Non-debt securities 7,858,705
-------------------
$ 9,294,417
===================
Management believes cost of equity investments approximates fair value
and fully expects to receive all principal and interest related to each
of the underlying investments. Further, management expects to realize no
actual loss related to any of the underlying investments at any time in
the future and accordingly has not recognized any loss at December 31,
2004.
A summary of investment income for the years ended December 31, 2004,
2003 and 2002 is as follows:
(unaudited) (unaudited)
2004 2003 2002
------------------ ----------------- --------------------
Interest $ 647,305 458,722 368,160
Dividend 210,523 160,203 108,568
Realized gains (losses), net 606,942 (58,456) (1,612,197)
Amortization of bond premiums and discounts, net 57,766 56,977 35,851
Capital gains distributions 661 521 912
Investment fees (60,538) (53,073) (41,341)
------------------ ----------------- --------------------
$ 1,462,659 564,894 (1,140,047)
================== ================= ====================
5 NOTES RECEIVABLE
A summary of notes receivable at December 31, 2004 and 2003 is as
follows:
(unaudited)
2004 2003
----------------- --------------
Note receivable from an affiliate of a stockholder with principal $ 3,220,000 1,730,000
and interest accruing at prime rate plus 1.00% (effective rate of
6.25% at December 31, 2004) due at maturity on December 31, 2006
Note receivable from an affiliate of a stockholder with principal 1,875,000 1,125,000
and interest accruing at 10.00% due at maturity on December 31,
2005
Note receivable from a stockholder with principal and interest 530,000 --
accruing at prime rate (effective rate of 5.25% at December 31,
2004) due at maturity on December 31, 2005
Note receivable from a third party with interest at 8% due 500,000 500,000
quarterly and principal due at October 31, 2004 secured by an
aircraft and a personal guarantee (subsequently collected in full)
Note receivable from a stockholder with interest paid annually at 400,202 400,202
prime rate plus 0.50% (effective rate of 5.75% at December 31,
2004) and principal due at maturity on December 31, 2005
Note receivable from a third party with interest at 6% due 389,001 3,000
quarterly and principal due on demand
Note receivable from an affiliate of a stockholder with interest 145,000 --
paid monthly at 5.50% and principal due monthly from November 2005
through October 2010 secured by a second mortgage on borrower's
corporate facility
Note receivable from an affiliate of a stockholder with interest 125,000 --
paid annually at prime rate plus 0.50% (effective rate of 5.75% at
December 31, 2004) and principal due at maturity on December 31,
2006
Note receivable from a stockholder with principal and interest 91,544 --
accruing at 15% due at maturity on July 31, 2005
Note receivable from a stockholder with principal and interest -- 103,464
accruing at 15% due at maturity on July 31, 2004
---------------- --------------
$ 7,275,747 3,861,666
================ ==============
6 PREFERRED STOCK
In 1996, Cibola issued 9,979, 3,370 and 2,851 shares of, Series A, Series
B and Series C preferred stock, respectively. In the event of any
voluntary or involuntary dissolution, the preferred stock has a
liquidation preference over the common stock of $50 million. The
preferred stockholders are not entitled to receive dividends.
The preferred stock provides for individual sinking funds for Series A,
Series B and Series C. The sinking fund provides for a periodic
irrevocable pro rata transfer of excess cash flows to each sinking
fund. The assets that are included on the balance sheet at December 31,
2004 are allocated to the sinking funds as follows:
(unaudited)
2004 2003
------------------ -------------------
Series A $ 14,459,918 11,280,958
Series B 4,583,032 3,596,452
Series C 4,274,325 3,520,883
------------------ -------------------
$ 23,317,275 18,398,293
------------------ -------------------
The Series A, B and C preferred stockholders also own 36,000 shares of
common stock.
7 NOTES RECEIVABLE - COMMON STOCK
During April 1996, The Beard Company purchased 144,000 shares of Cibola's
common stock. Such ownership represents 80% of the common stock
outstanding. The $1,440,000 purchase price was paid with cash and a
$1,438,560 note receivable. The note receivable balance remains at
$1,438,560. Interest is payable semiannually at 8.25%. The note
receivable is due June 30, 2006.
8 INCOME TAXES
Income tax expense represents the amounts due to Beard under the tax
sharing arrangement. The deferred tax liability at December 31, 2004 and
2003 consists of the tax effect of the net unrealized gains on investment
securities. Cibola has no deferred tax assets at December 31, 2004.
9 MAJOR CUSTOMER AND MAJOR SUPPLIER
As discussed in note 1, all of the natural gas purchases are generated
from one supplier and all of the natural gas sales are generated from one
customer. The associated risks are significant. In the event one of the
third parties failed to meet its obligation, Cibola would have to go to
the current natural gas markets to satisfy Cibola's obligation by buying
or selling at the then current price. The prices obtained in the current
natural gas markets could result in a significant loss to Cibola. Both
third parties have historically met their obligation. Cibola does not
expect either third party to fail to meet its obligations.
10 UNCONDITIONAL PURCHASE COMMITMENTS
As discussed in note 1, Cibola has entered into unconditional purchase
commitments during 1996 and 1997 for natural gas that Cibola will use to
satisfy its long term sales commitments. The purchase commitments covered
by the two agreements are with one supplier. This commitment is not
recorded on Cibola's balance sheet. Cibola purchased $4.3 million of
natural gas under this commitment during 2005. Cibola's future obligation
(undiscounted) under these purchase commitments approximates $2.9
million.
11 SUBSEQUENT EVENTS
Effective December 1, 2005, Cibola's minority stockholders exercised an
option to purchase the 144,000 shares of common stock owned by Beard.
In January 2006, Cibola redeemed the Series B and Series C preferred
stock and the common stock held by the Series B and Series C preferred
stockholders. As a result, the sinking funds associated with Series B and
Series C with certain holdbacks were distributed to the respective
preferred stockholders.